U.S. Treasury Secretary Timothy Geithner is speaking to his colleagues at the G20 meeting this weekend, trying to persuade them to not increase capital controls and come to some sort of currency deal.
But all the while the world’s leaders are thinking: you’ve got more QE up your sleeve.
The U.S. may be about to embark on another round of quantitative easing, aimed at flooding the U.S. market with more money and driving up asset prices.
But if the Japan experience is anything to go by, that QE is unlikely to succeed on its own.
Because, in a balance sheet recession where consumers are deleveraging, they aren’t going to spend that money. They are going to pay down debt and businesses aren’t going to invest because they aren’t confident anyone will spend.
So instead, all that money is just going to flood into emerging markets seeking yield or into assets that are rising due to speculation.
Richard Koo issued a warning several months back about the unique nature of this recession. We think it’s time for a reminder.