Despite the widely acknowledged failure of QE2, we would not be surprised to see the US Federal Reserve (Fed) start another easing programme sooner rather than later, which we could probably label QE3.
Date: Sept 21, 2011 Author: Paul Marson
Keywords: Liquidity, Quantitative easing
Despite the widely acknowledged failure of QE2, we would not be surprised to see the US Federal Reserve (Fed) start another easing programme sooner rather than later, which we could probably label QE3.
If this proves to be the case, it would in our view be another major mistake. With US$1.7 trillion worth of excess reserves – a number that should normally sit in the area of US$2 billion – and the subsequent capacity to generate US$11 trillion of additional credit, the US economy is all but liquidity-constrained.
In addition, negative real rates prove that inflation expectations are largely high enough, and the Fed is not by any stretch facing a deflation threat.
Therefore, QE3 is not the appropriate policy in this liquidity-flushed and non-deflationary environment. What is desperately needed here is a fundamental restructuring of the debt.
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