Thursday, January 24, 2008

Decoupling As A Matter Of Policy?

One of the many interesting features on the financial landscape at the moment is the very different actions being taken by central banks and governments to address actual or perceived economic problems. Here are some examples:

1. United States: a very large fiscal stimulus package from the government (presumably financed by more borrowing) and a large cut in interest rates by the Federal Reserve. There is talk of a bail out of bond insurers. The primary concern is expressed to be the risk of a recession rather than the risk of accelerating inflation;

2. Europe: the European Central Bank has thus far declined to follow the US Federal Reserve in cutting interest rates, being more concerned with the risk of inflation than the risk of recession;

3. Australia: the Reserve Bank is maintaining a high interest rate policy to combat inflation. The government has also expressed an intention to combat inflation but cutting government spending to take money out of the economy (in spite of running a surplus in 9 of the last 10 years);

4. Hong Kong: interest rates were cut in response to the cuts in US interest rates (which had to happen to some degree or another due to the currency peg). The government has announced that it will take steps to reduce a very large surplus through a combination of tax cuts/rebates, spending initiatives and increasing the pay of the already grossly overpaid civil servants. So we have lower interest rates and more money being injected into the economy in spite of rising inflation.

Four very different economic policies which would suggest that each of the four economies mentioned is dealing with different economic concerns. Could this be taken as evidence that decoupling is happening to a greater extent than once believed?

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