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Have central bankers taken a gamble too far?

As the US pledges $600 billion more to boost the lacklustre US economy is it the central bankers that are now playing casino with our futures?

 
Have central bankers taken a gamble too far?

Last night the US rate-setting committee took a step into the unknown, pledging to pump another $600 billion dollars into the economy.

The news that the US has embarked on a second stage of so-called quantitative easing – buying assets to help push money through the economy – came just hours after President Barack Obama admitted the US economy is in neutral and as the rate-setters said employment and growth in the US remains too low.

For share investors it must seem like Christmas has come early with markets across the globe up around 2% and hitting new highs. But elsewhere people are already worrying that the move either won’t do enough to revive the flagging US economy or could begin to lift prices without increasing jobs.

Policy for policy’s sake

The reasons why the members of the Federal Reserve’s Federal Open Market Committee feel it is necessary to do more are well known, but bear repeating; there are already signs that prices are falling in the US, growth is sub-par and the political stalemate after this week’s elections means only the FOMC can do anything to breathe new life in to the world’s largest economy.

And many of the people I have spoken to recently say there are two other factors at work; the Fed doesn’t want to be seen to be doing nothing, while it believes that the risk that its policy causes massive inflation is more manageable than the alternative.

Equity fans also point out the move adds to the attraction of shares, as alternatives such as cash and government bonds are actually losing you money with inflation at these levels.

Risks of bubbles forming

But while stock market investors are happy that the sweet spot that lifted shares last year is back, not everyone is impressed, as for others this pressure to take on more risk could soon cause bubbles to form.

Governments in the emerging markets are steeling themselves as billions of dollars continue to head their way each month as investors seek out the better returns provided by their higher growth economies.

And the fact that the dollar, already under pressure, has fallen another cent against the pound and the euro is also causing concern.

Fear that the US policy could inflate the US out of debt and that a weaker currency could be used to the struggling economy's advantage has already spurred the Bank of Japan to hold its next meeting two week’s early.

Most believe it will counter the US with some more stimulus of its own.

Pressure on the pound

The Bank of England has decided not to do more to stimulate the economy yet as growth has come in well above expectations and inflation remains solidly above the 2% target.

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22 comments so far. Why not have your say?

John Lacy

Nov 04, 2010 at 13:48

Let's face it---the Americans are so deep in the manure that they are now using a snorkel to breathe.

This will have no long term benefit and just push their economy even lower when the real correction arrives and there is no money left.

Cardboard boxes all round gentlemen!!

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Alan john

Nov 04, 2010 at 14:23

I totally agree with John lacy.

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Ian

Nov 04, 2010 at 14:43

I agree with John Lacy. Printing money is a short term fix which causes greater problems down the line. If the USA stopped living on the back of debt and put its house in order life would be very much better for future generations and the same goes for the UK.

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Joe Bloggs

Nov 04, 2010 at 14:43

I totally agree with Alan john.

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fred pyatt

Nov 04, 2010 at 14:48

Can anyone really believe that this wont end in TEARS !!! ??

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Frankie Dee

Nov 04, 2010 at 14:52

Its a great way of pushing up share prices for a few days thats about it in my opinion its reckless at least our lot didnt follow suit this time or was that because they simply didnt have the funds.

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chazza

Nov 04, 2010 at 14:52

Deborah,

you wrote: 'And increasingly commentators are convinced or worried – depending on their view – that the downward pressure on the pound will persist for possibly years to come as most believe this is not the Federal Reserve’s last throw of the dice.'

I assume you mean 'downward pressure on the dollar' (or upward pressure on the pound???)

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Drake

Nov 04, 2010 at 15:36

I'm still puzzled as to why the US, UK and other major economies don't have a concerted round of printing money and paying off national debt. If one country does it in isolation, that weakens the currency, sparks off inflation , etc, etc. But if all countries do a similar proportion of debt reduction it should have no effect other than reducing gearing and boosting their several economies.

I have heard this decribed as "scrolling back to zero".

Can a learned economist enlighten me please?

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Alan john

Nov 04, 2010 at 15:41

As I said before, I agree with John Lacy.However, I reckon it is about time the rest of the world confront the US.True, there are deep in the manure but they are making sure that the rest of the world follow them in their manure which is unacceptable. Not only Bernanke devaluates his currency, but he makes sure that a vast sum of money upsets the emerging markets.It is tan economic terrorism.

