Why QE2 INCREASES the Risk of Deflation

By: Submissions

Tim Waring writes: Markets lapped it up!

QE2 was met with rapture by commodity and stock markets as traders and investors continue the easy money ride of a sinking dollar. The effect on the real economy is unknown but common sense rather than models suggests this extra $600billion is a mistake.

GDP growth at the stroke of a pen?

In order to have GDP growth, the US will have to continue to do what it is best at, namely attract the brightest talent globally to its universities, retain a significant proportion of this talent, and be at the cutting edge of innovation development. As Alan Greenspan once said, developed nations have no one to borrow technology from. Their GDP growth is low as humans are not smart enough to develop technology any quicker. You can not magic growth out of a hat but try telling that to the Fed.

A Life Less Certain

QE2 has just made the average taxpayer even more worried about rising costs of oil, food etc plus higher taxation to come to eventually pay off the even bigger mess that the government has got him into. In short, he feels POORER from QE2 and will act accordingly. He is less likely to leave his job to start new businesses and therefore job creation opportunities go out of the window. He is likely to spend less rather than more this Christmas and beyond. As for small businesses, they are behaving like consumers (perfectly rationally) and de-leveraging in anticipation of tough months and years ahead. So why then does the FED expect them to do a 180 degree turn and taking up loans just because they may be a few basis points cheaper? Ain't gonna happen.

The Trade Deficit

Ben Bernanke can have no idea of how de-stabalising the dollar will affect the trade deficit. Maybe it will help exporters, but this could be wiped out by an oil price spike. Even if there is a positive trade balance effect, I believe this will be a jobless boon to the economy. Guess what - no extra jobs, no feel good feeling on the street.

Its a Party.... but your not invited!

The average man on the street can not enjoy the benefits of this money printing, and indeed is most likely to feel poorer as he knows he will have to pay it back in the future. Life on main street is now essentially a different world to Wall Street. Wall St met QE2 with excitement as stocks and commodities soared. Some traders griped they would have liked to have seen a bit more than $600m but hey ho. QE2 added more momentum to a an already strong trend. The biggest growth business for 2010 has been trading an unstable dollar.

QE2 is Extra Head Wind

On Main St, there are no quick fixes, just the hard graft of finding work, setting up small businesses, innovating and differentiating services and products from competitors - essentially graft, elbow grease, creativity and uphill scrapping. By de-stabalising the dollar the Fed has fuelled uncertainty. This has ADDED to deflationary pressures in the wider economy.

Tim Waring

http://grittyeconomics.blogspot.com/

I am a businessman and an investor, not an economist. Having spent the last 15 years in starting and running businesses I have a keen interest in how economic theory meets real world markets and economies.

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