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Recession on horizon - Time for QE3 ?

Last week there were many downgrades to US GDP growth with many economists lowering their GDP forecasts to 1% growth. With such a slow growth, there are always dangers of economy slipping back into recession. Markets being 6 months in advance are definitely hinting and to some extent pricing 40-50% chance of this happening. This summer's events and market reaction was almost exact replica of 2010 summer with some extra spice added due to debt limit drama played out in Washington DC.
This is why next week's Bernanke speech in Jackson Hole is so important. Last year, in same speech he gave an indication of QE-2 which saved markets and to some extent economy. Would he repeat his performance next week ? Given charged political atmosphere and Fed's bloated balance sheet, this is unlikely. Fed had already given promise of keeping rates low for another two years. However this did not help much at least in short term. So what medicines are left to treat sick patient (aka economy) especially when there is nothing happening on fiscal policy. Here are my suggestions:
  • President Obama should propose $1trillion stimulus - split 50:50 with among spending (on infrastructure, helping states etc) and tax-cuts across the board. Should also include tax-holiday to bring in cash parked overseas by companies (over $1trillion) at 10% tax rate but only if cash is used for hiring, R&D and so on
  • Bernanke should announce QE-3 with another $1trillion of treasury buy-back (effectively printing $1trillion greenbacks)
Only such a shock treatment would give economy a jolt it needs to avoid falling in recession. However given tea-party zealots and 2012 election climate, none of these would happen. 
If USA does not do any of these major shock treatments, we risk repeating Japanese mistakes (which are in their 3rd lost decade) and 1937 when economy which was coming out of depression fell back into severe recession. And this time there is no 3rd world-war to save economy as 2nd world-war did during depression times!

/Shyam




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