IMF says Deficits will remain absurdly high

A couple of interesting EI type of reports. The first, the LIBOR rates are now BLB - before Lehman Brothers.

The Libor-OIS premium that indicates banks’ reluctance to lend to each other fell to 0.87 percentage point on April 24, the lowest level since before Lehman Brothers Holdings Inc. collapsed in September, according to data compiled by Bloomberg. Companies have raised a record $468 billion in U.S. bond sales this year. Prices of the most senior portions of mortgage bonds backed by prime U.S. jumbo loans have climbed 24 percent in the past five weeks, according to London-based Barclays Capital.

Investor confidence in financial markets is returning after the U.S. government and the Fed agreed to spend, lend or commit $12.8 trillion to end the longest recession since the Great Depression. Finance chiefs from the Group of Seven predicted in Washington on April 24 that the world economy will start to rebound later this year.

The second, from Financial Times, shows government budget deficits will remain sky high, simply due to weak economic performance by all major industrialized nations, Germany being the projected worse:

Budget deficits across the industrialised world will remain sky-high next year in spite of reduced spending on fiscal stimulus packages, the International Monetary Fund warned on Sunday.

It said the Group of 20 leading economies taken together would run a budget deficit of 6.5 per cent next year compared with 6.6 per cent in 2009.

The huge deficits owe more to weakness in the world’s big economies than to discretionary spending on stimulus packages, which is set to decline in 2010.

Staff at the US Federal Reserve estimate that the ideal interest rate for the US economy under current conditions is minus 5 per cent, according to an internal analysis prepared for its last policy meeting.

The IMF said on Sunday the UK deficit would rise from 9.8 per cent of gross domestic product this year to 10.9 per cent next, while the deficit in Japan would increase to 9.6 per cent of GDP. It predicted that the US deficit would inch lower, but to a still high 8.8 per cent of GDP.

The biggest deterioration would come in Germany, the IMF forecast, with the deficit jumping from 4.7 per cent of GDP to 6.1 per cent. The deficit will also move higher in France, to 6.5 per cent of GDP.

What does this mean? We can all go into debt again because banks are lending but in terms of the real production economy we all are nowhere?

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