The U.S. economy needs faster-acting stimulus in the form of increased government spending because it will take time for a new round of monetary stimulus to have an impact, MSI Global Inc. President Michael Ivanovitch said.
“The economy is crying out for help,” Ivanovitch, a former economist at the Federal Reserve Bank of New York, said in an interview in Budapest yesterday. “We need something that is faster-acting, to accelerate growth in the United States, and that clearly is fiscal measures.”
The government’s ability to increase fiscal stimulus will depend on the composition of the next Congress because a loss of control by the Democrats would “straightjacket” the party and the administration of President Barack Obama, according to Ivanovitch, whose MSI Global advises on the world economy, geopolitics and investment strategy.
Federal Reserve Chairman Ben S. Bernanke and his fellow policy makers are debating whether to increase Treasury purchases to spur the U.S. economy by keeping borrowing costs low. The economy lost 95,000 jobs in September, the Labor Department reported on Oct. 8, underscoring the need to stimulate growth.
The government should increase spending on infrastructure to boost economic growth, because such projects are easier to gain support for, Ivanovitch said.
“The Fed has really done all it could,” he said. “In fact, the economy will be driven by this huge monetary stimulation, which works, but it works very slowly. With the fiscal prompt, depending on the elections, things are clear.”
The dollar reached a 15-year low against the yen yesterday on speculation the Federal Reserve will debase the currency by signaling increased quantitative easing to reduce unemployment. The yen appreciated 0.1 percent to 82.08 per dollar today. China’s yuan declined the most in almost two months as the central bank set the reference rate weaker for the first time in three days after the dollar rebounded against the euro and the yen.
Asian currencies such as the Chinese yuan need to be allowed to appreciate and it is in the government’s interest in Beijing to allow a gradual strengthening of its currency, Ivanovitch said. U.S. President Barack Obama said last month that the yuan is kept undervalued to give Chinese exporters an unfair trade advantage. The yuan’s 1.7 percent advance last month was the most since July 2005.
“Markets are piling up the pressure on the yuan,” Ivanovitch said. “And at some point something will have to give. Either markets will pile up an irresistible pressure on China to let the yuan go up, or the Chinese would have to allow the yuan to grow up faster but in a relatively gradual fashion.”
The U.S. Senate will consider legislation that would allow duties to be imposed on Chinese imports because of the nation’s failure to allow bigger currency gains, according to Senator Charles Schumer of New York. Yuan forwards surged to the highest level in more than two years yesterday on speculation that Premier Wen Jiabao’s government will yield to U.S. and European pressure.
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