“Some things don’t come easy” as the saying goes and Quantitative Easing is one of those things. The obvious clues have been the comments coming from the minutes of the 31 Jul – 1 August FOMC meeting. It is not written in clear language but the inference is that the Fed is preparing to buy more bonds. What the details and how it would transpire are not elaborated on – stay tuned for the September 1 meeting when it is likely to be announced.
The question is why only now as the economy has been deteriorating for a long time. The answer is a catch and may lie somewhere in an economic principle called “beggar thy neighbor” this refers to an economic policy that is designed to weaken a countries currency to improve its trading terms in an effort to stimulate growth.
Let’s consider European Trade Balances: France have a trade deficit on average it is approx €5.5bn per month. Germany is the consistent performer with an annual trade surplus in 2011 of €152.4b in 2010 €157.4bn and 2009 €122.2bn. Italy is the consistent non performer as they have good manufacturing and industry but still manage to deliver trade deficits in 2011 -€32.7bn, 2010 -€20.5bn, and 2009 -€4.6bn when you think fashion labels, cars, leather goods Italy is up there with the best of them but something is amiss with the management of its accounts! Spain dare I say it runs a USD52.2bn deficit in 2011 and Greece let’s not embarrass the Greeks there external account rest on tourism.
To put this into context as this is not a lesson on European trade or is it? It may be obvious to some that the Fed knows this economic principle of beggar thy neighbor, hence their reluctance. If the US prints again dollars in the form of QE the question then is what happens to the EUR/USD cross? Having a EURO at 1.25, 1.26, 1.27, 1.30 and 1.35 etc what does it do to Europe’s terms of trade, simply it kills them, kills their growth prospects and further weakens Europe’s natural ability to solve their sovereign debt issue. European officials should applaud a weak EUR currency instead of having “egos” on maintaining a reserve type currency. It is all about trade!
As markets stand at the door step to another round of stimulus from the US and even China there is one thing and markets will continue to have an appetite for risk as market jump in front of the plethora on fresh new money being injected into a failing global economy. Gold and Dollar denominated risk assets will more than like benefit in the near term from this the next round of central bank intervention.