Will these US$ 819 bn save the world? - Views on News from Equitymaster

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Will these US$ 819 bn save the world?

Jan 29, 2009

Obama government's first triumph
In what can be called the first triumph of the Obama-led government, the US House passed Barack Obama's proposed US$ 819 bn stimulus package, aimed at lifting the economy out of recession through tax cuts and more than a half-trillion dollars in new spending. The package would provide money for initiatives including US$ 40 bn for health-care coverage to the jobless, US$ 38 bn for education, US$ 30 bn for highway infrastructure projects, US$ 20 bn for food stamps and US$ 18.5 bn for energy efficiency programs.

The bill which will now seek the approval of the Republicans is, however, expected to face some encumbrances as the opposition has already complained that it included items unrelated to boosting the economy, including US$ 1 bn for the 2010 census and US$ 400 m to study global warming. Further, it is also estimated that the long-term cost of the economic recovery package could rise to US$ 1.2 trillion over 10 years, as the government will borrow to fund the plan and pay an estimated US$ 347 bn in interest. The Congressional Budget Office has also estimated US' fiscal deficit to rise to 10% of GDP including the stimulus package. Nonetheless, the agency expects the package to create between 1.2 m and 3.6 m jobs by the fourth quarter of 2010. We wonder whether this repeated attempt at offering life support to the economy that is the largest consumer of the world's resources will help save the rest of the world as well.

Meanwhile, the benchmark US indices rallied yesterday as investors drew comfort from the government's initiatives at stimulating credit flow and creating job opportunities. While the Dow Jones gained 2.5%, the S&P 500 and the Nasdaq gained 3.4% and 3.6% respectively. Those gains were sustained through the close after the Federal Reserve pledged keeping the interest low and doing 'whatever it can' to help get credit flowing again.

30 m people yet to lose jobs
If you think we are exaggerating, we are not! This is what the International Labour Organisation has to say. As per the organisation's Global Employment Trends report, even in the best case scenario, the global economic downturn could see 30 m more people lose their jobs by the end of the year, taking the unemployment rate to decade high levels. The projected worldwide unemployment level of nearly 230 m people in 2009 will be nearly 21% higher than at the end of 2008. This would hike the global unemployment rate to 6.5% from 6.0% in 2008. It may be noted that over the last ten years, the global unemployment rate has ranged from 5.7% to a peak of 6.3% in 2003. The unemployment rate would also relegate 26.8% of the world's workforce to the class of 'working poor' i.e. unable to earn more than US$ 2 (Rs 100) a day. The potential loss of jobs is particularly perilous for large populated economies like India and China and needs to be contained to evade social unrest.

Bank losses to double to US$ 2.2 trillion
If the loss of jobs thanks to the trillion dollars of bank losses were not enough, the IMF believes that we have not yet seen the end of it as global bank losses from toxic US assets is set to double to US$ 2.2 trillion. The figure is nearly 60% higher than the fund's earlier prediction of US$ 1.4 trillion losses. With the global growth rate shrinking to a miniscule 0.5% in 2009 (the weakest postwar growth rate) as per the fund's estimates, several advanced and developing countries could be seeking more than just fiscal stimulus packages.

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