Maybe the letters “QE” should stand for “questionable endeavor.” Luminous Capital Partner Alan Zafran called our attention via e-mail this morning to comments that Pimco’s Mohamed El-Erian made about the latest round of Fed security purchases, a policy known as quantitative easing. Zafran sent us a Bloomberg story about El-Erian’s op-ed piece in the Financial Times.
El-Erian writes that the Fed’s “QE2″ policy is likely to backfire because it faces three hurdles: 1) the Fed is effectively alone in trying to stimulate the economy; 2) the Fed’s move will likely be viewed by countries facing their own currency inflation as “unnecessarily disruptive”; and 3) the move further weakens the United States’ roles as provider of the world’s reserve currency and keeper of the deepest and most predictable financial markets.
Zafran writes in his note:
“One of the potential, unexpected consequences of the QE2 are laid out in the article below. Namely, excessive liquidity in the U.S. flows to emerging market countries, thereby further inflating the emerging market currencies and potentially leading to an asset bubble in those countries, forcing the emerging countries to impose capital controls (as Brazil has begun to do) or trade protectionism (like China has begun to do) or some other action that will be adverse to global economic growth and stability…
“Think of it this way. Countries have five levers to use when trying to stimulate (or weaken) economic growth:
“a) monetary policy
b) fiscal policy
c) government intervention of capital controls (limiting if/when/how much foreign exchange of currencies is permitted)
d) protectionism of products and services (subsidies on domestic industries; taxes/surcharges on imports; etc.)
e) real currency levels can decline in deficit countries (U.S.) or appreciate in surplus countries (China). This happens either because the nominal currency rate falls or because the inflation rate in a country falls (usually as a result of policies followed by the countries for some period of time)
“So the fed’s actions, focused on the U.S. economic malaise, may have longer-term, adverse global economic consequences…”