QE2 – why all the fuss?

The Federal Reserve (US central bank) second round of quantitative easing (QE2) has its critics – the Chinese and German governments, economist Joseph Stiglitz, and most Republican congressmen. The Fed is currently running out of options and once interest rates can’t be cut anymore it is resorting to buying up longer-term government bonds. This will hopefully keep long-term interest rates low and create more money in the economy and make investments other than government bonds more appealing. Therefore why all the fuss?

– China and Germany are worried that QE2 will increase the supply of US$ on the market and therefore weaken its value. This will make Chinese and German imports more expensive and US exports more competitive which ultimatley means job growth.
– Joseph Stiglitz says that economies always recover but without a stimulus it will take a long time. Short-term unemployment needs to fall and this requires more government spending – not quantitative easing (QE2). As Keynes said in the long-run we’ll recover but in the long-run we are all dead.
– The Republicans basically object to QE2 because it is there job to make sure that Obama is a one-term President. Would they be criticising Fed Chairman Bernanke if the Republicans were in office? I think not.

According to James Surowiecki of The New Yorker the attacks on QE2 are hysterical and people are accusing the Fed of injecting high-grade monetary heroin into the system which they assert will generate artifically high stock and commodity prices around the world. The reality is that stock prices have fallen over the last few weeks since QE2 as American banks have trillions of dollars to lend but consumers are continuing to reduce their debt. The biggest risk to the US is not that the economy will experience high levels of inflation in a couple of years (pipeline effect) or a stock market bubble or currency war. The reality is that there could still be well over 15 million people unemployed.

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