As CERN has come to a halt, global central bankers have been injecting tons of cash into the seized up credit market, where cash are no longer easily available to the banks and banks, in turn, are tightening loan approvals (or loaning their cash) to businesses. As the global banks' deleverage, more companies will fail. Even AIG, largest US insurance company failed, there is no such thing as large company are safe, GM has just stretched out their hands for billions of 'dole' money from the US government recently.
USD0.7 trillion rescue package is likely to be passed by US Congress this Thursday (or Friday morning Sgp time). As mentioned in my earlier blog, the US government already has USD11 trillions debt and it cannot continue to dole out cash forever. In fact, the Medicare and Social Security alone costs an average of USD4 trillions per year. With the economic downturn, tax revenues will be greatly reduced, causing even higher US government deficit.
US government has 3 options; borrow from the world, raise tax or print money. Recent data has indicated a slowdown of foreigners' willingness to lend to US, which will cause the rise of long term interest rate. Raising tax during recession is politically not possible and in fact, US Senate wants to reduce taxes, which will further widen the deficit.
The rescue package can only spread out the pain of the deep recession. US jobless rate will be climbing rapidly just as retail sales plunges. US houses prices will fall further (despite a 20% drop, it is currently still 70% above its Y2000 house prices). There will be rising mortgage defaults and wide spread bankruptcies.
US government is no different from all other governments that faces economic crisis, they tend to choose money printing. It is politically most expedient in solving economic crisis. It will indirectly reduces their debt, pump more 'steroids' into the economy and create jobs. The price; inflation. The faster the printing machine, the higher the inflation. Foreigners will be reluctant to hold USD, causing the USD to fall, real interest rates to raise. As a result, the import prices will raise, (one good example is the recent oil price hike whenever USD weakens). Long term interest rates will also raises as lenders will expect to be paid above inflation rate.
The US economic fallout will impact on other countries depending on their respective nations' economic structure; domestic vs export oriented growth, domestic demand potential, national savings, resources availability, government economic management skill, t....etc. In short, the higher the exposure to US (direct and indirect export to US, to US' financial instruments, ...etc), the greater the economic weakness going forward.
Similarly, it is also applicable to the companies, keeping in mind that the general respective market demand will weaken considerably and be watchful of the indirect and secondary demand effects. For example, a company may only have 5% direct export to US, but indirectly sold 70% of its products to a third country which ultimately are re-sold to US and, the weakening US economy will weaken Europe economy, causing Europe (secondary) demand to weaken too.
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