Feb. 13, 2008
George W. Bush has signed into law the stimulus bill passed by Congress which involves spending 168 billion US dollars in an effort to reverse recessionary tendencies in the US economy. President Bush and the Congress are to be congratulated for swift action on this front .
Here in Canada faced by similar circumstances I am afraid we would have had much less of an effective response given the brainwashing and unscientific propaganda that has occurred over the past 25 years about the dangers of deficits and the importance of always balancing the budget, no matter the circumstances.
The first cheques to moderate and low income citizens will be mailed out in May and the benefits of the policy of deliberately increasing the deficit as a measure of stimulus will become clear as the winter turns to spring and early summer.Once the 168 billion is added to the existing deficit the stimulative impulse will be of the order of 3 % of the GDP.
So long as the Fed continues to lower interest rates and keeps the real rate low ( that is the difference between the nominal rate and the rate of inflation measured by the GDP deflator) and the deficit stimulus package is in place the economy will recover from the shock of the asset backed commercial paper crisis which still has some way to go before its full extent is clear.
The credit markets despite the cuts in interest rates by the Fed are still demanding additional risk premiums over Treasury rates on corporate debt which risk exacerbating circumstances. The Fed will be well advised to cut rates further to show that they mean business in terms of injecting the necessary liquidity. Once the fiscal stimulus interacts with the monetary one there will be a break in the irrational pessimism that now prevails in the credit markets.
As well, if the government were to enhance its program of capital infrastructure amortized over a longer term this would reinforce the stimulus and help rebuild essential infrastructure at the same time.
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