Stephen Roach: Quantitative Easing Won’t Work

"Global imbalances are a shared responsibility. The world is dead wrong to blame it on China."

That’s how Morgan Stanley’s Stephen Roach began his interview with CNBC Asia. I agree 100% with these sentiments as I discussed in my post on My thoughts on the ‘currency war’.  Nor is it about Japan alone or the U.S. alone, Roach says. Collective action is necessary. He also says the U.S. has "the lowest savings rate in the history world for a leading economy." It is now the world’s largest debtor nation.

No amount of quantitative easing is going to fix this. Roach agrees, saying an economy that is actively deleveraging doesn’t need the government to continuously throw liquidity at it because this will only increase debt levels and "squander our savings."

I was discussing U.S. policy in an e-mail thread just moments ago and mentioned comments by Fed official Brian Sack on this issue. His quote is below [emphasis added]:

Some observers have argued that balance sheet changes, even if they influence longer-term interest rates, will not affect the economy because the transmission mechanism is broken. This point is overstated in my view. It is true that certain aspects of the transmission mechanism are clogged because of the credit constraints facing some households and businesses, and it is true that monetary policy cannot directly target those parties that are the most constrained. Nevertheless, balance sheet policy can still lower longer-term borrowing costs for many households and businesses, and it adds to household wealth by keeping asset prices higher than they otherwise would be. It seems highly unlikely that the economy is completely insensitive to borrowing costs and wealth, or to other changes in broad financial conditions.

Isn’t Sack just saying that the Fed wants to pump up asset prices – blow another bubble, if you will – in order to find a short-term fix for America’s savings deficit? Last June, I asked Does Ben Bernanke Blow Bubbles Too? Apparently, we have the answer in writing now. The asset-based economic model rules the day. It is extraordinary that this is official U.S. policy.

So, QE is probably coming. The major central banks are going to turn on the taps in short order. Roach agrees. He also says that capital controls are a legitimate way to stop the flood of money now coming from the West because of QE. Watch the clip for his comments.

My take:

Don’t expect any country to take this without a fight… Currency controls are now a legitimate policy option everywhere as Willem Buiter predicted they would be. Expect more of this, especially from emerging market countries worried about the flood of money coming from the G7 as policy makers there try to improve competitiveness with beggar  thy neighbour policies. Eventually, this will escalate into tariffs.

How a financial crisis morphs into a currency war


How is all this going to increase U.S. savings?

It’s not.

Source: Managing the Federal Reserve’s Balance Sheet – Brian Sack, FRB

  1. dk says

    “He also says that capital controls are a legitimate way to stop the flood of money now coming from the West because of QE.”

    Are US capital controls on incoming Chinese capital also legitimate?

    1. Edward Harrison says

      The US has a stated position which says capital controls are bad. The US view is that the Chinese need to eliminate theirs not enact ones of its own. And if the Chinese do not comply, the obvious course of action is a WTO filing. But that won’t be good enough for those who want to blame the Chinese as a scapegoat. So tariffs will add an extra measure of retaliation.

      If you want a real live situation that is actually problematic, it is rare earths.

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