The Trillion Dollars: The Injection Needed to Keep the Economy Stable due to Loss in Growth; The Mean Reversion for the Financial Markets

MWF (Wednesday) Briefing:

Most are convinced our next president will be Barack Obama.  Unfortunately for him, he's inheriting a financial mess and will have to spend his way through it to create stimulus... and he will get the blame for the trillion dollar deficit that will be needed to keep the world economy stable. 

• Bill Gross released his July 2008 Investment Outlook.  He calls for an immediate $500 billion or so of government spending (once the new Prez takes office) and a trillion total to offset declining growth and keep the recession from getting worse. "It must replace both reduced residential investment and consumption whose decline has placed the U.S. economy near, if not in a recession. Gross private domestic investment (machines, houses, inventories) has declined by $200 billion since its peak in late 2006. Due to higher unemployment and energy costs, domestic consumption will soon be $300 billion less than it should be if we are to return to historical economic growth rates. According to that old C + I + G formula (scratch the trade deficit for now) when C + I is reduced by $500 billion, then G should increase by that amount in order to fill the gap. The government deficit, the fiscal stabilizer popularized by Keynes following the Depression. And since the fiscal deficit for 2008 is likely to press $500 billion even before you take the oath of office, well there you have it: $500 billion + $500 billion = $1 trillion big ones, probably by sometime in 2011 or so. It takes time to spend those types of bucks." Pimco

• The US Financial sector has made around 1.2 Trillion ($1,200bn) of “excess” profits in the last decade relative to nominal GDP. So mean reversion would suggest that $1.2 trillion of profits need to be wiped out before the US financial sector can be cleansed of the excesses of the last decade. FT Alphaville

•  China output is impressive even with the recent shrinkage. Out of the BRICs, It looks like China is the real deal. It's achille's heel would be lack of natural oil reserves unless it causes some geopolitical rumblings by taking over oil rich areas in the South China Seas.  Growthology