White house and Democrats have reached an agreement for emergency economic package to help the economy grow and avoid the much expected recession. This seems a good news as customer spending is going down in last few months. Few days back, Fed also announced interest rate cut in a panic when the stock exchange was heading south. Everything seems a good step on the face. But I have a few concerns about the consequences of these steps.
This package will give tax rebate of $600 to individuals and $1200 to the couples who earn less than $75,000 and $150,000 respectively. The rebate part of this plan will cost the government around $100 billion and $50 billion are announced for the business tax cuts. It seems everyone will have to pay less tax.
One of the concerns for me is effect of these steps on the overall inflation. Since people will have more money to spend and interest rate cut also fuel the increase in inflation rate. If this happens than the real money to spend will again go down and the consumer will not be able to spend any extra money effectively. This higher rate of interest will also make the dollar weak in the exchange market that will further reduce purchasing power of the consumers. Since most of the products are imported their price will go up because even Chinese manufacturing plant cannot produce at low dollar price. I am still afraid that 2008 may see recession because fundamentals were ignored.
This package will give tax rebate of $600 to individuals and $1200 to the couples who earn less than $75,000 and $150,000 respectively. The rebate part of this plan will cost the government around $100 billion and $50 billion are announced for the business tax cuts. It seems everyone will have to pay less tax.
One of the concerns for me is effect of these steps on the overall inflation. Since people will have more money to spend and interest rate cut also fuel the increase in inflation rate. If this happens than the real money to spend will again go down and the consumer will not be able to spend any extra money effectively. This higher rate of interest will also make the dollar weak in the exchange market that will further reduce purchasing power of the consumers. Since most of the products are imported their price will go up because even Chinese manufacturing plant cannot produce at low dollar price. I am still afraid that 2008 may see recession because fundamentals were ignored.
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