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It’s all about Stimulating the Right Way on the Right Part



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Nov 10 2008
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China has announced 4 trillion yuan or $586 billion stimulus package (does it have a choice?) – the largest so far to prevent a real disaster from wiping out all the wealth and prosperity built over the decades. That was a lot of money and immediately investors cheer the plan to cushion the world’s fastest growing economy from a sudden collapse (well, it can happen). On surface the massive dollars will be used in domestic spending especially on roads, railways, airports, health & education, low cost housing, tax deduction and infrastructure. Well, that’s the only way to boost economy during such trying time. In fact there’re four basic things a nation can do to prolong its survivability.

China $586 billion Stimulus PackageFirst you have to excite the domestic economy with similar stimulus package and the amount has to be huge enough to generate the “oooh” and “aaah” amongst investment community. This includes bailout or rescue plan, whatever you wish to call it. This is also the most controversial because it may involve building the unnecessary just to create the artificial demands. Political cronies love this method. Second, you have no other choice but to cut interest rate continuously even if it means rock bottom zero percent (this can happen if the situation desire so). Third, it’s time for you to put your marketing skills to test – convince “main street” people and local companies to spend like mad and if they don’t threaten them with imprisonment or execution the mafia way *grin*. Fourth, cross your finger and pray that external factors do not wreck havoc your plan to revitalize the economy. There’re of course other methods but let’s not bore us to death, shall we?

Zero Interest RateHowever stimulus package, no matter how much in dollars and cents, is not the magic bullet by itself and you can’t expect everything to be solved by just an announcement. You need to convince the investors how you plan to use the money, not to mention your capability to execute and see it through. I just hope this AIG troubled-kid’s problem will goes away. The U.S. government is toying with the idea of another $40 billion injection bringing the total doses for American International Group Inc.’s (NYSE: AIG, stock) to a whopping $150 billion. This will erase $40 billion from the $700 billion bailout package pool. The government simply cannot afford to see another bankruptcy lest it wants to see another round of stock markets crashes. But what if the AIG’s management dug a “hole” too deep for any rescue attempt?

Nortel announced it’s axing another 1,300 jobs while DHL said it would cut 9,500 jobs and close all of its express service centers in U.S. on top of the 4,500 job cuts announced recently. Even Singapore’s DBS Holdings is set to retrench 900 staffs despite earning S$402 million in net profits for the quarter ended September. No wonder some of Singapore’s female graduates were reported to offer their underwear and virginity for sale to the highest bidder. Fannie Mae reported another staggering $29 billion loss in 3Q while U.S. second largest electronics retailer, Circuit City Stores Inc., filed for bankruptcy protection under Chapter 11 to hold off its creditors such as Hewlett-Packard, Sony, Samsung, Toshiba, Lenovo, Eastman Kodak and others.

Stimulating the Right WayHeck, even Warren Buffett’s Berkshire Hathaway’s (NYSE: BRK.A, stock) third-quarter profit fell 77 percent, the fourth straight quarterly decline. It must hurt the billionaire very much when the net income declined to $1.06 billion from $4.55 billion a year ago. But then money is not the top agenda for Warren as his latest toy is as economic adviser to President-elect Barack Obama.

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Comments

The AIG bailout is small change and means nothing to the Fed. The Fed is transparent in that it is subject to the oversight of Congress. Is twice a year not fast enough? The intent of Congress in shaping the Federal Reserve Act was to keep politics out of monetary policy. Legislation requires that the Federal Reserve reports annually on its activities to the Speaker of the House of Representatives.

http://nomedals.blogspot.com

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