QEII may enjoy no cruise as recovery drags anchor

THE QEII used to be the name of a flash cruise liner.
Nowadays, it is shorthand for a second round of quantitative easing, the term used for central bank and government attempts to prevent economic and market slumps.
Leading the wave of borrowing and spending is the US Federal Reserve, which recently took the first step towards a new wave of public spending.
After making some attempts to reduce the amount of liquidity in financial markets, it has now decided to reinvest US$100 billion ($141.8 billion) in principal payments it has received on mortgage holdings into long-term Treasury securities.
"The pace of economic recovery is likely to be more modest in the near term than had been anticipated," it said.
In addition, it left the overnight interbank lending rate target unchanged at zero to 0.25 per cent, where it's been since December 2008 and is likely to stay for the foreseeable future.
As economist John Makin says, QEI included a US$800 billion fiscal stimulus package in February 2009, but it failed to produce sustainable growth.
GDP figures for the second quarter on 2010 show zero growth from the private sector.
"Unprecedented monetary and fiscal-policy measures, largely already implemented, have left us with virtually no sustainable growth going forward," Makin says.
"The sharp loss of demand growth will mean a substantially weaker second half of 2010 for the US economy, with the possibility of negative growth by the fourth quarter."
Deflation worries have emerged as global inflation rates drift below a 1 per cent year-over-year pace, well below the informal inflation target of 2 per cent.
At a meeting in June of the 20 wealthiest countries in the world - the G20 - calls were made for deficits to be cut in half during the next two years.
Such steps could crush global growth, Makin believes.
Nor can every country boost its economy by engineering a weaker currency.
Not all currencies can go down at once.
Makin believes currency tensions will rise in an environment of falling exports in a region in which exports remain the key to growth.
China has indicated it will allow its currency to weaken if exports drop, and Japan has indicated it has concerns that a strong yen could hurt Japanese exports.
"The battle among export-dependent Asian nations for market share in a shrinking global market has begun," Makin says.
As the main engine of the world economy, decisions in the US are critical. Unfortunately, the Federal Reserve's reaction to the mid-year economic slowdown and the threat of deflation it entails has been tepid.
"We have not achieved lift-off and may be heading for a sharp reversal of the modest growth achieved so far," he says.
"With lower growth will come a higher risk of deflation and a global slowdown."
Unfortunately, a pattern of central bank complacency after the acute phase of a financial crisis that allows a growth relapse in the real economy is not uncommon. It happened in Japan in the late 1990s and in 2001, as well as in 1937 during the Great Depression in the US.
David McEwen is chief investment officer of Investment Research Group, based in Auckland. A disclosure statement is available free of charge on request. View: www.irg.co.nz