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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

The Great Global Economic Stimulus Gap

Economics / Economic Stimulus Jul 28, 2009 - 10:58 AM GMT

By: Money_and_Markets

Economics

Best Financial Markets Analysis ArticleMartin Weiss writes: Some exciting new changes are now unfolding, and later this week, I will tell you more about them via video from my home. (Look for my email announcement with the subject “Important Fireside Chat.”)

For now, here’s a heads-up on one of the most important developments:


While the U.S. and Europe are still mired in the mud pits of recession, Brazil, India, China, and other countries are already riding a new wave of growth.

It’s a great global gap that’s widening with nearly every new release of data. Just last week, for example, we learned that …

In the U.S., consumer confidence, which seemed to be climbing, suddenly took a new tumble, as the Reuters/University of Michigan index sank from 70.8 to 66.

U.S. consumers have little hope the stimulus package will work. Worse: There were fewer consumers reporting income gains than at any time in the entire 60-year history of the survey.

The reason is obvious: 16.5 percent of U.S. workers are unemployed, according to the government’s broadest measure — and even the most optimistic of Washington economists expect the jobless rate to continue rising for the rest of the year.

That means more home foreclosures, more defaults on consumer credit, and more big obstacles to growth in the U.S.

Similarly, in the U.K., second-quarter gross domestic product plunged 5.6 percent compared to the prior year, the worst decline since the government began tracking quarterly GDP in 1955. And …

In Spain, public despair is rising so quickly, it’s setting the stage for a massive social upheaval. Reason: The unemployment rate has surged to 17.9 percent and is expected to go even higher as Spain’s labor-intensive construction industry continues to collapse.

Meanwhile …

In Brazil, the unemployment rate unexpectedly plunged from 8.8 percent in May to 8.1 percent in June, a six-month low. And unlike the U.S. Federal Reserve — which has already dropped its official interest rates to virtually zero — Brazil’s central bank has room to reduce its rates further to spur more growth … and that’s precisely what it did last week, slashing its official rate by a full half percent.

India’s economy is likely to expand by 6.25 to 7.75 percent in the current fiscal year, according to government estimates. And …

China’s economy grew by more than 7.1 percent in the first half of this year. Indeed, China’s GDP is likely to surpass Japan’s as the world’s second-largest before the end of this year.

Why the huge contrast? A key reason is the one I’ve been harping on since the day I launched this publication: DEBT!

The Great Debt Dichotomy

The U.S. and most of Europe are buried in mountains of debts which, even in the best of circumstances, could take many years to unwind. Brazil, India, China, and others (such as Indonesia, Malaysia, and South Korea) are not.

According to the Fed’s Flow of Funds Accounts of the United States, at the end of the first quarter, the U.S. had $6.8 trillion in Treasury debt, $8.2 trillion in government agency debt, $2.7 trillion in municipal debt, $11.6 trillion of corporate debt, $14.6 trillion in mortgage debt, $2.5 trillion in consumer debt, plus $6.5 trillion in other debts.

Grand total: $52.9 trillion, the highest in history. (To see exactly where I get these numbers, click here.)

Moreover, the U.S. government has future obligations to Social Security, Medicare, and pensions that exceed $60 trillion … while U.S. banks now hold derivatives obligations exceeding $202 trillion, according to the latest tally by the OCC.

This is a huge, unprecedented burden to every single segment of our economy:

U.S. families are buried in their mortgages and credit cards, getting forced out of their homes by the millions.

U.S. cities and states are jettisoning essential services, abandoning decades-long commitments to their citizens.

U.S. corporations are defaulting on their debts in record numbers, with worse to come.

Even the Obama administration, despite a super-majority in Congress and all the political clout it can muster, is unable to overcome a simple reality: Washington’s finances are also in disarray.

Ironically, some of the countries with the least debt and the most cash reserves today are precisely the same ones that, just a few years ago, were among the most reliant on advanced industrial nations for capital:

  • Brazil has reversed from one of the world’s largest debtor countries to one of the world’s largest creditors. It’s the fourth-largest lender to the U.S. government. It has virtually eradicated its foreign debt. And its international reserves have now grown to a record $209.6 billion as of July 16.
  • India’s foreign-exchange reserves are even larger, at $266.2 billion. And …
  • China’s foreign-exchange reserves have just surged to $2.132 trillion, after growing by $177.87 billion in the second quarter, the largest rise on record.

Moreover, virtually every sector of their economies — from households to the federal government — has FAR less debt than their U.S. counterparts, even in proportion to their lower incomes.

And it’s largely due to this massive debt discrepancy that we now see …

A Disturbing Disparity in Stimulus Packages

In a nutshell, economic policies in the United States are failing. In Brazil, India, and China, they are succeeding.

But the greatest disparity of all is between the fiscal stimulus packages in the U.S. and Europe compared to the stimulus now being pursued by China:

Stimulus

  • In the U.K., the government is spending only $30 billion in an economy that’s almost one hundred times larger. That’s just 1.1 percent of GDP!
  • Even adding up all the stimulus packages among the 16 nations of the eurozone, the total is only $268 billion, or just 1.4 percent of GDP.
  • The Obama administration’s stimulus, at 5.5 percent of GDP, is over three times more aggressive than that of the eurozone, where governments are more fearful of the inflationary consequences.
  • But it still pales in comparison to the stimulus package in China, which represents an unusually robust 13.9 percent of GDP.

More important than the sheer size of the stimulus, however, is the way it’s being pursued.

In the U.S., the stimulus is being financed by debt, despite the fact that federal debt as a percent of GDP is already the highest among the four.

In China, it is being financed out of massive cash surpluses, which, as I just mentioned, continue to grow despite Beijing’s stimulus outlays so far.

Plus, here’s a big point most analysts are missing:

The Obama administration is planning to spend its stimulus money in just one year and is unlikely to have the political or financial capital to come back for a second round.

In contrast, China is spreading its stimulus expenditures out over two or three years; and, if needed, can easily renew it for another few years.

Bottom line: While America’s investors and business planners see just a one-time shot in the arm from Washington that’s already showing signs of failing, their counterparts in China can count on a steady flow of capital from Beijing as long as it’s needed.

Countries and companies that have hitched their revenues to this powerhouse are among the most likely to benefit. Those that are bogged down in debt are the most likely to be left behind.

Right now, most stocks in Brazil, India, and China are a bit pricey. But soon, major investment opportunities will abound.

Good luck and God bless!

Martin

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

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