Your country needs you – to spend, spend, spend

April 3, 2009

Getting the U.S. consumer spending again is simple. “The government should issue every household with a debit card with an expiration limit of 90 days, and if they don’t use it, they lose it,” says Paul Kasriel, chief economist of Chicago-based Northern Trust.

Kasriel has a reputation of being more pessimistic than the consensus, but given the programmes unveiled to date by the U.S. Treasury, he believes the U.S. economy will start to recover this year. “The Federal Reserve, like other central banks, is a legal counterfeiter, and they can create money out of thin air,” he says, pointing to the TALF, and son-of-TARP, the inelegantly named PPIP.

Under the terms of the Term Asset-Backed Securities Loan Facility, the Fed will provide financing for firms to purchase asset-backed securities of credit cards, auto loans and student loans, whilst accepting most of the credit risk. Kasriel says this $1 trillion programme has gotten off to a slow start, but he believes it will gain momentum over the next few months and will play a key role in kick-starting the credit markets.

PPIP, or the Public-Private Investment Plan, has been designed to help banks remove toxic assets from their balance sheets, but there is a question mark over how many banks will actually want to take additional write downs. Kasriel says the bulk of these assets at U.S. banks haven’t been written down yet.

Indeed, banks have resisted write downs by arguing that the lack of liquidity for these assets has made it difficult to mark to market. However, the PPIP will finally establish a price for these toxic assets, forcing write downs. “That will leave some institutions inadequately capitalised,” Kasriel points out.

As a result he sees more mergers, capital raisings in the market, or a kind of nationalisation ‘lite’. “There was a line in Obama’s budget that $750 billion had been allocated to bank recapitalisation – I think that’s the ultimate plan,” Kasriel says.

Although Kasriel sees inflation returning in 2011 as a result of all this spending, he sees US exports becoming a larger proportion of GDP, as developing nations start to spend and the world economy rebalances. He tips healthcare, agricultural products, green technology and engineering expertise for infrastructure projects as the sectors most likely to benefit.

(Reuters photo: Benoit Tessier)

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