Wednesday, December 9, 2009

Back to the well for more stimulus

Japan announced this week that 3Q final GDP will come in at .3% not .7% as predicted or the 1.2% reported last month. The currency has weakened and the Nikkei index has declined. Japan announced a new stimulus package totaling $81 billion this week. It is supposed to take effect in the first quarter of 2010.

The US has also announced new tax credit and jobs program policies to help the economy. These new policies have not been called a stimulus package. Some of the expected savings from the TARP fund will be used to help small business. There is no price tag on these programs.

Government have been overly optimistic about the recovery. They have used unconditional forecasting of past recessions as their guide. Most recessions follow the rule that a sharp decline leads to a sharp recovery. However, this crisis has been a balance sheet recession which usually takes longer and has a slower recovery rate. With governments showing little patience, we are starting to see a second round of spending discussion even while it is hard to track existing spending. Some of the new Japanese spending increases replace dropped initiatives from the last government. We also have not seen all of the stimulative effect of the US plan.

What is missing is a clarity concerning the business regulatory environment. Developed economies need help but the form should be a stable government framework. Institutions do matter. Money will gravitate to the stable countries and in many cases the more controlled emerging markets are a better bet.

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