The Federal Reserve and Quantitative Easing

by Guest on November 16, 2012

Now US elections are out of the way, time for FX traders to focus on the most powerful man in America right now: prof. Ben Bernanke. As head of the US Federal Reserve he is the real master of the markets since his predecessor, Alan Greenspan, left the institution in 2006. Fed policy is what will determine America’s future. However, injecting endless liquidity into the economy like the Fed has done over the past four years in the hope it will generate enough of a wealth effect and confidence among home owners and investors to prevent deflation and boost growth is a dangerous game where the losers and winners always remain the same.

Take a look at this Saxo infographic. The endless debt monetization permits ever more imbalances in the economy and has no real impact on growth. It perpetuates the vicious circle of debt creation and allows too much Fed intervention in the economy. Quantitative Easing invites for ever-growing intervention as its impact is less and less powerful. Already the market’s reaction to QE3 shows the returns from QE are quickly diminishing – QE3 effectively amounts to QE to Infinity, as the Fed has now decided to no longer limit the time or scope of how much easing is in the pipeline. In 2013 we will see that Fed policy will no longer gain the hoped-for traction.

Another dangerous consequence of the reckless Fed’s policy is that, in a global economy, it has been forced upon the whole world. Because the US Dollar is the world’s first reserve currency, when the Fed does QE it transmits dollars to global financial markets, aggravating bubbles everywhere from Brazil to Canada and Sweden. Eventually, these countries will also have to deal with their respective credit bubbles.

Will Bernanke effectively ‘kill’ the US Dollar with its ‘pretend and extend’ policy? Fortunately for the US, for all its problems and the perils of QE, its economy remains in a much more comfortable place than Europe’s, where the euro crisis outcome is likely to be one with a happy ending, or even China, where large infrastructural problems will soon make it apparent Asia’s economic powerhouse is running out of steam unless it implements the necessary reforms. On the other hand, there are some positive trends intrinsic to the US economy: the reshoring initiative, the shale gas revolution, young demographics, the possibility of a second round of the Homeland Investment Act. These factors should help support the greenback despite the Fed’s devastating and futile attempts to revive a moribund economy by pumping endless amounts of cash into it. To view Saxo’s top experts’ views on the Dollar: download Saxo’s free e-book. Discuss the fate of the US Dollar and the impact of the Fed’s policy, join the #FXdebates.

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