by Dr. Greg Story
I recently ran into an American friend of mine who seemed concerned about the amount of money being poured into the stimulus package in the US. Wasn’t this going to put everyone into hock big time? I told my friend he should start praying that Obama will rain money down like heavy snow in mid-winter or we are all going to be in big trouble.
The reason is quite simple. The rest of the world needs America to start functioning again, as this affects the global financial markets and global trade. I wrote a few months ago about the death spiral we are in and how it will not improve without massive intervention.
That spiral is well underway and we are all headed south at a rapid pace of knots. Banks stop lending to us because they are all afraid other banks will stop lending to them if they don’t keep plenty of capital on their books. No bank has enough money of its own to function. Banks take in our money on an overnight at. call’ basis, but they agree to lend it back out to us for 30 years. Banks bridge the difference by borrowing in the market from other banks. When they decide another bank is risky and may not he able to pay them back, that bank is history because everyone else refuses to lend to them. No more bridge, no more bank.
Think of your own situation—are you
reducing your spending right now?
Banks stop lending and companies stop expanding because they can’t get the funds required. Less activity means less employment for the workers, who then consume less because they either have no job or are worried that they will lose their job. Think of your own situation—are you reducing your spending right now? Less consumption means less profit for companies, so more pressure on employment, which spirals into lower consumption, etc., etc. This started with America but rapidly spread worldwide because we are all so interconnected.
So we all need Obama to break the downward spiral in the US and create global trade demand. So pile on that stimulus please!
Won’t we see massive deficits and the return of inflation because of the stimulus packages? Yes, we will, but the bitterness of this medicine is less bitter than not taking the risk of spending our way out of trouble. We can debate the merits of how the stimulus is spent but we need money to (low into our economies to stop this death spiral.
Looking ahead, in two years time if things are going to be better what investments can we buy today that will make us money in 2011? If we think about it there are lots of bargains around! The question is, though, do we feel secure enough to take the risk today? Those who can lake the risk will clean up. So maybe we can lake some small risk and make a modest investment today that will tap into the rebound. Obama-san — ganbatte on that spending!
Dr. Greg Story is the country head of National Australia Bank. For more information, see www.nabasia.com or call 03-3241-2144.