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Save or Spend (or Pay Down Debt)

The start of the week brings another pair of economic stimulus packages. This time it's the governments of India and Australia that are going to find ways of pushing money into their economies in an attempt to stave off the worst effects of slowing growth.

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Australia Prime Minister Kevin Rudd has almost declared it the duty of the country's citizens to spend the handout to preserve jobs. The cash payments worth nearly 9 billion Australian dollars will give 2 million families a thousand dollars for every child and 4 million pensioners more than a thousand dollars each. The cash comes as the economy wracks up its weakest growth in nearly 8 years.

But is it responsible politics to urge some of the most vulnerable in society to spend? Setting aside the moral question of encouraging the indebted to spend more, is it better to direct spending on the economy through the individual rather than state-led employment programs?

The risk for the Australian economy is that the cash "disappears" into a bank account or is used to pay down debt. The central banks are doing their best to discourage saving by lowering base rates. If consumers wish to maintain purchasing power they won't do so by saving.

But worried and debt-laden consumers are unlikely to feel emboldened to spend when newspaper headlines daily report declining employment.

Logic would dictate the indebted pay down debt, those with little saving build up a "rainy day" buffer and anybody that is left enjoys the money that they receive in conspicuous consumption or investing in assets that are likely to generate a return better than cash.

Asset Allocation

Giles Keating, our guest host today from Credit Suisse, suggested a strategy of buying deep value in corporate debt and equity in companies with strong balance sheets, solid business models and good cash flow. They make up the core of the portfolio, while other assets should have limited correlation. He thinks gold, China, infrastructure, dollar shorts and inflation-linked bonds are the place to go fishing.

(Watch the full Giles Keating interview here >>>).

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