Photo: Charles Goyette (Blue Wire)
A new report on currency form Morgan Stanley examines what would happen to the dollar (and other currencies) in the event that Bernanke restarts quantitative easing:QEI resulted in the dollar falling mainly against currencies that were unlikely to ever print. So, the commodity currencies fared the best, followed by the euro, and GBP underperformed once the BoE pursued a similar policy. Something along the same lines would perhaps happen again, although we think that there would be a number of differences. First, the market might be less scared of QE. It hasn’t led to hyper-inflation as some feared (yet), and the Fed has a fairly credible exit strategy now, which wasn’t discussed prior to QEI. In a sense, exit strategy is less relevant.
Second, the main problem with QEII would be that after a period of excess liquidity and abnormally easy monetary policy (as well as loose fiscal policy), the signal QEII sends is perhaps as important as the policy itself, in that it says that policymakers are genuinely worried about a double-dip scenario and a period of disinflation.
Given the ongoing deflation (or at least threat of deflation), it’s funny to think that people have been waving their hands about inflation or hyperinflation all this time, only to be proven wrong.
But hyperinflation isn’t just something that happens at wily nily. Either the conditions are created or they’re not, and quantitative easing does not, alas, qualify.
Here’s the thing: quantitative easing just isn’t that radical of a policy step. It was radical when the US went off the gold standard, switching from a hard currency to a fiat currency. But once we went fiat, quantitative easing (or negative interest rates, or Fed portfolio expansion, or whatever version of stimulant you prefer) is just part of the normal toolkit.
In fact, one might argue that under a fiat currency, the whole idea of seeing 0% as a bottom-bound of interest rates is totally arbitrary. Essentially Ben Bernanke has a dial, he can turn it far to one end, or far to another. Nothing magic happens when he crosses 0 that would suddenly make hyperinflation (which, really, is a term that should only be used when the dollar is threatened with toilet paper status) a reality.
Rather than fret about negative interest rates, we might do better to ask: what vestiges of the hard currency days remain in our thinking that cause us confusion about what’s proper policy.
All that being said, given the lack of new investment, and reluctance among banks to lend, it’s very much in doubt whether QEII would actually spur the real economy.
In a must-read Ambrose Evans-Pritichard piece, the pugnacious columnist slams America for not being bold enough, arguing that the Fed should toss in the kitchen sink, buying up everything from all kinds of organisations — not just banks — like insurance and pension funds in an effort to plump money into the economy.