Read This : Fed May Buy $300 Billion in Treasuries After QE2
If you ever catch a Jim Rogers interview on TV, more often than not you will hear him say, "All they know how to do is print more money". Then he goes on to talk about the virtues of investing in gold, commodities and farms.
In an earlier posting, I explained how the US Fed prints money. It creates money (out of nothing) to buy US treasuries from the US banks. What has all this printing done to the US dollar? I had a business contract in which I was getting paid in US$. The contract was signed 6 years ago and as the progressive payments come in the US$ drops from S$1.66 to S$1.23. This money printing serves several purposes. First it caises the US$ to drop and this makes US companies competitive. Second it reduces the US govt debt - debt that it has difficulty servicing and conspiracy theorists believes the Fed needs to do this because the US is no longer able to service its debt.. Third it keeps the interest rate low and that helps to stimulate the US economy preventing it from slipping into recession.
The problem is such massive printing of money causes inflation. Inflation so far looks tame only because the US economy is very weak - even so we see oil prices trading above $100 per barrel a few months ago before the recent falls. Commodity and food prices have also gone up. The MAS (under Tharman) tried to keep inflation out of Singapore by allowing the S$ to appreciate against the US$. There is a limit to doing this and stock investors know too well - the strong S$ has caused our exporters' margins to decline sharply in the last quarter so we cannot keep the S$ rising against the US$.
The options for central bankers around the world are quite limited right now. They have used up all their bullets to tackle the financial crisis and the Great Recession that followed that crisis. Right now they are just kicking various cans down the road - both the EU and US are doing just that. The financial markets appear to be temporarily rescued from a Greek default and each time they do it the escape becomes narrower and disaster seems to get closer. It is just a matter of time before we face another crisis when it is no longer possible to delay the inevitable. While the latest QE (QE3?) might reignite the stock market and commodities market ....so far that has been only what each round of QE has been able to accomplish - the US economy has been pretty anaemic after 2 rounds of QE. While some argue that the economy will be in worse shape if not for the stimulus packages, low interest rates and 2 rounds of QE, the current slowdown just shows how bad the situation is....the best they can do is to just keep it going until something happens....