QE continues to cause bubbling resentments
First reactions from the equity market to the Federal Reserve's additional wodge of $600bn of qualitative — sorry, quantitative — easing have been positive.
Shares in the US rose a couple of percentage points, the UK more, and this, coming on top of earlier rises in anticipation of these measures, means that they have now got back the ground lost following the collapse of Lehman Brothers. The FTSE 100 index is back to the level of June 2008.
But the move has been met with a barrage of criticism from two of the main emerging economies, China and Brazil, and has also led to concern in the eurozone's largest and most successful economy, Germany. More directly, while the interest rate on US 10-year Treasury bonds fell, the rate on very long-term ones actually rose. The market vote for initiative was not unanimous.
So there are two quite different views. One is that the Fed is doing what has to be done to keep demand moving at a time when the economy has been staging a slow and near-jobless recovery — indeed some people argue it should be doing even more. The other is that it is printing money so that the US can continue with its huge budget deficit, the largest in peacetime, and it is trying inflate away the real value of the country's debts. Which is more likely to be proved to be right?
The initial bout of QE, not just in America but also in Europe, the UK, Japan and so on, halted the collapse of asset prices worldwide. It was an exceptional policy for exceptional times and it worked.
The arguments now are different. This is not a co-ordinated international policy. The European Central Bank is not going to follow suit, and the case for the Bank of England doing so is weak. This is US policy designed to cope with a problem that seems to be even greater in the US than elsewhere: debt-laden consumers, a housing market that is still extremely weak, and a budget deficit that has not yet been brought under control. And America seems to be able to get away with it because the dollar is a reserve currency. From the perspective of the US, this is to get the economy moving. From the perspective of much of the emerging world, it is to make US exports more competitive.
That point, that this may be helpful to the US but the effect is to export the country's problems to the rest of the world, has been made by both the Chinese and the Brazilians. China is in a corner, because it links its currency to the dollar and has resisted pressure to revalue it, or at least to revalue it by very much. Brazil has a new government and will assert itself to stop its currency rising further, maybe by bringing in capital controls.
We'll see. I don't think it makes a lot of sense to declare currency war. The president of the ECB, Jean-Claude Trichet, said that he did not think that the US was deliberately trying to devalue the dollar, and that is surely the right response. I was in the US last week and everyone was so preoccupied with American politics and a sense of economic distress that there did not seem to be much space left over to ponder the global implications of policy. In London there may be more perspective. For example, Ted Scott at F&C Investments makes the point that without supply or demand for credit the Fed cannot push the money it has created into the economy. Meanwhile, it is creating dangerous asset bubbles and, he argues, is in danger of debasing the currency and generating inflation.
Further scepticism comes from Michael Dicks at Barclays Wealth. His analysis is that this new bout of QE should add a bit to GDP growth, but this would not be huge. He makes the point that the danger now is that any boost from marginally lower long-term rates, higher share prices and a lower exchange rate, might be more than offset by international resistance.
I think it is pretty clear that this is the end of the line for QE both in the US and the rest of the world. Yes, if there were some further economic disaster then maybe it could be revived. But three points stand against it. One is that the risk/reward ratio has tilted against it.
The second is that global opposition is mounting and it is the rest of the world that has been supplying the main increment to world demand through the downturn.
And the third is that the US may be stoking up the next asset bubble, and we should all be worried about that.