What Will Happen When Countries Remove Stimulus?

World Bank President, Robert Zoellick, cautioned countries to maintain existing stimulus programs, and hold off on implementing new stimulus packages as concerns about rising unemployment and potential inflation …

World Bank President, Robert Zoellick, cautioned countries to maintain existing stimulus programs, and hold off on implementing new stimulus packages as concerns about rising unemployment and potential inflation continue to influence the economic outlook for 2010. With the US expected to ease its monetary policy by mid-2010, and continued high unemployment rates, experts believe that the United States could be at the dawn of a second wave of foreclosures in 2010. See the following article from Money Morning for more on this.

The global economy must be wary of bubble and credit risks in 2010 as central banks around the world begin removing stimulus, warned World Bank President Robert Zoellick Wednesday.

Speaking to the press at the Singapore Foreign Correspondents Association, Zoellick said policymakers must be vigilant in preventing asset bubbles and that the private sector is needed to stoke demand.

“And so when that stimulus money has run its course, then the question will be, will the private sector rebuild demand?” he said.

Part of the problem going forward for East Asian economies is policymakers typically follow the U.S. Federal Reserve. However, nations choosing to do this may face challenges because the recovery won’t be symmetrical.

“I think one of the questions here will be the timing of how they manage the interest rates and the risk that they could get some inflation and even asset bubbles which obviously, if they become a serious issue, could undermine confidence going forward,” he said.

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Asian economies are already self-sustaining, argues Money Morning Contributing Editor Martin Hutchinson, a leading expert on international financial markets. But the problems could be ahead for nations such as the United States and United Kingdom.

“At some point they will have to remove stimulus, as the rising commodity prices will feed through to inflation,” said Hutchinson, who sees the current surge in commodities and stock equities as a bubble that has profit opportunities for investors.

World policymakers should keep existing stimulus packages in place, but hold off on implementing new ones, Zoellick says.

Once those packages are removed, it’s up to consumers to pick up the slack – a scenario that the Zoellick fears won’t happen quickly enough in the United States, which is expected to ease its current monetary policy by the middle of next year.

“If you’ve got large scale unemployment, if you’ve got consumers rebuilding savings and deleveraging, I don’t think the consumer is going to play that role,” Zoellick said. “What’s the other source of demand?”

Unemployment, which economists expect to remain elevated in 2010, could have an adverse affect on banks already inundated with toxic assets, as more consumers default on their loans.

“You’re going to have problems with delinquencies of credit card loans, consumer loans, people won’t be able to pay their mortgages,” said Zoellick. “Some banks are going to continue to be troubled by bad loans.”

Indeed, even with numerous government programs in place to help consumers keep their homes in the United States, and the nation could be at the dawn of a second wave of foreclosures.

“Foreclosures should remain really high as long as unemployment is rising, and that is through next spring,” economist Mark Zandi of Moody’s Economy.com told USA Today. “They should be very high into spring.”

Zandi’s forecast is optimistic compared to one by Rick Sharga, senior vice president for marketing at research firm RealtyTrac Inc.

“We’d hoped this year would be the peak as far as foreclosures, but we’ve since concluded it will not be,” said Sharga. “We should see a peak in foreclosures at the end of 2010.”

This article has been republished from Money Morning. You can also view this article at
Money Morning, an investment news and analysis site.

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