AMERICA’S FEDERAL RESERVE has announced an ambitious second round of ‘quantitative easing‘, indicating that it will buy $600bn of its own bonds back from American investors in an attempt to lift the flagging economy.
The eight-month programme – already being referred to in investor circles as ‘QE2′, being the second round of such measures – will see the American government advance the repayment on its outstanding bonds, a form of government borrowing, in an attempt both to eliminate a portion of the outstanding national debt while also injecting cash into the economy.
The two-pronged move is seen by some analysts, BBC reports, as the last chance to rescue the slumping United States economy from sliding into a ‘double dip’ recession that would almost certainly cause similar economic depressions around the world.
The tactic can be seen as a dangerous one, however, as the measures involve paying off the bonds with ‘electronic money’ fabricated by central banks purely for the purpose of repaying the debt. Increasing the cash-flow as a result will likely contribute to inflation, and in significant amounts potentially could lead to hyperinflation.
The first round of such measures in the US came in mid-2008 when the Fed announced it would be printing $1.5 trillion ($1,500 billion, €1.06tn) in new dollars to buy back some of its own bonds.
Because the supply of cash becomes more plentiful, the relative value of a single dollar is also likely to fall – meaning that American exports become more affordable on international markets.
International stock markets have responded positively to the news; after analysts had initially expected a $500bn package of measures, the Dow Jones rose at the end of yesterday’s trading, while Asian markets have responded positively this morning.
Bond markets have also responded positively, with the costs of American and German bonds contracting in the wake of the news with investors believing the measures will pave the way for a sturdier economic recovery.
Business Insider reports that Asian governments have also begun to take measures devaluing their own currencies as a result, potentially triggering the onset of a so-called ‘currency war’ where countries artificially lower the values of their currencies in order to boost exports.
The onset of such a ‘war’ would undoubtedly be a worry for nations within the Eurozone, which have no power of their own to devalue the EU’s common currency.
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