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Thursday, December 4, 2008

Trillion Dollar Stimulus, Can Only Print That Kind of Money

This kind of money can only be printed on such short notice. With the rest of the world also in crisis mode, there just won't be enough global savings to go around.

Yes the Fed is already printing money. No that isn't immediately inflationary. First, debt destruction and therefore money destruction is massive. Second, the Fed isn't printing fast enough to even keep up with the rate of money destruction, let alone exceed it. Third, the printed money is being hoarded by the major money centre banks. So first, we deflate anyways. Ultimately we could face inflation but only if the amount of money printed far exceeds the amount destroyed.

Almost everything I was concerned about (and therefore raged about here) has come to pass...


Calls for $1 Trillion Stimulus Package Grow as Economy Tumbles: “The one thing that isn’t shrinking in the U.S. economy these days is the size of the stimulus package that financial experts say is needed to turn it around.

With automobile sales dropping, payrolls plunging and manufacturing contracting, economists from across the political spectrum are raising the ante on how much the government should lay out. Some are now calling for at least a $1 trillion boost.

Kenneth Rogoff, a Harvard University professor who was an adviser to Republican presidential candidate John McCain, and Joseph Stiglitz, a Nobel Prize winner who served in President Bill Clinton’s White House, are among those who say President- elect Barack Obama should push for a package of that size.

“They need a stimulus of $500-to-$600 billion a year for at least two years to counter what is going to be a collapse in consumption,” said Rogoff, a former chief economist at the International Monetary Fund.

That number may grow. This week brought news that the economy has been in recession for a year. Tomorrow the government will release November employment data, which economists say will show another 330,000 jobs lost, the most in seven years.

“Every day it looks like the stimulus package needs to be bigger,” said Bill Samuel, the lead lobbyist for the AFL-CIO, the largest U.S. labor federation. “You’re talking $500, $600, $700 billion or even more” for a year.

‘Things Are Evolving’

Obama, who has said that enacting a stimulus plan will be his top priority once he takes office on Jan. 20, has himself been steadily increasing the amount he thinks is needed.

Earlier in the presidential campaign, he proposed a package worth $50 billion, then raised that to $175 billion as the election approached. Advisers have since said the program may total as much as $700 billion, although that number, too, may rise.

“Congress should think in terms of $900 billion in 2009, with possibly more in 2010,” said James Galbraith, a self-styled liberal economics professor at the University of Texas in Austin who has talked with the Obama transition team about the issue. “I may be higher than they are at this point,” he said, “but things are evolving.”

Whatever its size, the package is likely to include tax cuts, aid to the states, higher unemployment benefits and increased spending on infrastructure such as roads and bridges.

‘Liquidity Trap’

New Jersey Governor Jon Corzine said Washington needs to step in because the U.S. is caught in a “liquidity trap,” where repeated interest-rate cuts by the Federal Reserve fail to boost the economy because banks don’t want to lend and skittish consumers and companies don’t want to borrow.

[ TheFinancialNinja: Closer to ZIRP, Liquidity Trap, Lost Decade, Japan v2.0: GLOBAL Liquidity Trap, Fed Admits Quantitative Easing, From INFLATION to Instant DEFLATION, Zero Rate World, The Age of Free Money: We’re Doomed, ZIRP, Zero, Nada, Free Money and a Big Mess, Money Supply, Hoarding, Gold, Deflation: Tin Foil Hats, Japan Stuck, Quantitative Easing in the US, DEFLATION is Here]

“If the government doesn’t operate to fill that gap, we are going to see not only rising unemployment but a shockingly high level of unemployment over the next 12 to 24 months,” Corzine said in Bloomberg Television interview yesterday. He called for a stimulus of “overwhelming force.”

Adam Posen, a former New York Fed official, agreed that’s the lesson to take from Japan’s experience during the 1990s, when it faced a similar situation.

“The stimulus has to come through the fiscal side,” said Posen, who has written about Japan and who’s now deputy director at the Peterson Institute for International Economics in Washington. “A package of 4 percent of GDP, even 5 percent of GDP is not unreasonable over one year.” That would equate to about $500 billion to $700 billion.

Posen said Japan’s economic-recovery packages at times didn’t seem to work because they turned out to be smaller than first announced and were slow in coming.

All About Speed

The Obama team is aware of that problem. “We hear that Japan invested over a trillion dollars in infrastructure and nothing happened,” Vice President-elect Joe Biden told a meeting of state governors on Dec. 2. “Well, it’s all about how rapidly we can get these projects up and running.”

[ TheFinancialNinja: Japan v2.0, The Lost Decade, Stimulus Package: Does it Even Work ]

While some conservative economists agree that a big stimulus package is needed, they argue that it should focus on tax cuts, not on increased government spending on infrastructure.

John Makin, a visiting scholar at the American Enterprise Institute in Washington, has advocated a temporary cut in the payroll taxes that help finance Social Security. So, too, has Stanford University Professor Robert Hall, the chairman of the National Bureau of Economic Research committee that calls the beginnings and ends of recessions.

Love That Pork

“Politicians love pork, but maybe they can be pushed toward something better,” Hall said in an e-mail message.

Because the payroll tax is paid by employees and businesses, reducing it would both give consumers more money to spend and businesses more incentive to retain staff, said Mark Bils of the University of Rochester.

Not all economists think fiscal stimulus is the answer to the economy’s ills. “There are other choices,” said Greg Mankiw, a Harvard professor who served as President George W. Bush’s chief economic adviser. Foremost among the alternatives is monetary policy, said Mankiw. The Fed can act to bring down long- term interest rates as well as short-term ones, he said.

