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Loose monetary policy to spur long freeze in world economy

By Ye Tan (QStheory.cn)

14:52, September 09, 2011

Edited and Translated by People's Daily Online

Given the high pressure in the real economy and the investment market, loose monetary policy will become the only reliable and politically right option of various state governments. Loose monetary policy is generally adopted through interest rate cuts and quantitative easing. Adopting the loose monetary policy amid the inflationary expectations to stimulate the economy will push the market up in the short term and yet heighten inflationary expectations in the long term. The world economy is expected to experience several years of frozen growth.

The European crisis is deteriorating. What is even worse is that the German economy, which is known as the locomotive of the European economy, has lost its steam. The economic growth in the euro zone slowed down to 0.2 percent in the second quarter from 0.8 percent in the first quarter.

Germany’s economic growth also nearly stopped, standing at only 0.1 percent in the second quarter. France’s economic growth was zero. The U.S. economy is weak. According to data released by the U.S. Department of Labor on Sept. 2, the non-farm payrolls showed no employment growth in August, setting the worst record over the past year.

It is unrealistic for taxpayers in European countries such as Germany and France to assume debt costs. Europe’s credit market is almost frozen to the point where the sovereign debt yields for countries such as Greece are standing at a high level and banks are reluctant to lend cash.

Facing a difficult economic situation at home, the United States may be willing to see a weaker euro and thus is unlikely to help the euro zone. The petro euro used to pose a real threat to the U.S. dollar in the late 1990s but is now in a precarious situation. By contrast, the U.S. dollar has been rising against other currencies for some time, with the dollar index climbing above 75 recently.

The prices of U.S. bonds and gold keep hitting new highs owing to weak investor confidence worldwide. Frightened investors are seeing U.S. government debt and gold as two life-saving tools as they did during the 2008 global financial crisis. As the contrarian indicators of the global economy, the rising prices of U.S. bonds and gold have shown that the world economy is entering an "ice age" and may revisit the stagflation nightmare of the 1970s.

Due to growing stagflation risks, some emerging countries including Turkey and Brazil have recently lowered their interest rates. Mexico and Russia are likely to follow suit.

The major central bank meetings this week may signal the end of the interest rate-hike cycle over the first half of 2011 and the beginning of the monetary easing cycle. An axis of economies centered on the quantitative easing monetary policy has taken shape since the 2008 financial crisis.

The European Central Bank (ECB) has stopped raising the interest rate. If the situation continues worsening, the ECB may start to reduce the interest rate in the second half of 2011. The ECB has already started to buy the national debts of the debtor countries in 2010, meaning it has launched an indirect quantitative easing monetary policy.

The whole world is paying attention to the policy conference of the U.S. Federal Reserve held on Sep. 20 and 21. A certain thing is that the U.S. Federal Reserve will re-declare its determination to reduce the interest rate. An uncertain thing is whether the U.S. Federal Reserve will launch the third round of Quantitative Easing Policy (QE3). Regardless of whether or not the QE3 will be launched, it is predictable that an indirect quantitative easing monetary policy will be launched.

Regarding Japan’s attitude, Japan is a great promoter of the quantitative easing policy.

The three large axis economies launching direct or indirect quantitative easing monetary policies together proved that the real economy will not be able to work and the monetarism is the last life-saving straw.

An interesting thing is that the Swiss National Bank (SNB) declared on Sept. 6 that the minimum exchange rate of Swiss frank against euro is 1.2 to 1. The SNB stepped in the foreign exchange market heavily in order to stop hedging capitals from crazily raising the exchange rate of the Swiss frank. In the panic investment market, the market-driving exchange rate already cannot be seen, and what can be seen is the debt shift in the name of marketization and the last joint efforts of every country against the inflation.

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