Stabilising demand - will the tax rebate work?

It is an interesting case study in how to stabilise demand and output at a time when consumer confidence is declining and the domestic economy has been hit by a sharp negative shock emanating from the housing market. The fiscal rebates will soon be landing in the post boxes of millions of US households ... the key question is how much of a temporary stimulus will this provide for the economy? The Financial Times has a good article on this today.

“The difference depends on how much of the rebate package will be spent and how much will go on imported goods. It is also related to the time-frame over which it is spent, and whether this expenditure will, in turn, trigger knock-on spending ..... In effect the government will nationalise part of US household debt – socialising some of the costs of the economic downturn. In doing so it may reduce the risk of a sudden pull-back in spending by overstretched consumers, even if it does not actually boost spending by much. Analysts estimate anywhere from 20 per cent to 50 per cent of the rebates will be spent over a period of four to six months.”

The impact will depend on the marginal propensity to save and spend the extra income and also the marginal propensity to import goods and services. With a weaker dollar raising the prices imported products, perhaps the propensity to import might be a little lower at this key stage of the economic cycle? The tax rebate is also targeted at Americans on incomes below the top of the pay ladder - whose marginal propensity to spend might be expected to be higher than the super-rich.

According to ABC news:

“More than 130 million U.S. households are eligible for the checks. Individuals could get up to $600, couples up to $1,200 with an additional $300 per child. In total about $120 billion will be doled out over the next two months.”

The rest of the FT article is here

US economy awaits stimulation from Bush’s tax rebate (Guardian)

Chart of the Day: The Falling Dollar and Oil at $110

Crude oil prices are spiking higher again driven higher by signs of further reductions in oil stocks (inventories) - which creates a stampede among investors to buy whatever stocks might be available - but also by the continuing decline in the value of the US dollar. Covered in this BBC news article and also here in the International Herald Tribune.

Chart of the Day: $6m per minute - hot money flows into China

The Chinese stock market is down and property prices have been falling in many of the major cities and the Chinese trade surplus is starting to diminish. But short term capital flows are surging into the Chinese economy at the moment - according to research from HSBC Global Economics,

Currencies hit the Headlines

Two currency movements are in the news today. Firstly the pound has fallen to an eleven year low against the Euro with one Euro now worth eighty pence. The second currency hitting the headlines is the Chinese renminbi which has appreciated beyond Rmb7 to the US dollar for the first time since 1994.

Revision: The Pound Falls to 5 Year Low against the Euro

Today’s revision note is on exchange rates and is designed for AS students - the pound has slipped to a five year low against the Euro. It is perhaps the result of the Euro’s strength against the US dollar rather than any fundamental collapse in market sentiment against sterling. 

Mind Map: Credit Crunch

Our A2 macro group mind-mapped the Credit Crunch in a lesson on Friday, a text summary appears below and the original map is also available as a pdf file.

ECB inertia threatens the slow lane

Central banks in the USA and the UK are cutting interest rates as credit crunch 2.0 takes hold. But the European Central Bank is holding firm with official rates at 4 per cent despite mounting evidence that the surging Euro-dollar exchange rate is hitting investment, exports and growth prospects. Why the inertia? And is the ECB so firmly fixated on the altar of price stability that it is prepared to allow the Eurozone economy to tumble into a growth recession thus putting the future of the single currency area under theat?

A to Z of AS Macroeconomics!

Teaching at 5.30pm on a Friday afternoon as the fag end of term approaches isn’t great fun but after a successful SWOT analysis of the UK economy yesterday, I set my AS macro group a half hour challenge today - to produce an A to Z of macroeconomics as a prelude to their revision. Working in pairs, they tried to assemble twenty-six entries - it could be a concept, an issue in the news or perhaps a well known economist - anything so long as it had a macroeconomic connection! Similar to the game of Scattegories, teams only scored a mark when their answer was unique within the class.

Double points could be scored for suggestions such as Ben Bernanke, price pressures or credit crunch. Three marks for purchasing power parity! This led to some very creative and quirky answers.

Anyway ... here is a potted (albeit incomplete) summary of the responses. My job over the weekend is to produce a word document that provides a web link to a newpaper or BBC news story for each of them - so that they can access some articles linked to their suggestions whenever they want to. Can blog users suggest other entries? I am happy to email the word file over if you want to try this exercise before the end of term!

Gold glitters over $1000

The price of gold has risen above $1000 for the first time and the falling US dollar is the main cause. As the greenback slides in the foreign exchange markets, so gold becomes an even more attractive target for speculators who are keen to hedge against the growing global economic uncertainty and also take advantage of stronger currencies to buy gold - which of course is priced in dollars. Nervous investors are looking for assets that will give a more certain return and, with equities markets struggling to recover from the fall-out from the credit crunch, foreign investors now regard precious metals as hard assets that can protect the real value of their portfolios. How much longer can the gold bull (or should that be bullion) run continue? The spread-betting markets are chocker with traders taking bets that gold will rise to $1100 or higher still. The lesson seems to be this - watch what the US dollar is doing first and that will give you the next move in the price of gold. So when will the US Fed stop cutting interest rates?

The Decoupling Debate

The D word - ‘decoupling’ - is at the heart of the debate regarding global economic prospects for 2008 and beyond.

The term refers to the shift by developing economies - and newly industrialising countries in particular - away from dependence on strong demand in the West for their products.