Wednesday, 13 October 2010
And the moral of QE is?
The oft cited argument for further QE is if the FOMC did not do do something, "the consequences would be far worse". Far worse over what time horizon? Would unemployment stay higher for longer? Possibly. Might there be some lost GDP over the short term? Possibly, yes again. But just as likely, it might have the perverse consequence of increasing savings for those reliant on interest income for their future planning and reduce consumption in the medium term (and actually prolong this monetary experiment, look at Japan). On the other hand, could the extra monetary stimulus cause much greater damage in the long term, by creating asset bubbles (or the perception thereof, once the monetary stimulus had to be withdrawn)? Will it cause trade friction which might result in barriers and fuel greater nationalism, thereby making societies less open? Very likely in the latter cases. So what if the world's richest country does not grow at full blast for a while or indeed falls into a recession? The growth it should desire should be based on sustainable economic change which addresses some of the deep rooted and now very apparent structural problems. One of the obvious ones is that the US, as with some other developed economies, relies far too heavily on house price growth to sustain the broader economy. Withdrawal of house equity to buy televisions and cars cannot be a sustainable growth model. Cheap money will do nothing to resolve this issue. This is not as simple as another " we gotta do something, whatever". We are forever telling our kids how hard work and application are the foundation to future riches. The Fed is now implying quick fixes and shortcuts are better.