Unintended Consequences of Western policies of Quantitative Easing (QE)
The policies undertaken to avoid Western economic collapse triggered by creative financial engineering and fiscal indisciple indulged by Wall Street and Nations, can cause serious long-term dangers to the global economy by their unintended consequences.
The Band-Aids solutions necessary for save imminent collapse is a perfect setup for Law of Unintended Consequences to exact its revenge.
The latest financial crisis relates to Eurozone, whose architect did not anticipate the unintended consequences of imposing single currency solutions to a culturally diverse continent. History as relates to work ethics and saving preferences between the European member states were ignored to propose a pan-European solution.
European Central Banks have been forced to support their respective banks, badly burned by collapse of housing market and high unemployment’s due to tighter lending standards.
Unintended Consequences enhanced by U.S participation
U.S. has been pulled into this mess and as part of G-6. To support these efforts, called Quantitative Easing (QE), U.S. Federal reserve has committed itself to:
1. Provided unlimited dollars to European Central banks until Feb 1, 2013 and
2. Keep interest rates near zero till 2014.
Global Unintended Consequences of Western Quantitative Easing (QE)
Undoubtedly, all the above steps taken together have averted a financial disaster, however, our intention here is to anticipate the unintended consequences and help modify the policy so the unintended negatives do not overcome the intended benefits.
The unintended consequences are outlined below:
1. Unintended consequence of lack of trust in inter-bank market.
Interbank liquidity has ceased to function and it is difficult to imaging how the historical trust that has lubricated interbank relations will recover. With Central Banks zero interest rates policy, banks prefer dealing directly with it, having lost faith in the financial strength of their corresponding banks.
Till Central banks raises interest rates and stop direct lending practices, the interbank market based on mutual trust will not respect will recover.
2. Unintended consequence of lack of trust in Western solvency
With huge Central bank market interventions, the non-Western lender like China have faith in Sovereign and Commercial debts. These lenders realize the crisis in the Western financial system and know that it is being kept alive unlimited cash infusions. They know that even the Central Banks do not have unlimited capacity to hold thing together.
Chinas’ reaction – an example of Unintended Consequences
To learn how the World is perceives this crisis and is reacting to it, let us look at the example of China.
1. China has reduced its exposure to U.S. Treasury by $32 billions in the month of December 2011.
2. China is investing its reserves in hard assets, some examples
a. China, which produced 360 tons of gold last year further, imported another 428 tons, keeping the global gold prices high.
b. China imported over half million tones of copper in December 2011, which was up by nearly 48% over prior year, despite a slowing down of its economy.
c. Similarly, China imports of crude oil imports reached over 23 million tones in January, up 7% on year-to-year basis.
Rising oil prices are badly impacting poor countries and contributing to their misery, they have to suffer the unintended consequences of Western QE programs to save their economies from misery inflicted by their financial and political sectors.
Conclusion on how to deal with Law of Unintended Consequences
We call upon Western Central Banks to re-design the fiscal policies with global perspectives and avoid the unintended consequences all around.
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