QE2 may not be able to save the day

Diana Fung, German Swiss International School
Diana Fung, German Swiss International School |

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The world is concerned about the effects of the second round of quantitative easing (QE2) implemented by the United States Federal Reserve. Under this process, US$600 billion is being printed to buy US Treasury bonds and boost the US economy.

In theory, QE2 should speed up economic recovery by stimulating demand through increased lending, lower interest rates, and a weakening of the dollar, which will help US exports. But it's easy to understand why many countries are upset. The bond purchases will lower the yield for investors, who will turn to emerging markets that promise more robust returns.

Emerging economies say they are innocent victims, as their currencies are forced up by foreign capital surging into their markets. This will weaken their competitiveness, they complain.

Many countries are resisting the rise of their currencies by introducing anti-speculative measures and raising interest rates. This may spark a worldwide "currency war" which could undermine the health of the global economy.

Developed economies such as Hong Kong will also suffer. With the low interest rates, Hong Kong's property prices are soaring and there are growing fears of an asset bubble.

QE2 will add to the instability as Asian economies attract even more capital.

Critics, including American Congressmen, say QE2 also risks fuelling inflation.

As the value of the dollar falls, the prices of oil, gold and other commodities are likely to rise.

A sudden leap in food prices will hurt poor countries, especially in Africa.

I think QE2 is not the answer to America's problems. US interest rates are very low but economic activity is still stagnant.

This is because people have learned a lesson from the financial crunch: instead of borrowing, they are saving at such an uncertain time.