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Global Outlook

Too Much Money; Too Little Demand - The World Awakes

June 27, 2014, Friday, 18:23 GMT | 14:23 EST | 21:53 IST | 00:23 SGT
Contributed by eResearch

This theme may well be just starting to gain traction as shown in Larry Summer's address on Monday (June 16) at the 20th International Economic Forum of the Americas in Montreal, Quebec.

Larry Summers said that the problem now faced by the U.S. economy is the lack of demand, which may not be easy to solve. He added that the Federal Reserve's current monetary policy has done everything it can do to stimulate the demand side. The burden will have to shift to private investments and fiscal policies.

Public spending on infrastructure development is a crucial step to improve the economy and stimulate strong demand. The access to cheaper credit should stimulate more spending on projects, like renovating New York's JFK International Airport and building oil pipelines between Canada and U.S.A.

The trick to get the money really flowing into the economy is first to get consensus between all levels of government (fat chance!). It may, however, be more likely to come in dribs and drabs from action by the FED following the recent ECB imposition of negative interest rates on overnight money parked at the central bank.

Even if the Fed were to just eliminate the 0.25% interest that it is currently paying the commercial banks on excess reserves, there may be some movement into riskier assets, such as moving out along the yield curve, which might push longer term rates even lower or, perhaps, into equities now that the DJII is up well over 10,000 points from the Mar 2009 low.

The DJII continues to move to new record highs as the dividend discount value of the DJII at 25,000 continues to exceed its price of 16,946 by a wide margin, ensuring that the pressure on the market remains up, as it has been since the days of Lehman.

Perhaps the banks will consider equities at 25,000 and come late to the party yet again?!

Plus ga change, plus c'est la meme chose!