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The Obama largesse could also hurt

The Obama largesse could also hurt
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First Published: Mon, Dec 08 2008. 11 07 PM IST

Updated: Mon, Dec 08 2008. 11 07 PM IST
The Greenspan put is dead and buried. But investors seem happy to get high on the Obama largesse. Asian and European stock markets jumped as much as 8% on Monday, spurred on by the incoming US president’s vast but vague promises of fiscal stimulus.
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While cheap credit was still the investor drug of choice, painful economic news was taken as an invitation for a pleasing painkiller: interest rate cuts from former US Federal Reserve chairman Alan Greenspan.
But even the finest morphine eventually loses its kick. As of Friday, the S&P 500 index was down 40% so far this year, despite the official US overnight interest rate being cut from 4.25% to 1%.
If a patient doesn’t respond to the first line of treatment, doctors turn to stronger and riskier remedies. For a stumbling economy, government deficits come in when monetary policy fails. Investors can now look forward to the US government pumping a lot of money into the economy. Other governments around the world are likely to follow.
Obama provided no specific numbers in his Sunday TV appearance and press conference, but analysts are expecting $500 billion (Rs9.84 trillion) of stimulus programmes in 2009. That will come on top of the $1 trillion deficit created by the recession and various bailouts. In total, the federal largesse will amount to more than 10% of gross domestic product.
Should investors get excited at the prospect? Obama’s decisiveness is certainly welcome, as is his emphasis on investing in US infrastructure. But he needs to be this bold only because the patient is in such bad shape.
Companies are cutting back on investment while big sectors of the global economy—finance, construction, commodity production—are shrinking. Stock market investors are still in denial about this. Earnings for non-financial companies are forecast to shrink by only 2% in 2009, according to corporate and investment banker Societe Generale.
The Obama plan is risky. Even if the new president manages to spend wisely, the money for the gargantuan deficits has to come from somewhere: future taxes, exigent foreigners or the printing press.
Whatever mix Obama turns to, investors should expect some adverse reactions.
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First Published: Mon, Dec 08 2008. 11 07 PM IST
More Topics: Greenspan | Investors | Obama | Largesse | Asia |