Monday , 20 May 2024

More Quantitative Easing Would Have Frightening Side Effects

Like, ‘depression’, ‘recession’ has become an unacceptable word, because its use would drain confidence even more heavily. The housing market is already tipping into another negative slide with new house sales falling and mortgage rates at record lows. What can be done? We…see more quantitative easing as being unavoidable within three months, if the bad news continues. This time, [however,] we have to ask, can it be managed without frightening side effects? Words: 833

Lorimer Wilson, editor of, provides below further reformatted and edited [..] excerpts from Julian Phillips’ ( original article* for the sake of clarity and brevity to ensure a fast and easy read. (Please note that this paragraph must be included in any article reposting to avoid copyright infringement.) Philips goes on to say:

Debt Crisis of U.S. States will Necessitate Further Bailouts

Forty-eight U.S. states will be in deficit this year and the combined shortfall will probably exceed $300 billion. That puts Greece’s expected 2010 budget shortfall of around $28 billion and the Eurozone crisis into perspective. Greece’s shortfall is put at around 13.6% of G.D.P., whereas there are a good number of U.S. states anticipating deficits of more than 20% this year, including some, like California, New York, Florida and Illinois, with far bigger economies than Spain, Greece and Portugal lumped together. There are around a dozen U.S. states with bigger economies than Greece and most of these anticipate 2010 deficits at this kind of level! The result is going to have to be massive Federal Government bailouts in the midst of quantitative easing.

Inflation Will Be Generated to Attack Deflation

The net effect is the threat of default and massive deflation. [Indeed,] the word ‘depression’ will be heard if there is no, almost unlimited, quantitative easing. While such measures may stave off the worst economically, the impact on confidence will be remarkable, but not in a good way. We believe that the Fed and government will accept that inflation is the lesser of two evils and, overall, will lessen the threat of deflation, recession and bad debts… [Such inflation] will result in the devaluation of the U.S. dollar, both internally and externally, but the rescue of the U.S. economy will be the top priority of the Fed and the government, irrespective of external consequences.

Consequences of Quantitative Easing

1. Inflation and the Debilitation of the U.S. Dollar
Inside the U.S. the current thriftiness of consumers will turn to spending as they realize that their savings are also being devalued, as is their debt. This will speed the velocity of money again as well as stimulate retail sales, inventory building, investment in capital goods and growth. Wonderful! Just what is wanted! Should inflation run amok, they always have the Volker solution. Such consequences will be seen as more than justifying the debilitation of the U.S. dollar.

Outside the U.S. the scene will be different. Externally the dollar will be devalued too [and] trade-dependent satellite nations will have to follow suit to keep exports at constant levels. Competitive devaluations of these currencies will become rampant [and, as such,] we do not believe any other currencies will be safe havens from U.S. dollar devaluation. Indeed, we would not be surprised to see international cooperation to make currency devaluations act in synch.

2. Rising Interest Rates and Runaway Inflation
Foreign surplus holders such as the Chinese, who form the backbone of U.S. Treasury bills and bond holders, will be very unhappy with such devaluation after being castigated by the U.S. for holding their currencies down… and may simply not invest or acquire new dollar holdings, thereafter. If that or part of that happens the Treasury markets will suffer badly. These nations will prefer to price their exports in other currencies. No matter what happens to exchange rates, the lowering of the demand for the dollar from these sources will hit the U.S. very hard. After that rising interest rates alongside runaway inflation will be forced onto the U.S. public.

Conclusion: Is the Fed Up to the Task?
If the Fed acts too early to slow inflation, deflation resurges. If they act too late, inflation will be rocketing, so subsequent cooling of inflation will once again have a devastating effect on the economy, bringing much heavier deflation and an environment of mortally wounded confidence, back again.

The careful balancing act needed to manage such an environment may be too much for the Fed with its limited tools [and] letting those forces loose will catch the tiger by the tail and they may not be able to let go.


Editor’s Note:
The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
Permission to reprint in whole or in part is gladly granted, provided full credit is given.
Sign up to receive every article posted via Twitter, Facebook or RSS feed.
Subscribe to our Weekly Newsletter.
Submit a comment. Share your views on the subject with all our readers.