The US unemployment rate is officially at 9.6 per cent and undoubtedly even higher, one of the many reasons why the Democrats were badly punished yesterday in the mid-term elections. But elevated unemployment and weak growth is the tragic yet unavoidable consequence of an economy that is attempting to wean itself from a mad credit and property bubble. Consumers and governments need to deleverage (not that Washington has even started on this); the property market needs to return to normal; resources and manpower previously allocated to construction need to be shifted. This is a difficult and painful process. The Fed has already done as much as it sensibly could to alleviate the transitional pain; there has been plenty of asset purchases, while interest rates are still at rock-bottom. Bernanke should not try to pursue an utopian policy to conjure growth out of thin air by printing more money. QE will occasionally have a vital role to play in economic policy – but only to eliminate the threat of total collapse. We were at this stage two years ago but certainly not today.
On top of the $600bn in fresh quantitative easing, the Fed already has a scheme to reinvest maturing assets. The combined action means that the US central bank is set to buy $850bn to $900bn of Treasuries by the end of the second quarter of next year. To date, the Fed has bought $1.7 trillion in US government and mortgage securities.
Bernanke is repeating, at least in part, the terrible mistake made in 2003 by his predecessor Alan Greenspan, when interest rates were cut to one per cent to minimise what many wrongly saw at the time as a risk of deflation. In the event, core consumer price inflation actually rose from a low of 1.1 per cent in December 2003 to 2.4 per cent in February 2005.
The US is not currently in deflation – and it is not facing a recession either. The economy grew by a paltry annualised two per cent in the third quarter – but given the huge dangers of engaging in further QE, weak growth is the least of several evils in this instance.
One of the side-effects of quantitative easing is that it is fuelling a bubble in the emerging markets. Liquidity is pouring in, as yield-seeking investors seek to boost returns, pushing up exchange rates and triggering protectionist or interventionist responses.
Sometimes, weak growth is just a fact of life. There may be no limit to the harm central bankers can do but there is certainly a limit to what good they can achieve. What a shame the US authorities cannot accept this.