$787 billion. A bill so hurried that it is questionable if
any Representative or Senator who voted on it read the entire text. $311
billion in discretionary spending, much of it not until 2010 and 2011, $285
billion in tax cuts and $191 billion in increased benefits spending.
Will this stimulus help the economy in 2009? Last
yearâ€™s $168 billion stimulus did almost nothing to bolster consumer spending,
most of the money went into saving or to pay down debt. Obama advisor David
Axelrod is already downplaying expectations saying only that things would be in
â€śmuch worse shapeâ€ť without the bill.
Consumer spending is crippled by three factors, two real and
one psychological. The economy lost 2.5 million jobs in 2008, three
quarters of those in the last four months of the year. The monthly job
reductions accelerated in January and there is no economic rationale to expect
improvement before the half year. These vanished jobs represent an absolute
decline in consumer spending; no amount of possible unemployment benefits and
personal savings can replace the lost wages. Until the unemployed find new work
the drain on consumption will diminish GDP and the feedback loop to further
cutbacks in employment will continue.
A 7.6% unemployment rate means that over 90% of those who
want work and are actively seeking employment have found it. These consumers
are able to spend but some of their potential consumption is blocked by their
inability to obtain credit. Commercial banks normally supply only about 20% of
the credit in the economy. The balance and much of the credit for consumer
loans is supplied by the shadow banking system, through firms that lend and
then securitize their loans through the asset-backed market and allied
financing methods. This market has been almost completely moribund since last
fall. The normal loan velocity for firms that supply credit to this market is
shut down because they cannot securitize and sell their existing loans to
obtain the capital for new ventures.
The gloom over the economy is led by none other than
President Obama, who has said the recession â€świll get significantly worse
before it gets betterâ€ť. Media coverage of the economy is almost completely
negative. The effect on consumers, especially those who might be
calculating a large purchase like a house or car can only be delay or forbearance.
This psychological recession acts to forestall or eliminate spending as
families that can afford purchases choose not to buy that new sofa or take a
The main goal of the fiscal stimulus package, in the words
of its supporters, is the creation of 3.5 million jobs. Over the next 18 months
Federal spending will strive to replace jobs lost with equivalent work or
government employment. The effect on consumer spending will be delayed into
next year. In the initial months of stimulus expenditures any employment gains
will probably be overwhelmed by continuing jobs losses. For much of 2009 the
stimulus will have negligible effect on consumer spending, the money simply
cannot be spent fast enough.
The dearth of consumer credit and the collapse of the
securitization market cannot be cured quickly even after a bank rescue is
formulated by the government. Trust and confidence between the
institutions that create and market securitized products and with the private
investors who buy them cannot be restored in a matter of weeks. Nor can the
enormous weight of toxic debt be lifted from the balance sheets of lending
firms in short order. Here too it is likely that 2009 will see limited
return of securitization activity and scant improvement in the availability of
If there is little to immediately expect for the economy
from the stimulus can we say the same for the dollar? Will the lack of positive
movement in the US economy endanger the gains the dollar has made since last
Here we move from absolute measures to comparative ones. By
all standards except risk aversion the dollar is unlikely to surrender its edge
to its European or Asian trading partners. The economy of the European
Monetary Union fell faster in the fourth quarter, about a 5.9% annualized rate,
than did the United States at 3.8%. Japanâ€™s GDP shrank at a 12.7% annual
pace in the fourth quarter. It was the third quarterly drop in a row and the
worst fall since the 1974 oil embargo. Fiscal stimulus in Japan or the
EMU will be no more effective or rapid than in the United States. In 2009
neither the European nor the Japanese economy will provide an advantage to its
currency against the dollar.
Ben Bernanke has promised low rates for as long as
necessary. He might as well have been speaking for all of his industrialized
world colleagues. The convergence of central bank rate policy will remain
in place for the next several quarters giving no currency a jump on the next
upward rate cycle.
However, if the US stimulus plan succeeds in stabilizing the
American economy, the returning calm could prompt a return to the activity in
the yen crosses. For the dollar rising yen crosses are a two sided coin,
providing strong support against the yen but weakening it versus the euro,
sterling, aussie and kiwi. But returning risk appetite will not resurrect
the carry trade which has been rendered pointless by rate convergence and it is
unlikely we will see a long term positive trend in the yen crosses.
stability may not be an exciting goal for a politician but if the Obama
stimulus achieves that much (or that little) it may well have a positive effect
on the dollar.
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