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Will Fed's QE infinity work?

13:26, July 15, 2011

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By Li Hong

Hardly half a month passed after the US Federal Reserve ended its second round of monetary stimulus with a nickname of "quantitative easing", Reserve Chairman Ben Bernanke told a Congressional testimony this week that the US central bank could launch a third round soon, printing more dollars and purchasing more amounts of the Treasury bonds.

The world has just got to know the results of QE II clearly. The Federal Reserve bought a total of $600 billion government securities in 10 months from September to June in a desperate attempt to arrest US economy, wounded seriously in a self-inflicted financial crisis, from slipping back to a double-dip contraction. Because the world's weightiest reserve currency was artificially inflated, prices of crude oil, staple food, gold and other metals, all jumped, causing torrid price rises and elevated inflation in major emerging countries.

Although the Fed has bought more than $2 trillion mortgage-backed securities and government debt in QE I and II, and has kept America's interest rates near zero for two and half years, the measures haven't really helped US economy. The unemployment rate, at 9.2 percent now, isn't much better than the 9.7 percent in 2009 when the Great Recession was at its peak. Despite the Fed's unprecedented monetary stimulus, US economy crawled by merely 2 percent in the first six months this year.

It's a pity that the Fed has almost used up its tools but failed to jumpstart a lumbering economy. At the very beginning of QE II, I have written in a column here that projected a subdued American economy for as long as a decade because of the housing and financial meltdown in 2008. Now three years later, what we have kept hearing is an old engine that is sputtering. "We don't know where the economy is headed," Bernanke said at the testimony.

An expert and pundit in researching Japan's "Lost Two Decades" since 1990 --- which started with an abrupt burst of a huge housing bubble, too --- Bernanke has a faith in extraordinary monetary loosening to flood the system with credit to create jobs and resist deflation, an ill he believes is hurting his country. Bernanke and his Fed colleagues have openly spoken of their like and desire to stir up some extent of inflation in America.

Despite prices of gas and food have climbed up, and vast middle class American families have increasingly felt the pinch of the price rises, Bernanke isn't to change faith. He claimed at the Capitol Hill that US economy needed more aids, and the Fed is considering QE III and steps to discourage banks to park their money at the Reserve by lowering rates. It's no secret that the Fed wants to increase market liquidity and devalue the dollar to new lows.

American people should be prepared for two outcomes: their life is to be made more difficult as gas, food and other daily uses cost more; and Wall Street stock market bubbles become larger as investment banks, hedge funds and speculators get more credit and returns, too. Who said that US economy was becoming healthier after the big bang in 2008? A stock bubble supported by man-made credit crest is the least thing any economy wants.

I am bemoaned by an American critic's comment on a popular US website, which wrote: The two rounds of QE hasn't helped the economy, though they benefitted the balance sheets of Wall Street financial companies, but people lost jobs, homes, and hope. Their wrath at incompetent Washington politicians will explode at the end of the day.

Global economic risks are building with QE III. The major developing economies will face more price rises and incendiary inflation pressure, and their governments would be forced to raise interest rates further. Once the economies of Brazil, China and India cannot absorb the headwinds of inflation and considerably slow down, the world is not far away from another prolonged depression.

For China, the uncertainties of its future growth loom larger because of QE III and possibly more. Beijing could continue to raise banks' required reserve rates to rein in credit inflows from outside its borders at the central bank's "store pool", while raising interest rates gingerly to curb inflation. It is also strongly suggested to raise the value of its own currency, the yuan, against the dollar to deflect ripple-in effect of the QE.

With more than $3.2 trillion in store, the world's second largest economy has more options to fight the dangers of a big slowdown. The government's huge investment in infrastructure projects, scattering all across China, and its recent fiscal effort to construct 36 million affordable houses by 2015, will prove to be adequate to back up economic growth. Also, Beijing's determination to restrict home sales to investors and speculators --- to prevent a housing price bubble from forming --- is highly laudable.

The articles in this column represent the author's views only. They do not represent opinions of People's Daily or People's Daily Online.

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About this column

Li Hong has been a reporter and column writer, mainly on China's economy and politics.

He was graduated from Beijing Foreign Studies University, and once studied in University of Hawaii and the Poynter Institute in Florida.

Columnists

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Milligan-Whyte 
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John Milligan-Whyte and Dai Min, the executive producers and co-hosts of the Collaboration of Civilizations television series adapted by the eight books they wrote in the America-China Partnership Book Series published in English and Mandarin in 2009-2010 that created the "New School of America-China Relations." They founded the America-China Partnership Foundation and Forum in 2008 and the Center for American-China Partnership in 2005, which was recognized in 2009 as "the first American think tank to combine and integrate American and Chinese perspectives providing a complete answer for America and China's success in the 21st century."

Li HongmeiLi Hongmei

Li Hongmei, editor and columnist of PD Online.

http://english.people.com.cn/90002/96743/7441674.pdf