Cogito

After a Long Weekend

Posted in Uncategorized by qmarks on September 7, 2010

Catching up with the news for myself.

Obama will spend at least $50 billion on a six-year infrastructure program with a plan to expand tax relief for businesses.

Effect?

Watch for infrastructure companies in US, government budget deficit. How it will be financed is another question. Academically speaking, Obama will push the Aggregate Demand from the government side, so expect growth and subsequently little bit of inflation. In the long run if Aggregate Supply will level up, it will increase the demand for labour. But also BofA, Morgan Stanley economists say jobless rate may approach 10% in coming months.

Financing part is obvious, government will supply more bonds, T-bills, notes to finance the deficit. That will decrease the price of available fixed income securites, and yields will rise. Eventually, higher nominal inflation, higher borrowing cost, and the less profitable projects.

Probability of rate hike in Canada has risen since last month

Effect?

Mark  Carney saw the an increase in demand from the consumer side thus he will try to curb the inflation. He will increase the increase interest rates by 0.25% or 25bps. If the effect of this increase will be reflected in the exchange rates, that will bring a higher demand for Canadian Dollar against other exchange rates especially, USD. Eventually the loonie will strengthen and the domestic demand for foreign goods will raise, the Net Exports will be written still under red ink.

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