Yesterday the Federal Reserve announced that it would phase out Treasury Security purchases by October 2009. This is unfortunate. Quantitative Easing is essential during this time of fundamental changes to the structure of our economy. We are not in the throes of an ordinary recession. We are in the beginning phases of a deep and protracted economic adjustment.
Winston Churchill stated after defeating Rommel in North Africa; "This is not the end. It is not even the beginning of the end. Rather, it is the end of the beginning." The recent stabilization of global financial institutions should be looked at the same way. We have applied a tourniquet on the worst of the wounds, but we have not stopped the bleeding and the patient is still in intensive care.
Quantitative Easing is a proven means to maintain liquidity and asset demand during times of deleveraging. The deleveraging of our financial institutions, corporations, small businesses and consumers has just begun. If asset values are not reflated, the deleveraging will simply be even more prolonged and severe.
QE is one of the few tools that we have to counteract the actions by other Central Banks who are deflating their currencies and thereby discouraging the purchase of USA made goods and services.
It will take a number of years for the emerging economies of the world to develop sustainable domestic markets. Our domestic economy needs to "hang on" until this happens.
Inflation is not in the cards for decades, that is unless our economy collapses to the point where all faith in the dollar in lost. Sure, globally priced goods and services are going to rise, but labor and domestic pricing will not.
I suspect the Federal Reserve will reinstate QE at some later date, but not until even more permanent damage to our economy has occurred.
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