As our chart indicates, the U.S. budget deficit is expanding at its fastest rate in the post-war era. Obama’s proposed fiscal stimulus will add to this deficit. This aggressive fiscal response is meant to offset a sharp contraction in GDP. As our updated CGS indicators package shows (see right hand column), the 3.8% fall in the fourth quarter is unlikely to mark the end of the downturn.
Financial stocks plunged this week, renewing the debate over how to fix the banking system. The Treasury’s remaining $350 billion in TARP funds would be enough to buy the existing common equity of the U.S. banking system, but buying existing stock wouldn’t provide the banks with new capital. To fix the banks, the Obama administration must select from a range of options that include capital injections, asset purchases, a ‘bad bank’, or nationalization.
In what Russia claims to be a purely commercial dispute, Gazprom cut off gas to Ukraine, disrupting supplies across Europe. However, some suggest that Russia’s real aim is to exploit European dependence on Russian gas (see chart) in order to divide Europe and undermine its pro-Western neighbor. The following articles discuss the geopolitical implications of Europe’s dependence on Russian gas.
The experience of the 1997-98 East Asian crisis encouraged many developing countries to accumulate vast sums of foreign exchange reserves in order to self-insure against future crises. As our chart indicates, as of the end of November, emerging market countries were burning through these reserves. This crisis will put to test previous thoughts about necessary reserve levels and the efficacy of self-insurance.
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