The Plain Facts | Quantitative easing

The Plain Facts | Quantitative easing

It’s been more than a week since the US Fed announced a $600 billion (Rs26.8 trillion) bond buying programme, popularly known as the QE2. There have been widespread fears that the flood of liquidity unleashed will inflate asset bubbles around the world, and especially in emerging markets such as India.

The response from various asset markets between 2 November and 12 November has been modest. To be sure, it’s early days as yet. And comparing QE2 with QE1 is a bit misleading, because the first round of quantitative easing entailed a sudden $1.8 trillion infusion into a global economy where credit had dried up. Markets had soared.

Also See Ten days Later (PDF)

QE2 is smaller in size, will be spaced out and comes at a time when the global economy is not in the midst of a panic attack.

Yet, some early signals are worth noting. The BSE Sensex is down and so is the CRB global commodities index. The Dow Jones index is up marginally. The star performers have been crude oil and gold. Is this an early sign of stagflation, that noxious combination of stagnant growth and rising inflation?

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