Sunday, April 05, 2009

A Short Sharp Recession Followed by Growth and Inflationary Prices.

Now that G20 has their say in the matter of our economic future, I can safely say that this recession is a BLIP. As the title above suggest, now its time to buy stocks, blue chip stock that has been battered lately, especially those companies that has something to do with resources, building, oil and food. The basics.

But its all depends on whether the populace of the world managed to muster their economic confidence for them to start spending again.

Most modern economies throughout the globe has rolled out big budgets to get their economies out of recession. Yes I tend to agree with Joseph Stiglitz that America shouldn’t have wasted their trillions cleaning up the toxic debt racked up by their gungho bankers. The money would have been better spent directly on every citizen of that country. I agree with reserve banks around the world reducing the headline interest rate to zero. While this give message to the populace to start spending and investing, stop hoarding their money, that message normally is slow to filter through. Simply because when people just incurred huge losses in their investments, they are not likely to invest more, but would rather get their finances in order first and be more careful in choosing their investment vehicles.
The key to get people confident again and spend is to give them money, a lot of money. Buying toxic debt from financial institutions and made the country, hence all taxpayers pay for it, is just like absolving the guilt of wrongdoers. The money just gone down the drain. If that trillion of money that the Obama Administration spent on bad debt is divided up with every American citizen and given to them straight to their bank account, I believe that would address the issues of economic confidence very quickly.

Quantitative easing (oh my, what a name) or monetary expansion and fiscal expansion would be adequate to get the economy out of recession, provided that the populace managed to be confident again. So far the American, European governments has done the right things, rolling out fiscally expansionary programs and increase government spending and massive monetary expansion by lowering interest rate to zero and massive buy back of government bonds, which will flood the economy with money.

The big question is, how soon will the money reach the street?

Under normal circumstances, fiscal measure would take 6 months and monetary measure would take 12-18 months before we can see the result in the economy. A long lag time. Why so long? Well it makes sense, because of bureaucracy and rules of operations that has to be adhered. Truth is, the money trickles down slowly, and when it reaches the bottom, nothing much is left for those who most need it.

I believe it is about time that we do something drastically different. Lets distribute a reasonably big sum of money to every citizen, so that they can spend it on what they see fit to their needs. Food, housing, education, transport or investment for future spendings. We would see immediate increase in consumption and aggregate demand. A faster way to jump start the economy.

I remember back in early 1990’s in Malaysia when the Malaysian Government investment vehicle the Amanah Saham Nasional give a huge bonus of nearly 100% to their shareholders. The people/shareholders spent their new found confidence by spending on their most immediate needs and investing in their life. The economy grew at a faster clip for the next few years.

1 comment:

Dr Firdaus said...

We Should put you at Bank Negara. I'm serious about this. Your commentaries are brill! I agree with your view