Sunday, June 6, 2010

G20 drops support for fiscal stimulus



The communiqué of the meeting made clear the G20 no longer thought expansionary fiscal policy was sustainable or effective in fostering recovery because investors were no longer confident about some countries’ public finances.

“Those countries with serious fiscal challenges need to accelerate the pace of consolidation,” it said. “We welcome the recent announcements by some countries to reduce their deficits in 2010 and strengthen their fiscal frameworks and institutions.”

As I have been predicting for months, with fiscal support now totally abandoned as a means to sustain output, global economic activity is going to collapse. We WILL see the lows of 2009 revisted and unemployment in the U.S. may climb to 15% or more! Be prepared, it's going to get VERY ugly.

2 comments:

Mike Sandifer said...

All I can say Mike is that I wish you were Fed Chairman.

Mike Norman said...

Mike,

I'd probably need to be dictator. :)

But seriously, there is something the Fed can do and that would be to support the stock market. The Fed is allowed to buy anything as stipulated in Article 13 paragraph 3 of the Federal Reserve Act.

Buying stocks would act as a funding mechanism to businesses, who are struggling because banks are not lending. It would also provide a "wealth effect" to households, which hold about as much stock as real estate. That wealth effect would translate into higher consumption and higher GDP and, eventually, the increased economic activity would cause the banks to lend again.

The problem is, the Fed will NEVER do this as it is considered too unorthodox (as if buying Bear Stearns' assets was not unorthodox) and if it did do it, it would create a global outcry.

However, it would be an easy way to circumvent Congress's lack of action on the economy because of irrational deficit fears.

And it would be much more effective than keeping interest rates at zero, which is doing absolutely nothing.