Unsure of initial stimulus helping: Richard Burdekin

Nifty BSE | NSE 30/05/12 Are Mutual Funds betting on Nifty?

Q: But if all the government can do is finally just stabilize the economy and that is probably in your opinion the best way to go about doing their job then when do you forecast or foresee any recovery? We have had one economist on the show earlier and he was talking about a W-shape recovery saying that we might see things come back a bit in the middle of this year but that would only be an illusion. Thereafter, they would continue to deteriorate and an actual recovery could only be seen late next year or thereafter. So what is your sense of how long a recovery would take to pan out?

A: I think in the US, that sort of timeframe seems reasonable to me. I think there is obviously a lot of variables that we just don't know enough about to come up with a proper forecast but I do think that an important element here is what happens not just in the US but what happens in Asia, particularly, in China. It looks like the Chinese stimulus package, at least, so far is seemingly somewhat more effective. It seems to be a little evidence that the Asian markets if the financial markets are decoupling a bit from the US.

 

So one thing that would be important in India--first of all what is happening in China and then also to what extent economies can somewhat insulate themselves from what is happening in the US. So, one thing is how long it takes the US to recover--I think it is a while and then could Asia recover earlier particularly the larger economies with the larger domestic base of consumption. That is the most interesting question at the moment. I think there is at least a chance that Asia comes out of it a bit earlier.          

 

Q: One other quick question, we have been discussing the amount of money that both the US government as well as the expansion in the Fed's balance sheet that has taken place in the attempt to revive the American economy--does it worry you at all? What this means in terms of future asset bubbles that we may be setting ourselves up for, all this extra spending that both the American government is doing as well as doubling of the Fed's balance sheet?

A: That is a major concern and bringing in China apparently China went through deflation between 1988 and 2002 triggered in by Asian Financial Crisis and then no sooner did the deflation end, inflationary concerns emerged almost one after the other. And I think that is a real possibility in the US; there has been a huge increase in the monetary base. An increase late last year over 50% in a matter of a few months.

So at the moment all the extra money that has been created is not really going very far. So you don't see the big expansion in terms of broad money supply. But at some point of time all that liquidity, all that expansion in the balance sheet is going to emerge and it's just the matter of when. And if it does emerge at a time when the US economy is recovering then it's manageable because the Fed can raise rates and tighten and the economy can handle that. The danger would be if that liquidity translates into inflationary pressures before the economy has recovered, then you would be looking at a situation like the 1970's with stagflation.

So, it is definitely a problem that is going to emerge--it's just when. It is not going to emerge in the next month but will it emerge later this year, next year that is where I don't have an answer, but it can be critically important.