Wednesday, March 23, 2011

Lend More Money To Governments At Negative Real Rates

Some snippets from Steven Wieting, US economist at Citigroup, written on Monday:
If deficit spending hasn’t immediately boosted hiring, where did the money go? To the extent that increased government spending has not immediately been matched by private labor income, it boosted corporate profits.

The personal savings rate has risen significantly – but with the aid of income transfer payments of largely borrowed money. If, as we expect, national savings in the U.S. rises in the years ahead as fiscal easing unwinds, we believe corporate profits will rise less than the economy expands.

Increased transfer payments during the severe recent downturn were 3X the size (relative to GDP) of average recessions of the past four decades. Tax cuts, credits and rebates added up to 2% of GDP intermittently in recent years.
So, lend more money to governments that can transfer it easily into pockets of corporate shareholders. But now, when QE is destroying the foundations of private credit markets, sleep well in wealth delusion.

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