When I was a boy, QE2 was the acronym used to describe a ship owned by Cunard. Now, it’s the next chapter of U.S. monetary policy. The QE2 of today refers to the second part of the U.S.’s programme of quantitative easing. For the next few months, the Federal Reserve intends to buy another $600 bn of U.S. Treasury bonds in the open market. As with the $1.7 trillion that financed QE1, the consideration for such purchases will be conjured entirely out of thin air. Ben Bernanke makes David Blaine look like Tommy Cooper.
The background to this would be amusing if it were not so serious. At the recent G20 summit in Seoul, the U.S. wanted the Chinese to accept its proposal that net exporters should limit their current account surpluses to 4% of GDP. In short, they should deliberately take action either to reduce their exports or increase imports but why, we ask, would a country voluntarily undermine its own trade performance? It is akin to Tesco offering to reduce its turnover in order to help Sainsburys; which is why there is not a hope the Chinese will play ball.
After the QE2 announcement, China told the U.S. that the artificial suppression of trade surpluses “harked back to the days of planned economies”. Mmmm ……. a country ruled by a communist regime rejects planned economics while the home of free market capitalism wants interventionist trade policies and prints money, to boot. Whatever next? Sir Cliff Richard gets married? Wayne Rooney enjoys a quiet night in? The ambassador fails to break open the Ferrero Rochers? The German finance minister’s more nuanced appraisal was more to our liking. He opined that “with all due respect, U.S. policy is clueless”.
So far, instead of prompting business investment, a significant proportion of QE1 has simply leached into the stockmarket. Not that Bernanke sees a problem with that. He says “higher stock prices will boost consumer wealth and help increase confidence”. All of which completely ignores the obvious that another artificially inflated asset bubble is the last thing America (or the U.K.) needs; that’s how we got into the current mess in the first place.
While Bernanke oversees the production of a blizzard of monopoly money, it has clearly not crossed his mind to ask why China (and others) have such large trade surpluses. It’s because they are efficient and make goods the world wants at prices it is willing to pay; it really is that simple. It’s odd that the communists get it while the capitalists don’t. When David Blaine made the Statue of Liberty vanish, it soon reappeared. With Bernanke’s magic show, post war dollar hegemony may not be quite so lucky.
John Newsome can be contacted on: 01423 705123 or email:john.newsome@williams-im.com