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Deborah Hyde (Citywire)

Nov 04, 2010 at 15:52

Chazza,

Thanks for that. You were right.

I have corrected it now. I hope it didn't spoil your enjoyment.

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Arthur Smart

Nov 04, 2010 at 16:32

I am no economist, but have been asking myself exactly the same question that Drake asks. Maybe it is too simple a solution.

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William Phillips

Nov 04, 2010 at 16:49

Drake's solution is brilliant except for one tiny problem. If the major governments acted as a cartel to reward thriftlessness |(including their own) and punish savers, the latter would never buy their bonds or trust their fiat money again. We'd go on strike and trade between ourselves-- in gold.

The Fed is itself a cartel of private bankers whose machinations and objectives have diverged widely from the interests of Americans. Secret financial diplomacy and fiat money have produced a nation in which a few enjoy unimaginable wealth while the mass of hard-working middle class guys are trapped in debt, see their living standards under attack, social mobility freezing up and their kids facing penury and subjection to Asia.

One day this Bastille will be stormed. Luckily the voters had the sense this week to give thumping majorities to Dr Ron Paul, the Fed's foremost critic in the House of Representatives, and to his son Dr Rand Paul in the Senate.

The crusade for honest money goes on!

http://www.campaignforliberty.com/

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Robin Linger

Nov 04, 2010 at 17:18

QE cannot and will not help the American economy in any way whatsoever as is the case in the UK:- in fact it may jeopardise the recovery as the money is channelled into the wrong sources instead of being put directly into the economy at large e.g. public works etc road building and industrial uses, which has been proved to work in the past i.e. in Germany in the 30's. The American property market was bolstered by criminal activity and needed sorting out, as was the British property market with "Self-assessment " mortgages which are to blame for worthless bank assets.To regulate and control the ratio of bank assets will only work if these assets are of true value and not fictitious but unfortunately, the only assets which could be duly valued without risk, are uninvested cash reserves which are of no value to banks as they cannot generate revenue. A weakened currency is a very short term solution as it increases the cost of commodities which industry needs to buy in to manufacture goods, so the competitive benefits will evaporate.

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Observer

Nov 04, 2010 at 17:48

In 1983, in Rio de Janeiro, a wise man told me that if an empty beer glass was a fully liquid asset worth the Brazilian national debt (circa US$100 billion), all you had to do was take the beer glass to New York, and the debt would be paid

He told me that if one attempted the journey you and the beer glass would never be seen again.

The truth is the lenders dont want the money back, what would they do with it ?

So what is money. If all the world debt was repaid, then what.

What would all these numbers sitting in a computer do next.

The stupid situation right now is that growth is measured in people spending money on things they dont need.

Will someone wake up, every cupboard in the western world is FULL.

I cant buy anything, I dont have the space.

People should save, so banks can lend to businesses, or is all this too old hat.

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Drake

Nov 04, 2010 at 19:05

Interesting stuff. William (Phillips), my point is that if the action is concerted it should not affect relative currency values. Indeed, savers would benefit from currencies backed by less highly-geared economies.

In one sense paper debts are as much a fiction as electronic money. I love Observer's surreal story and I suspect we are saying much the same thing. The world is full of the most amazing technology, huge riches and mindboggling scientific skills. Despite that we seem to be grinding to a halt as a result of a failure of something (money, both positive and negative) that reflects the world, but is not actually the world itself. It is meant to be a tool that we use to oil the wheels of economies, so let's start using it as such.

I am suggesting a tentative way to start unscrambling the mess by means of agreed debt reductions. Certainly unilateral actions such as QE2 in the US will get us nowhere.

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Frankie Dee

Nov 04, 2010 at 19:36

Th general feeling here is quantative easing is a bad idea so why did the markets in the USA and UK rise 100 & 200 points can someone respond if they have any idea i am intigued I personally feel its the wrong thing to do its typically chucking money at something that may do something in the very short term.

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snoekie

Nov 04, 2010 at 22:05

John has it aright.

Rather than printing money to buy their way out of debt, is it not better that they take an axe to the defective limbs causing the haemorrhage and apply the hot poker to staunch the bleeding.

Instead of three meals a day, cut it back to 2, make do with what you have, rather than trotting out to the printing shed and print some more money because sooner or later somebody is going to wise up that these are good forgeries, not backed by solid assets.

