G8 Worries Over Whether Stimulus Money Is Being “Delivered”

Most analysis of the stimulus packages put together by France and the huge $585 billion Chinese program to keep its GDP growing showthat the capital is already making its way into these economies which is helping employment and spending. Reviews of the $787 billion US effort is that much of the money will not effect the economy until next year.

The US program may end up being a failure simply because it is acting too slowly and unemployment will probably be 10% by the fall. There has even been discussion of a second stimulus package.

Some leaders making comments about the world economy at the G8 summit are expressing worry that the hundreds of billions of dollars being spent to push global GDP back to positive territory are being used inefficiently.

According to Reuters, “Before there is talk of additional stimulus, I would urge all leaders to focus first on making sure the stimulus that has been announced actually gets delivered,” Canadian Prime Minister Stephen Harper said. The recovery is in an awful bind if Harper’s concerns are accurate.

Part of the process of rebuilding many of the G8 economies has been an unprecedented level of sovereign borrowing in the global capital markets. The US will raise well over $1 trillion this year on its own. Concerns about the national debt of the UK have caused credit rating agencies to voice some worry about its ability to cover its interest and repayment of principal. The notion that a second set of stimulus packages may be necessary next year raises the specter of capital markets that will not buy notes from major national treasuries unless the interest paid on those notes is significantly higher.

China will probably end up being the “lender of last resort” if several of the G8 nations increase their debt loads next year. China may have the ability to push up rates all on its own by stonewalling governments that are not willing to improve the yield on their paper.

Interest rates across the world would move up sharply in 2010 if a relatively small group of potential buyers are asked to take on the financial needs of some of the largest national economies. And, higher interest rates will further impede any further recover meaning the cycle gets more vicious as time passes.

Douglas A. McIntyre