Saturday, 9 February 2013

QE3, Unintended Consequences and Economic Apartheid Based on Cronyism

Emmanuel Martin writes on QE3's Nasty Surprises,

...there are unintended consequences from such loose central bank policy. In the past it has fuelled bubbles. Injections of liquidity may not fuel investment in productive enterprises (assuming a bad business climate, regime uncertainty, etc.) but instead may drive speculation in commodity markets, with counterproductive effects. An increase in oil prices, for example, is likely to have a negative effect on recovery in the US. In parallel, the announcement of a Zero Interest Rate Policy for the next three years means that a bubble will not be burst by an increase in interest rates: it is in fact a clear signal for the creation of a new bubble on this period.
These unintended consequences affect the rest of the world, for example through the impact of a ‘liquidity flood’ on food markets. And with increasing inflation expectations, purchases of consumables may of course increase: people, especially in poor countries, will rush to buy sugar, oil and rice for fear of price increases and thereby contribute to a price spiral.
China has already warned it fears Western inflationary monetary policies will end up generating social unrest in the Chinese hinterlands because of soaring food prices. US monetary policy may therefore increase tensions with China.
In the Middle East, QE2 precisely corresponded to the Arab Spring, a movement of liberation then celebrated as a progress. Unfortunately two years later, promises of freedom have only vaguely materialised: populations still live under an ‘economic apartheid’ based on cronyism. Protests against soaring food prices partly due to US monetary policy might soon erupt, threatening political stability in this strategically important region.
When the ‘unconventional’ becomes conventional danger lurks ahead. That just a few men can hold so much power is unbearable. More than ever, the world needs firewalls against centralised decisions that can have such devastating unintended consequences. Perhaps it is now time to question the centralisation of such power and to question the institution of central banking itself. 
Read the full article as published on the Institute of Economic Affairs website here.

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