THE BLOG'S THREE MAIN OBJECTIVES:
~*Revealing and Getting Rid of Scams | Creating Honest Sustainable Wealth | Offering Happiness, Safety and Legitimacy*~

Wednesday, 18 February 2009

Will we survive the recession?

By Larry Haverkamp

IF you doubted the seriousness of this recession, doubt no more: A Canadian survey found 12 per cent of couples gave up their lovers in the last six months for financial reasons.

That's serious. Less colourful data looks just as grim. Global growth is at a standstill. Our GDP is expected to shrink this year.

World stock prices plunged 42 per cent last year and are down another 8 per cent so far this year. Property prices, company profits and unemployment are all ka-plooey.

How did we get in this mess?

Recessions follow periods of excess. Just before the Great Depression of the 1930s, people lived it up and bought US shares with no money down.

It was like contra trading but without the need to pay up in three days.

No cash was required as long as prices kept moving higher. It worked beautifully until the market crashed in October 1929.

Then, customers had to pay for their shares. When they couldn't, brokers sold them out and that pushed prices down further. Many investors became bankrupt. Some committed suicide.

Over the next three years, prices dropped a whopping 89 per cent before hitting rock bottom in March 1933.

Now, it is deja vu all over again. This time around, the property market is the culprit.

US banks issued trillions of dollars of 'no-money-down mortgages'. Homeowners were allowed to make minimum interest payments with the rest added back to the principal due, like credit card debt.

When prices fell, US homes became worth less than the mortgage, so many owners simply walked away.

Banks took back the abandoned properties, sold them at a discount and pushed property prices even lower.

At the end of last month, 31 per cent - nearly one in three - of these adjustable rate mortgages were either in default, foreclosed or had been seized by the bank.

US President Barack Obama summed it up when he told Congress before last week's stimulus vote: 'The problems in the US are accelerating instead of getting better.'

Depending on the US

This recession was made in the US and has spread to the rest of the world. Now, the US needs to re-start its economic engine. That will fire up its imports and boost our exports.

How to do it? First, the US will increase government spending to replace the big decline in private spending.

Second, tax cuts will put more cash into consumers' pockets. Last year's tax rebates were US$1,667 ($2,500) per tax-paying family. This year's are lower at US$800 but will include a larger number of families.

Will it be enough? No one knows, but here's a thought: there has never been a depression or recession that did not end.

Think about that while you are worrying.

What S'pore is doing

WE are a small and open economy that depends on imported consumer goods.

As a result, handouts don't help much. The extra money would simply flow out of the country and fail to boost our economy.

What to do? Our focus has been on employment. The new jobs incentive scheme pays a portion of the employer's CPF, thereby encouraging them to hang on to workers during these troubled times.

It is an innovative solution that helps workers AND keeps the stimulus money at home. It is appropriate for an open economy like ours.

Will it be enough?

No one knows but Credit Suisse bank estimates our stimulus spending is about 8per cent of GDP, making it the highest in the world.

Compare that to our eight regional neighbours: Hong Kong, India, Indonesia, South Korea, Malaysia, Philippines, Taiwan and Thailand.

Their spending stimulus averages 2 per cent of GDP, considerably less than what we are pumping into the economy.

This article was first published in The New Paper.

No comments:

Goldman Sachs Information, Comments, Opinions and Facts