Thursday, November 4, 2010

By Mohamed El-Erian

QE2 blunderbuss likely to backfire

Published: November 3 2010 20:12 Given the high market expectations, the US Federal Reserve had no choice but to announce a second tranche of quantitative easing, nicknamed QE2. But the measure is an inevitably blunt instrument for the difficult task of restoring growth and generating jobs. The benefits accruing to America come with burdens for other countries, and both could soon be swamped by the unintended consequences of this unavoidably imperfect policy approach.

Posted by devo @ 06:37 AM (1529 views)
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22 thoughts on “By Mohamed El-Erian

  • Here are the concluding paragraphs to an extensive comment by Viji:

    The Zombie Too Big To Fails and Asset Managers that have dumped their toxic treasuries will look for a place to park their new found cash. Now where might you think they can put all that new cash into? COMMODITIES. Commodities of all types will shoot to the moon. From precious and industrial metals, Oil, food staples will all skyrocket in price, catching the American public with their pants down. Commodities will be the only safe haven to go to and this is when the American public will get it’s first taste of hyperinflation and it will taste like gasoline when the price of oil surges passed $150 a barrel in one week equating to $10 a gallon gas!!

    Commodities SOARS and DOLLAR COLLAPSE ensues. The sell off of assets in purchase of commodities will be ballistic. People will unload homes, cars, personal belongings all once thought important for real assets like Gold, Silver, Food, Weapons, and Oil. In hyperinflation your $400,000 house will be worth $60,000 or 70 pieces of silver, for your house will not be able to help you buy things you need, while a commodity like gold and silver can.

    Most of all the government can’t stop it

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  • Please bear in mind that the author of the article is the CEO of Pimco – the world’s largest bond investor.

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  • mark wadsworth says:

    What a stupid headline. It’s a mixed metaphor or something. Blunderbusses are guns, they do not backfire – it’s cars that backfire (unless I’ve missed something).

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  • Planet of the zombies.

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  • A rather inconclusive article by Mohamed El-Erian in which he admits that he doesn’t know the outcome of this latest tranche of QE. It’s interesting that he obviously approves of the latest bout of QE, with the rider that he thinks other US agencies should also chip in to help out the fed (he calls it a holistic approach). It’s a shame that he sees fit to agree with something that he thinks has an uncertain outcome (surely a rather reckless attitude?). Of course bond sales will be good if there is uncertainty, so he is probably rather pleased

    Viji @1 is a random word generator freak: Zombie, hyperinflation, gold, ballistic, pieces of silver, collapse, weapons, blah blah.

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  • One of the key ideas behing QE is to reduce interest rates and keep bond yields low, and one of the purpose to to drive the money into other things. So a rise in commodities, equities and a number of other things can only be part of the plan.

    Viji seems to be merely stating how a significant of people are now feeling – so it’s quite natural, no conspiracy there.

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  • hpwatcher – you could be right – all major markets surging ahead – FTSE100 up roughly 100 points as I type.

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  • hpwatcher – you could be right – all major markets surging ahead – FTSE100 up roughly 100 points as I type.

    To be honest, I find it pathetic.

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  • jack c: It’s never as easy/linear as “more QE equals higher equities and commodities”. Don’t be surprised to see equities taking a hit soon.

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  • Quantitative Easing shows that the guvmint can create credit by buying stuff with unbacked cheques the way banks create credit by issuing you a loan which does n’t take anything out of their reserves.Great.So we now have the Guv expanding the money supply with QE at the same time as they are trying to reduce it with an Austerity Plan.Hey ho!

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  • flash – agreed, I’m also expecting a reverse.

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  • – agreed, I’m also expecting a reverse.

    Certain people have been ”predicting” and ”expecting” a reverse for the past 2 years – it hasn’t happened, so don’t hold your breath. This could continue for a long, long time.

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  • it deeply concerns me that governments still believe there is an easy way out… by literally printing money to dilute currencies doesn’t solve problems… has anyone got any papers on quantitive easing and its long term effects on asset, equity and currency valuations? Also what are the long term interest rate effects? – i know it surpresses them in some ways… but long term to keep inflation down does it create hyper inflation?

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  • dbc: You are mixing up the policies of two different governments. This article is about US government QE and the US government disapproves of European style austerity measures

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  • jack: I am not predicting a reverse as such. I’m just saying that the relationship between QE and equities/commodities is not as straightforward or linear as some of the less informed blog pundits seem to think

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  • @jack c – you might wish to bear in mind that’s it’s also very easy to over complicate these matters, and not see the wood for the trees. Sometimes one can only see trends by taking a broad view – so I think – at times – it can be perfectly appropriate.

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  • Flash – thanks for your input/clarification

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  • general congreve says:

    @14 – We can forget the austerity here (token as it is anyway). The dollar devaluation that is occuring as we speak, due to QE2, is going to force foreign central banks to devalue too, if they want to maintain export market share. The Japs have already scheduled and emergency meeting today in reponse to the FED move and the BoE meets in around a week to announce it’s latest move. Currency wars and a race to the bottom ahoy. Oh, for a currency that can’t be debased by feckless governments!!!

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  • Currency wars and a race to the bottom ahoy. Oh, for a currency that can’t be debased by feckless governments!!!

    They are doing it wilfully, that’s what is scaring me.

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  • general congreve says:

    @19 – And that’s what is making me jump for joy! 😉

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  • hpwatcher,
    “They are doing it wilfully, that’s what is scaring me.”

    We are on our way to the end of all fiat money in less than a year.
    Best buy some plastic pants mate.

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