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QE Harm to Others How to Last Long





Slowdown in U.S. economic recovery should not be attributed to the Fed's policy. The second round of quantitative easing should be withdrawn plans

Governments and central banks have made it clear that the second round against the quantitative easing policy of the Federal Reserve, that is acquired on the long-term U.S. Treasury bonds. This is probably because of national self-interest, but I think, again, the Fed purchase of government bonds also hurt a lot of U.S. interests.

Federal Reserve open market operations to further defend their common ground is that this could be through increased bank reserve and raise bank lending. Slowdown in U.S. economic recovery, a reason that the bank credit crunch. However, over the past few years, the Federal Reserve open market operations through the creation of an additional trillion dollars surplus reserves, and did not make the rapid increase in bank loans. Instead, the bank has accumulated a large amount of excess reserves. Bank deposits with reserves of more than the corresponding collateral requirements.

Whereas the Bank has been holding large reserves and very low interest rates, the additional reserves really hard to understand a significant increase loans. Constraints a major factor in loan market is that borrowers and lenders at the same time there is a big investment risk. This is partly because the impact of government policies, such as health care and financial reform bills, and increased high-income and capital gains tax proposal - which will increase business costs and reduce the investor's after-tax income. Of course, this view may be because of the recent changes in the U.S. mid-term elections. A large number of members of Congress have claimed, to reduce taxes, reduce the size of government. However, there is a risk of the investment environment will not change the view.

Question the second round of quantitative easing suffering Another reason is that the policy will ultimately fuel inflation. Before long, the U.S. economy will accelerate the pace of recovery, bank loans will increase significantly. By then, the Fed's dollar reserves will be created through bank loans and cash into businesses and households, such as currency and demand deposits. Due to the increase in money supply caused inflation expectations will be far more than the Fed. Unless large-scale sell-off during the crisis, the Fed has accumulated trillions of dollars of assets, or can not suppress the growth of money.

In fact, the spread of the Fed holds a tool to control inflation. It can sell new dollar assets, reducing bank reserves. However, the problem is that the Fed have the political will. Federal Reserve any efforts, including selling assets, reducing reserves, not only inflation, but will reduce economic growth. Therefore, the Federal Reserve open market operations to reduce the political pressure faced. The Fed will yield, depending on the political will of its chairman Ben Bernanke. Maybe he will, but I guess both sides will reach a compromise, that the Fed tightening, but less than it hoped for. The end result will be more inflation than economic growth.

Central banks and other money market participants have expected, the United States will eventually be commodity prices rise sharply. This is why they have been working mainly of holdings of dollar assets, so as not to cause its actual value due to inflation down. In turn, these actions reduce the U.S. dollar against the euro, yen and other currencies of the parity. With the substantial increase in actual inflation, the dollar decline will reduce the U.S. price of commodities in the international market. This in turn will stimulate demand for U.S. exports and reduce imports of U.S. consumers demand. However, once inflation up, the situation is often reversed: the demand for U.S. exports will decline, while U.S. import demand will rise.

Federal Reserve Chairman Ben Bernanke tried to buy several hundred billion dollars plan to defend the long-term bonds. He said the move in part to the long-term interest rates to the level of short-term interest rates - short-term interest rates are almost zero - in order to stimulate long-term investment. Bulk purchase of long-term bonds, can really lower long-term interest rates, but the effect is not too much. This is because the current long-term interest rates and expectations is essentially a weighted average of short-term interest rates, but with greater risk for long-term debt less current phase-matching, was only raised. This means that long-term view, the interest rate yield curve to determine the main elements of these basic, short-term or long-term relative changes in the assets, the impact on long-term interest rates are much smaller.
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Article Added on Friday, April 13, 2012
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