The role of central bankers is to be prudent, not reckless by printing more money. To hell with what the government thinks, their role is to protect the currency because that in turn will protect the economy.

If the politicians want extra bodies, then they need to raise taxes, something I will not do because I will get booted out of office.

The fact remains is that there are too many bodies in the government service, a lot of whom are redundant, or surplus to requirements and at the same job can be done probably by less than two thirds of those that are in place.

When industry runs short of money, it has to economise. When government run short of money, it seems the only thing that they do is to start the printing presses, or raise taxes. Whichever way, a bad thing because either there is adult rated currency floating around, or they take money that should be spent within the economy out of the economy for their purposes, not a good thing.

Let it be so.

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Whatisname

Nov 05, 2010 at 15:16

Bankers are doing what bankers do best. Making themselves rich and leaving the rest of us to pay. It has always been so and unless politicans worldwide can agree a method of controling the bankers, central and national, it will always be so.

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a benington

Nov 05, 2010 at 17:48

I'm not a fan of QE because in the UK it's all about propping up bubble house prices. I think the old fashioned building infrastructure is a better idea as we end up with a tangible object that facilitates wealth creation.

For the US, god where do you start. Two principal structural problems, political corruption and an income differential that is too big for a sustainable consumer economy and warps business.

I think FaceBook sums it all up. A site for teenage gabble and the occasional keeping up with old school friends and uni mates. It hasn't gone forward from it's first function. It's still a garage business with extra servers. Yet it's valued at billions.

Google is trying. But even so there isn't much to it. The guys running it have sold out to the spying prying corporates and used the money trying to create a 50s SciFi world. But the public don't like being spyed on.

Apple is a real business but dependent on the vision of one man. Does anyone see another like him getting that job. No.

So vision is on of the missing things. Instead of leading Corporate America it's almost invisible. Marketing and the ringing of cash tills lead. I'm not saying profits and marketing aren't important. It's that in a leading edge economy or business, profit is created and led by vision.

Investors in a large income differentiated society with a corrupt political system don't prize vision because they don't need it to create wealth. They just use marketing and their ability to influence legislation.

The UK is little better. We don't value vision either and it's getting worse.

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AL WILSON

Nov 06, 2010 at 16:30

When one strips the problem right down to basics, it is not an 'economic' problem, it is one of 'society'. In the West our Societies have come to expect as a right, houses, cars, holidays, jobs, pensions and total Welfare. The thought that some, most, of these 'rights' might disappear, is unthinkable. Yet that is exactly what is going to happen, sometimes slowly and sometimes with an almighty bang - gone. The wealth we in the West currently enjoy is quite quickly, draining Eastwards. Whereas once the Chinese were famous for making cheap plastic yellow ducks, now they are building a middle class quite capable of running Banks, Insurance Companies, becoming doctors and dentists, engineers and architects, providing in short everything for themselves, no need to buy anything from the West.

These events will destabilise Western Societies.More and more people will become unemployed because they wont have anything to do, their Companies will no longer be relevant, the work being done cheaper and better by someone in Shanghai or Jakarta. As tax receipts fall less and less 'welfare' will be available to prop up households, so the people on mass will become anxious, taking to the streeets, trying to defend their 'rights' (see France last week).

Not until Society changes will the Economies stabilise and possibly learn to compete again.

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Drake

Nov 07, 2010 at 12:31

Well said, Mr Wilson.

Few people are prepared to look at the bigger picture. For example, in the future we may have to come to terms with running a society that does not depend on economic growth for its success. There are such models, but they are rarely discussed. We continue to run our economies on the basis of fear and greed, which the ancient Greeks told us long ago is a recipe for disaster.

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Deborah Hyde (Citywire)

Nov 08, 2010 at 15:31

Frankie Dee,

The main reason investors were buying shares is that if the US and other developed countries are willing to do more stimulus that means shares will pay a better return.

More QE basically pulls interest rates even lower and makes the prospect of a US interest rate hike even more unlikely in the months possibly years ahead.

That means investors are losing money on cash and bonds as rising prices take their toll.

That means investors have been hunting better returns in the stock markets and in commodities.

There are some more points to consider in the QE part II story at

http://www.citywire.co.uk/money/ask-citywire-quantitative-easing-part-ii/a447558?ref=citywire-money-latest-news-list

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