Quantitative Easing has come to be the single largest monetary policy lever that Central Bankers keep falling behind. It’s another word for monetary expansion or flushing the market with cheap liquidity in the hope that it will eventually be lent out to business and spur economic recovery. Just yesterday, the Federal Reserve in USA announced it will buy up $600 billion of bonds. This follows earlier rounds by USA and Europe to the tune of trillions.
But some pundits-of-doom are warning that this puts economic fundamentals at grave risk including a collapse of the global monetary system – basically because you are expanding money when there is not as much economic value to back it up. Normally, this devalues money through an inflationary cycle. But, the Central Bankers argue that inflations is a non-issue due to muted consumer demand and that if things start to go sour they can pull the liquidity out of the system and cull the money supply quickly, so the risk is worth it.
What do you think, boon or bust?
Replies
Well put Richard, you are spot on. And, despite the confidence/emotional factors, people are turned off debt. They don't want to leverage to spend. Much better and equitable would be to do a smaller tax refund. At least that will have the change of nudging the confidence factor in the right direction.
Amer Chaudri, author of 'Diatribe: A Scathing Journey Into the Heart of the Financial Corporate Culture'. You can purchase a copy from Amazon UK
Richard Ellis PMP PRM said:
First, a major driver of an economy is confidence. If people feel the Federal Reserve will take any steps necessary to insure a double dip recession does not happen, investment decisions can be strongly influenced toward going ahead. This can easily add several points to the growth in GDP next year.
Second, the risk of short term deflation is greater than the risk of short term inflation. Deflation, if it goes on for too long can be terribly damaging to the public psyche in an economy. I'm not suggesting we are starting to look like Japan. What I am saying is the cost of getting out of a deflationary trap is huge. Inflation is more easily tamed in its early stages. It's not trivial but most people would rather have the problem of slowing an overheating economy down than reviving one that appears dead in the water.
I like to compare QE2 to the cash for clunkers program. The costs and risks of both programs are relatively low, as are the tangible returns. But, they both create buzz. Buzz is what gets people excited.
Richard Ellis PMP PRM
www.richardellis86.blogspot.com