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Wednesday, September 12, 2012

China, Europe and US; who's going to win the stimulus award?

The world is begging for stimulus, and markets will never be satisfied. It sounds a little radical, but this is, in reality what we are looking at since the subprime crises started in 2007 and exploded in 2008.
After sinking interest rates to minimum levels Central Banks used a variety of instruments to boost stagnant economies.

First was the FED pumping money into the system hoping to avoid the worst recession from the 30's of last century, then, most Central Banks, from the Bank of England to the European Central Bank, People's Bank of China and Bank of Japan (among others) injected massive quantity of liquidity into markets, some to avoid economic contraction, some others to help sustaining growth.
Different methods were used around the world to bring liquidity back to markets, from the most direct Quantitative Easing programs (FED's QE and QE2 ), to the acquisition or the extension of liability of the acquired national debts in form of bonds (operation twist from United States and Gilt massive purchases from the UK), passing trough the extensions of assets accepted as collateral by private banks (ECB and PBOC), gigantic public infrastructure projects (China) and discounted loans at 1% from the ECB to the financial institutions of Europe called LTRO (this is how some automakers like Volkswagen can sell their cars with little or no down payment and an interest rate of 2 or 3%).

Last act in this stimulus run across the globe was the announcement, last week, from president of the ECB, Mr. Mario Draghi of the OMT program which will make sure (under strict conditions), that public debt in European countries is sold at a sustainable level, in fact, paying interest rates of more than 6-7% from countries like Italy or Spain would not be sustainable for a long period of time and could bring the Euro zone to implosion.
Recently, at the World Economic Forum in Tianjin (Shanghai), Chinese premier, Mr. Wen Jiabao, affirmed it could use his budget surplus, set aside in a special reserve fund, to boost fiscal spending in order to support the economy, and when we talk about a gigantic economy like China we know we are talking about massive quantity of money, just to have an idea, the budget surplus from 2012 alone has recently raised to US$ 158 Billions.
After all, liquidity injection, is the best recipe to revitalize the economy; the problem is that markets became addicted to stimulus and like a junkie in need of his drug, when the drug is no longer available, the user start shaking, it feels bad and would do anything to get his dose.

The question is , how effective can stimulus be? Specially if we think that major corporations, who never stopped making profits, are literally sitting on piles of in utilized cash, waiting to decide if is better to invest in infrastructure, acquisitions or simply give it back to investors in form of dividends. If we could bring half of this cash back to the real economy we would probably live an economic boom just like during the late 80's or the mid 90's; research could be a wise way of exploiting these resources; the biggest effort from this companies will be bringing new innovative products to the public, stimulating demand(let's just think of what Apple did when it launched the first I-Phone six years ago).
Some academics and analysts affirm that further stimulus will not be effective and will hardly achieve results we've seen in the past, just like an addicted, market, need a bigger quantity of liquidity to be reactive.
We are now, anxiously waiting for the FOMC meeting of September to see if some form of stimulus will be announced, markets are heavily betting on a new Quantitative Easing, partly due to the latest Non Farm Payrolls data that were far from encouraging, but the FED will probably take time till next meeting to announce anything and will surprise markets with some creative form of stimulus instead of a new QE program.

Images: FreeDigitalPhotos.net

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