QE2 is the name for the latest round of quantitative easing announce by America’s Federal Reserve this week.

If you want a 15 minute lecture on what QE is, go here What is quantitative easing?, it’s actually quite enlightening.

The Fed can’t cut interest rates (already done that, so has the Bank of England), so it has to print money to stimulate the US economy.

This has an impact on assets prices – stocks and bonds. We’ve done it here as well. It means, with low interest rates, that investors are driven to more risky assets to try and beat inflation with their money. Weaker, more indebted, less efficient companies survive, when in reality they should have failed, or been bought up by more successful rivals. Good companies are thus penalised, and handicapping the better businesses hampers your economy. So if you’ve got a decent business, blame the central bankers if you can’t expand, get credit, or buy up a competitor.

It also weakens the currency, which makes it easier to export, or such is the theory. But every major currently is trying to do the same, and they are all chasing their currencies down. Sooner or later, a major economy is going to say enough is enough, and introduce trade barriers, which should ensure we all suffer.

China is already not happy – they hold trillions in foreign currency – mainly dollars, which have just devalued. And China needs to export to maintain its growth. Where do most of those exports go? You guessed – the most consumption hungry country on the planet – the USA.

Commodity and food prices are already rising, and this would accelerate the trend. Inflation in prices but not in wages will hurt far more than anything the Chancellor proposed recently.
But anything to avoid the issue for a bit longer, which is the Fed’s game plan.

The Fed, by the way, has been in existence for 97 years. And in that time the dollar has lost 95% of its value. Not long to go!