Inside investment: Quantitative easing – Kill or cure?
Monday, June 08, 2009
Andrew Capon
Euromoney
Quantitative easing is being hailed as a policy panacea. The problem is that it sounds a lot like a prescription that causes the very problems it is designed to treat.
When the world was a happier place, before economists annexed the lexicon of forensic pathologists, there was much talk about global imbalances. In the final quarter of 2005 the US current account deficit peaked at 6.4% of GDP. Some thought this was a bad thing, although few pinned down exactly why. Others thought it was a “stable disequilibrium”. Export-driven economies, principally in Asia, could in effect provide vendor financing to the US via their high savings rates, foreign exchange reserves and sovereign wealth funds.
We now know that this stable disequilibrium did not beget stability. Instead, it inflated bubbles everywhere. Federal Reserve chairman Ben Bernanke presciently called the rise in current account surpluses in Asia and oil-exporting economies a “global savings glut”. By contrast the US household savings rate as a share of disposable income gradually declined from 10% in the early 1980s and tipped into negative territory in 2003. The reason US savings went negative was that people were using their houses as ATMs. As house prices soared so did equity withdrawal.
Ultimately, like a Ponzi scheme, debt-fuelled demand will collapse under its own weight. Many point to Bernanke’s predecessor at the Fed, Alan Greenspan, as bubble-blower-in-chief. It is now received wisdom that after the TMT bust Greenspan kept interest rates too low for too long. However, Greenspan could only keep rates so low with the complicity of foreign investors, many of them other central banks and official institutions, which were needed to plug the gap in US savings and fund the current account deficit. By 2007 the US absorbed 65% of global capital imports. Read the rest of this entry »

Radio report here

Bernanke explains quantitative easing