Economic Blame Game — Not QE2’s Fault
The Biggest Global Impact of QE2 Might Be Political Rather Than Solidly Economic

January 2011

When the Federal Reserve announced its second round of quantitative easing (QE2) in early November, questions arose about whether the $600 billion in additional stimulus might tip the recovery in favor of the United States at the expense of other nations. But closer scrutiny of the potential impact of QE2 on various countries' economies suggests that the hand wringing may have been misguided.

“No countries’ risk profiles have materially changed. QE2 will only serve to lightly exacerbate current trends and the associated country responses,” said Victoria Marklew, country risk manager with Northern Trust. “The current trends of currency appreciation and asset price inflation have already been factored into country risk assessments, and the scale of the current quantitative easing will not significantly affect those assessments.”

Marklew notes that QE2 is not causing current global imbalances — they already existed. QE2 is much smaller than QE1 ($1.7 trillion) and is far from the only factor driving U.S. interest rates. Rather, QE2 cements ongoing patterns that are driving money into emerging markets in pursuit of higher growth and yields.

“On the other hand, without QE2, (hysteria from Brazil and Germany notwithstanding) we doubt the global picture would be all that different in real terms,” she added. Policy rates remain abnormally low in Japan, which tried its own version of quantitative easing, and in the United Kingdom, which is not expected to opt for any additional quantitative easing.

Rates also remain low in the eurozone, which is slowly trying to “normalize” money market operations. “Normally, QE2 would add to downward pressure on the dollar, and thus strengthening the euro, but the euro is being held back by worries about peripheral eurozone countries' debt levels,” Marklew added.

Given disagreements about global currency devaluation efforts and policies, QE2 also quickly became a convenient excuse for some governments to avoid making a firm commitment in the foreign exchange markets realm. For Marklew, then, the biggest global impact of QE2 might be political rather than solidly economic.

For those looking for the next formidable bump in the road to global recovery, Marklew suggested the real challenge likely would stem not from QE2 or some permutation of it but from a stumble in the U.S. economy or a renewed round of market panic about the stability of the euro.

“The biggest risk for 2011 is a sovereign debt crisis in the eurozone, which could trigger a sharp increase in global funding costs throughout asset classes and push much of Europe back into recession,” she concluded.

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