US economic meltdown?
January 25th, 2008
The measures introduced by the US federal reserve and Congress to stave off stock market meltdown are a panic-induced over-reaction that are more likely to lead the US into economic Armageddon than to avert it.
An entry in the Investors Chronicle’s ‘week in review’ slot today sums up the position pretty well.
Stock markets are in meltdown, you may have heard on the news. Are they? As things currently stand, the FTSE 100 is actually up 59 points compared to the start of the week – but only after falling 323 on Monday, rising 162 on Tuesday, falling 131 on Wednesday, rising 266 on Thursday and putting on 85 points so far today. The genie has been kept in the bottle by a huge cut in US interest rates, agreement on a tax cuts package and a rescue plan for struggling bond insurers. In short, anything to encourage American consumers to spend money they don’t have on things they don’t need. If this hotch potch of panic measures can in any way be seen as a panacea for the structural defects within the world’s financial system, then the Footsie should be up to 7,000 by next week.
Surely treasury secretary Hank Paulson and Federal Reserve chairman Ben Bernanke can do better than this?
Their indiscriminate slashing of interest rates and mindless fiscal giveaways smack of panic – particularly given that they were not replicated in Europe. The moves have, as expected, provided a short-term fillip for the markets and naturally won the approval of those short-term greedsters on Wall Street. However, I suspect the measures will do nothing to restore the American, or indeed the world economy, to either stability or health.
In fact, they’re more likely to do the opposite.
One wonders why Bernanke and Paulson don’t pay more heed to the recent remarks of the US comptroller general, David Walker. Earlier this month, Walker told the Rotary Club of Birmingham, Alabama that unless reckless borrowing by the US federal government and by US consumers is reined in, then the world’s largest economy is heading for catastrophe.
But the measures we saw earlier this week – a slashing of US interest rates to 3.5% and “stipends” or tax credits for middle-earning Americans equivalent to 1% of GDP – will have precisely the opposite effect.
Indiscriminate monetary easing (which could yet see the fed funds rate fall to 1%) coupled with fiscal laxity will almost certainly accelerate the decline of the dollar. This could have a number of negative consequences. One is that the dollar could replace the Yen as the currency of choice for the “carry trade”. Alan Ruskin, chief international strategist at RBS Greenwich Capital, warned of this earlier this week.
Were that to happen, the greenback would enter a spiral of decline, bringing even slower growth and higher inflation in the States. It would, among other things, reduce foreign central banks’ appetite for continuing to support the humungous US trade deficit.
If the only solution to the world’s economic ills is for the US government to open the monetary and fiscal taps in the hope that US consumers who are spooked by the property market downturn will be persuaded to spend money they don’t have on things they don’t need, then “we’re doomed, all doomed” (as my namesake Private Frazer delighted in saying in “Dad’s Army”).
Read my earlier post of US comptroller general David Walker’s intervention here.
To view the Investors Chronicle website click here
© Copyright Ian Fraser 2008