Some bond-market investors are also worried about the swelling stimulus and the impact it will have on the budget deficit and ultimately the economy.

“A stimulus of this magnitude helps push government debt as a percentage of GDP closer to dangerous levels, when inflation and interest rates start to rise,” said Thomas Atteberry, who manages $3.5 billion in fixed-income assets at First Pacific Advisors in Los Angeles.

[ TheFinancialNinja: Federal Receipts and Outlays: The New Scary Chart? ]

‘Enormous Amounts’

Regardless of the risks, that’s where policy makers are heading, said David Rubenstein, co-founder of the Carlyle Group.

“Congress is going to spend enormous amounts of money,” he told reporters in Washington on Dec. 2. “Initially, people were talking about $150 billion, then $300 billion, then $500 billion then $800 billion. Now people are talking about a trillion-dollar stimulus package.””

14 comments:

S said...

See the post at London banker bloggsite for list of wht has and what will be...

"HISTORY
1.Margin calls on hedge funds
2.Sudden contraction of global market liquidity
3.Huge sales to meet margin calls
4.Trillions of dollars of value wiped off balance sheets
5.High levels of hedgie redemptions
6.More sales of assets
7.Collapse in global prices for equities, debt and commodities.
8.Dollar stronger because lots of funds in London struggling to meet their margin calls in New York.
9.Fed doubles balance sheet
10.Taxpayer largesse doled out to Wall Street
11.Bailouts of autos, airlines, etc. wherever (and ONLY wherever) Wall Street is at risk from CDS liabilities
12.Huge expansion in the monetary base
13.Banks begin to accumulate massive reserves
14.Incoming margin cash (and a lot of other cash) parked in Treasuries
15.Treasury prices up; yields down.
16.25 November: Bloomberg reports US bailout totals 7.7 trillion

FUTURE
17.Margin calls end
18.Deleveraging stops
19.Reduced demand for dollars
20.Reduced need to park cash in US Treasuries
21.US domestic demand very low and imports greatly reduced
22.US trade deficit declines quickly
23.Exporters to US don’t need to need to buy so many US Treasuries
24.Bank reserves used to buy crashed assets, many outside the US
25.Banks start to sell US Treasuries to finance these purchases
26.Net sales of US Treasuries – prices falter then fall
27.US can’t sell enough Treasuries and starts to monetize debt
28.Dollar starts to fall
29.Global equity markets rise
30.Commodity prices rise
31.Supply-side shock in the US leads to shortages
32.US prices rise and US govt. can’t fudge inflation numbers enough
33.US citizens panic
34.Hyperinflation of prices of consumption goods in the USA
35.Dollar falls
36.IMF overwhelmed
37.Exports to USA reduced even further
38.Global economy shrinks again, worse than ever
39.Global depression"

Brant said...

Hey look, they updated the Scary Fed Charts with the......recession. Seems to match up real well when those up and down spikes began.

Brant, Atlanta, GA

AphexMandelbrot said...

I don't know about you, but I was awake for the exact drop of information at 8:30a. I had a final at 10:30a, so I figured I could chillax for a moment or two before heading off into morning traffic to campus.

Bloomberg is normally what I go to sleep to; playing the stream from the Internet - so they had the Asian girl on for Morning Call. She's talking, chats up a few people who have made various predictions. 'Guy who may wish to reconsider his prediction skills' says he expects around 270,000; 'Guy who gets called the Grim Reaper for his pessimism' says that the numbers are off and we may see around 370,000.

She's talking about the general average between the analysts that Bloomberg asked, showing graphs, another guy is talking about how it will probably be around 350- wait; it is now 8:30, and it appears we have those numbers and-

And her face just sinks. And her jaw begins slacken. It was like a grain of sand becoming self-aware for one second to realize it was on a beach.

Well, I thought it was funny.

Anonymous said...

Ninja,

Rumors are flying that China and another nation (possibly Korea?) are going to intentionally devalue their currencies within days by 30-35% in retaliation for the US (Henry Paulson and Heli Ben) having double-crossed the Chinese.


The rumor has it that the dynamic-duo promised the Chinese the US would bail them out of the hundreds of billions (trillions?) of garbage mortgage securities US bankers sold them over the past few years and would use TARP/EESA funds to do so. And, while making the case for the bailout before the Congress they used the threat of Chinese retaliation as leverage .


But Paulson and Bernanke, so it goes, were lying not only to Congress, they were also lying to the Chinese and instead, as we now know, they used the money to bail out their buddies on Wall St. and the US banks. So, the rumor has it that neither Paulson nor Bernanke ever intended to actually pay off the Chinese, and used the money instead to cover the outrageous (and even possibly unlawful) actions of Wall St. and the private banks?


Now the Chinese are furious and China's Central Bank chief made an "unscheduled" trip to America on Thursday, while Paulson himself was in China, to deliver the message to America that China will retaliate by (1) devaluing the renminbi by 30 – 35 % and (2) by no longer investing in US securities.

Questions:


1)Is there any truth to the rumor?

2)What, in your opinion, will the consequences of this be if this is true?

Anonymous said...

During this weekend, China was also in my thoughts: i know Americans are idiots. It takes the creation of 100-130K new jobs per month just to absorb new graduates into the workforce. Bush and Chao have rarely met that target. If Rush Limbaugh fails to point it out, most American cannot figure it out on their own.

However, the Chinese also failed to figure it out, so enjoy the humor where you can. We send American middle class jobs offshore to China and India, but the Chinese (and Saudis) continue to invest in America because they also believe monthly mortgage payments can reset to a higher monthly payment. Incredible and enjoy while you can still laugh. Evidently no one on planet earth has common sense and arithmetic.

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