MB: As the year ends an onslaught of economic indicators are being released to the public; many in which have shown promising data. For example a report released today showed a 7% increase on existing home sales. Additionally BEA reported a 2.8% increase in GDP for the third quarter. This is good news for the economy and has stimulated a new trend in economic debates. Rather than discussing whether or not our economy is recovering, we are now questioning if the recovery is sustainable. Within this discussion the main controversy is the continuation of government stimulus spending.
Joseph Stiglitz a noble prize winner in 2001 states: While this week’s figures on gross domestic product are “very good,” the numbers would be “miserable” without stimulus measures enacted by the Obama administration.” He urged the U.S. and other countries not to pull back on efforts to shore up economies.
“When we look at if workers can get jobs, if they can work full time, if businesses are able to sell goods they produce, in those terms, we are nowhere near the end of recession” in the U.S., said Stiglitz, 66, the former chief economist at the World Bank. The U.S. job market is still “in very bad shape.”
Below is a blog post from Blogging Stocks, which explains how former FED chairman Alan Greenspan feels about stimulus spending.
Former U.S. Federal Reserve Chairman Alan Greenspan said 2009’s bull market in stocks is reducing the need for additional stimulus actions, Bloomberg News reported Thursday.
Aided by U..S. stock market gains, U.S. household net worth increased by $2.7 trillion in Q3 to $53.4 trillion, according to data compiled by the U.S. Federal Reserve.
When portfolio values rise due to stock, bond, or other asset gains, it increases wealth and its impact on economic activity, called the ‘wealth effect.’
"The stimulus is only a third spent, and its order of magnitude is not large enough to compare with the strength and power of the remarkable global equity increase that’s occurred since early March," Greenspan told Bloomberg News Wednesday. "Capital gains have proved a far greater stimulus than one can attribute to the $787 billion program that has been only partially spent." Greenspan added that increasing spending beyond fiscal/monetary funds committed to-date may not be not needed because higher stock prices and earnings increases will make loans easier to access.
Economic Analysis: Another positive development for the U.S. economy. The subject of wealth and its relationship to income is a topic that’s been worthy of many books, dissertations, and treatises, but briefly, here: perhaps the most important impact of the increased wealth is the enhanced capital position of banks, and the resulting improvement to their balance sheets. Hopefully, it will prompt more lending to small/medium sized businesses who need the capital to expand operations.
The wealth effect is also positively correlated with consumer spending: provided those who increase their spending are in a sound financial position to do so, the impact of the likely boost in consumption will represent another tailwind for the U.S. economy.
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