Thoughts On Darling’s Fiscal Stimulus

Today I’ve been musing about the effects of the Alastair Darling’s fiscal stimulus which may be announced tomorrow.

When faced with deflation, governments typically try to stimulate the economy by cutting taxes, and kicking of major infrastructure projects.  For further explanation see my post on inflation and deflation.  This is already happening eg China recently announced its $600 billion infrastructure project.

Tomorrow, it is anticipated that Darling will announce tax cuts to kick start things.  I’m now thinking about how he is going to pay for these cuts and how can I profit from this?

As I see it, he can either issue more bonds or print more money.

His problem is that as many countries are now in the same situation trying to stimulate their own economies, who is he going to get to buy these Gilts?  In the Middle East, many countries are now under pressure due to the low oil prices so have no more spare cash.

So, as issuing new debt looks unlikely, I think it more likely he will print more money thus devaluing the pound further (note how it’s already down 25% agains the dollar) and it won’t be long before the Oil sector races ahead once more.

This thinking is backed up by heavy weight investors such as jim rogers who state that comoddities will come out of this with their fundamentals intact.

Maybe the reports in the Saturday’s Telegraph that Soco may be bought for £24 per share (though less than my valuation) is just the start of the next commodity upswing.