IMF economists uncover a gloomy economic future for the US
The Age
Thursday November 19, 2009
FINANCIAL stimulus packages worsen the effects of economic shocks and decrease long-term global growth, financial modelling by IMF economists has found.In the case of the US, consumption and investment will increase in the short term, but gross domestic product and investment are likely to fall into negative figures in 10 to 20 years, dragging the global economy down.The working paper, titled Fiscal stimulus to the rescue? Short-run benefits and potential long-run costs of fiscal deficits, found that nations going into debt to fund a stimulus program exacerbated economic problems, particularly when the official cash rate did not change."In the first 10 years following the increase in deficits, US GDP, consumption and investment increase," the report's authors said."[But] higher debt eventually leads to both higher distortionary taxes and higher real interest rates, with the latter spreading the negative effects to the global economy."In subsequent decades, growth would decrease because debt repayments would require lower savings rates, which in turn would cut US domestic and foreign investment.With the official cash rate at 0.25 per cent, the Federal Reserve cannot lower rates to stimulate the economy, which means the paper's worst-case predictions are likely to emerge.Turning to derivatives, this week's column looks at a way that retail investors can get exposure to movements in bond prices without actually buying bonds.While the Government is still considering whether to create a retail-sized Commonwealth bond, investors with a strong appetite for risk can already buy futures contracts on bond prices through a broker.Shifts in market interest rates cause bond prices to move up or down. For example, a rise in rates might send the price of a bond with a face value of $100 down to $94. Someone buying at that price would receive $100 for each bond they hold when it expires, thus making a profit of $6 a bond.The futures market allows you take advantage of such price moves to "go short" on bond prices €” that is, to sell a contract in expectation of buying it back cheaper, so making a profit.However, investors must have enough money to cover potential losses if the bond price moves against them."If you pay your margin, you can either buy or sell a futures contract," said the head of futures and foreign exchange at Bell Potter Securities, Geoff Louw."It can be bought and sold on any given day, or be bought and held until the expiration of the particular contract."Contracts expire at the end of each financial quarter.
© 2009 The Age
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