Forex Investment and Currency Trading

The stimulus package likely will draw on some of the components of the Obama economic platform and include a mix of proposals:

• Tax cuts for middle and lower income households. Unlike the Economic Stimulus Act of 2008, which provided $100 billion of tax rebates, this stimulus package will include “rebates or credits” that will be associated with actual rate cuts or new tax credits or expanded deductions that were in Obama’s platform. As such, they will have be relatively more permanent in their impact.
• Further subsidies for distressed homeowners. This will include funding for refinancing mortgages and providing direct subsides to distressed homeowners, including those whose market values have fallen below their mortgages.
• Job creation programs, some of which will be geared toward “infrastructure” and the energy complex. These will focus on infrastructure programs that can create jobs quickly•
• Block grants to states. Presently, state tax receipts are falling and federal grants would go toward easing the gap between spending and taxes. A portion of such block grants may be tied specifically to states’ cost-share of Medicaid.
• Liberalization of unemployment insurance (duration extension), food stamps and welfare programs. These are traditional countercyclical policies.
• Tax credits for home purchases. Presently, there is excess supply of unsold homes and expectations of further home price declines are constraining demand. Tax credits would be one way to stimulate demand and serve to reduce the inventory of unsold homes and mitigate the decline in prices. Such credits may take a number of forms, and could be linked to taxpayer income.

The financing of the fiscal stimulus package is clear: it will add to an already skyrocketing federal budget deficit. In light of the fragile state of financial markets and economic recession, the fiscal package is unlikely to include tax hikes on higher income households. Nor is it likely to include higher taxes on dividends and capital gains. Those changes will come later.

As a result, the net impact of the fiscal package will be reflected directly in government spending, taxes and deficits. On top of sharp declines in federal tax receipts reflecting recession and declining capital gains, the costs of the Economic Stimulus Act of 2008, and the TARP (since most TARP-related activities are considered asset swaps, its expected impact on budget deficits is the government’s expected net loss from these activities), the upcoming fiscal stimulus package, if it is in the magnitude we expect, may drive the budget deficit toward $1 trillion, or nearly 7% of GDP.