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Rate cuts are coming/谢国忠

谢国忠搜狐博客　http://xieguozhong.blog.sohu.com/ 　

The collapse of the US bailout bill in the Congress indicates enormous resistance to solve the financial mess with taxpayers' money. The bill, I think, will be resuscitated in some form soon. But, it won't change the political reality that the US taxpayers resist paying for the Wall Street's mess.

The bailout plan won't rescue the economy. The US government hopes that the bailout will allow banks to lend again. But, to whom? The US households borrowed in the past with appreciating home value as collateral. The consumer credit is already slowing sharply (2.1% in July vs. 5.6% in 2007). The consumer credit risk is too high when unemployment is rising so fast. The financial sector doesn't want to lend to households even when they have money. As consumption contracts, businesses won't raise capex. The chances are that they will decrease it. As the global economy is weak, exports won't help like before. Whatever angle we look at this, it seems the US economy is heading for unprecedented contraction.

The pressure on central banks to ease extends to other economies. Government debt levels are too high in Europe and Japan, and tax rates are already too high. As their economies contract, their politicians will pressure their central banks to ease.

At the same time, energy price will remain high, and labor productivity sluggish. The bout of rapid labor productivity growth due to global trade boom is winding down. Hence, sluggish global economy won't decrease inflationary pressure like before.

China is also under enormous pressure to cut rates, even though inflationary pressure remains high. The fiscal policy is too slow to dent the rapid deceleration of the economy. I think that lending rates can be cut by 1.5 percentage points over the next twelve months, but the deposit rates will remain quite stable. The lending margin for banks can contract to below 2%. This kind of policy is all reasonable in Chinese context. Banks made a lot of money during the boom. They should share the burden on the way down.

Hence, global coordinated cuts of interest rates may happen soon. Printing money may become the most important source of funds for recapitalizing the financial system.

Stagflation is here to stay. I remain bullish on energy and gold, bearish on pretty much anything else.