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article imageOp-Ed: IMF and others warn of negative effects of quantitative easing

By Ken Hanly     Apr 20, 2013 in Business
Moscow - The International Monetary Fund is warning that quantitative easing and other loose monetary policies used by many countries to stimulate growth could have quite negative long-term collateral effects, and even produce an economic crisis.
The Fund (IMF) agreed however that in the short term monetary easing such as that employed in Japan and the US is a reasonable policy. The IMF head of financial stability, Jose Vinals said:“When the patient is still under treatment, you should not suspend the medicine, but you should always be vigilant about the side-effects of this medicine.” The IMF also said that the time was not yet ripe for switching to more conventional means of raising growth by imposing higher interest rates. This would simply slow growth and destabilize the system which is growing, even though slowly.
The IMF advised the Eurozone to develop a uniform model for providing financial aid and deposit guarantees. Vinals said of the US situation:“While we are at the very early stage [of the US recovery], we are already seeing a deterioration in the quality of issuance, which is typical of the late stages of the credit cycle." He cautioned that the US should already begin to take account of possible negative effects of extensive quantitative easing.
Even some central bank executives were unsure about what longer term effect extensive monetary easing could have on their economies. Lorenzo Smaghi, a former member of the executive board of the European Central Bank said that “we don’t fully understand what is happening in advanced economies.” The governor of the Bank of England also expressed concerns about the practice. Janet Yellen, however,. of the US Federal Reserve was more optimistic:“I don’t see pervasive evidence of rapid credit growth, a marked build-up in leverage, or significant asset bubbles that would threaten financial stability. But there are signs that some parties are reaching for yield, and the Federal Reserve continues to carefully monitor this situation.".
Among stock market analysts and bond investors, there is much stronger criticism of quantitative easing in the US and elsewhere. Famous commodities investor Jim Rogers says that now is the time to bet against long term US treasuries. Bill Gross, bond market analyst, warns of 'inflationary dragons' . These dragons have yet to appear. In fact, in places where there is quantitative easing the hope is that inflation will increase to around 2% at least.
Rogers says that all the quantitative easing has made him believe that US Treasury Debt is bound to decrease in value: "He said he's shorting government bonds and that if it's indeed the end of the 30-year bond bull market, those shorts will pay off. In particularly he said it's time to short long-dated U.S. government debt." He noted that the quantitative easing in Japan was having the effect of causing the stock market to go up although he thought it was bad for the world. The falling yen is making Japanese exports cheaper and more competitive.
Bill Gross, of Pimco, warns that quantitative easing will make discount bonds, that is bonds sold below par, "road kill" as the massive amount of money pumped into the system to boost liquidity will ultimately generate inflation and a sell off of bonds at ever lower prices since they have such low interest rates.
Quantitative easing may lead to currency wars. Brazil has voiced concerns about the practice since it tends to lower the value of the currency that is engaging in the practice and make that country more competitive as compared to those who do not. China has complained about the US practice for the same reason and also because it means that the value of all the US debt it holds is often lowered in value. When the G20 finance ministers meet next week in Moscow no doubt currency exchange rates and monetary policy such as quantitative easing will be high on the agenda. Ron Paul has long been a critic of quantitative easing. In the longer run he sees it as debasing a currency. I append a video with Paul from just over a year ago.
This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of DigitalJournal.com
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