How Much Is Enough?

Posted January 15, 2009

The US markets have entered a state of extreme volatility again as Bank of America’s request for additional bailout funds indicates continued bank instability. The yen weakened against most major currencies as the US government indicated more cash injections into the economy are on their way soon.

 

When the Bank of America in the US asked for more bailout funding from the US government, the response in the stock market was swift.  The Dow Jones Industrial Average took a nosedive threatening to reach into the upper 7,000 range again.  The key point about this request is the message it sends that the stimulus funds already injected in the banking system have not been nearly enough.  The financial system is still not stabilized which is very bad news. 

The question is: How much will be enough?  Will the additional $350 billion TARP funds be enough?  Will the President-elect Barack Obama proposed $850 million plus economic stimulus funds be enough? What exactly will be enough???

This is not a question just for the US either. The German economy is expected to experience a minimum 2.5% contraction during 2009 despite stimulus efforts to date.  China has gotten strangely quiet as it deals with its own economy by propping up the yuan.  But in another unexpected turn of events, China’s National Bureau of Statistics issued revised 2007 Gross Domestic Product numbers.  The revision would not be notable except that it led to a reordered list of economies in terms of size.  China became the third largest world economy in US dollars and Germany falls to number four.  Numbers one and two are the US and Japan respectively.

Germany’s Gross Domestic Product grew 1.3% in 2008.  Germany, Great Britain, Greece, and many other European countries are experiencing severe recessions as is the US.  The euro is taking a beating too as the data continues to present a picture of deteriorating economic conditions.  One market writers described the situation as “continued worries about the financial system sent investors grasping for safety.” (Wall Street Journal, 15/January/2009, p. C 10, Riva Froymovich). 

European woes were not helped by the situation in Greece either.  Greece has the honour of becoming the first euro zone country to get a credit downgrade.  Standard & Poor’s lowered the credit rating on Greek government debt and there are more countries close behind unless the economies show signs of revival.  They include Spain, Ireland and Portugal. 

The Greece credit downgrade and threats of additional credit downgrade actions impacted the euro naturally.  It hit a five week low of $1.3093 on Wednesday, 14/January/2008, when paired with the US dollar at the news of the Greek downgrade.

The yen fell yesterday mostly in response to the efforts of the US government to continue its financial stabilization programs.  Investors were willing to take on a little more risk as concerns eased a bit over whether additional bailouts would pass legislative review.  The US Congress has agreed to release the remaining $350 billion TARP funds to President-elect Obama.  There is an agreement that $100 billion will go to help prop up the mortgage loan industry.

The yen fell against the US dollar (89.84 yen per dollar); the Australian dollar (59.55 yen per Aussie); the New Zealand dollar (48.28 yen per the Kiwi); and the euro (118.93 yen per euro).

The European Central Bank did cut the benchmark interest rate by .5% as expected.  As a result the euro fell against the US dollar to $1.3115 dollar per euro.

The credit downgrades in Europe are bad news to the euro zone. A lower credit rating will make it much harder to raise funding to cover debt, and there is certainly a lot of government debt to cover.

 

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