In the USA the latest move from the Fed to say it will buy up some more Treasury bonds to try to stave off another slowdown or worse has been dubbed by some wags as QE2. Some here in the UK want the Bank of England to also run up another phase of quantitative easing so they too can have QE2 headlines.
The reaction of the markets to it was at first sight perverse. The dollar strengthened, when you might have thought it would weaken on news of more money printing. The Stock market weakened, when the authorities hoped that more QE would send a message of hope for a stronger recovery. The share market first of all took it as sign of weakness that it was needed. Poeple bought the dollar, perhaps because they have been borrowing too much in low interest rate dollars to invest elsewhere and want to cut their bets.
One of the problems the authorities on both sides of the Atlantic have trouble grasping is the move to make the banks hold more cash and capital is preventing much of the money they are printing from circulating in the private sector and adding to credit. If the banks were working as normal the amounts printed would already be offering a huge kick to activity and would be on course to trigger another bout of inflation. As the commercial banks are constrained,a Central bank buying in more bonds will not necessarily fix it in the way intended.
In the Uk the money printing was on an extreme scale. Most of the money simply fed excess public spending. It was inflationary only because it helped lower the value of the pound, and inflationary in the public sector where it was used to finance another round of pay increases and sloppy buying. We then imported some inflation. Local wages have not taken off in an inflationary spiral because the banks cannot lend the money on recklessly to the corporate sector, who cannot therefore pay much higher wages.
If the authorities really want to ensure higher growth rates next year they need to relax the controls on the banks, so more of the high powered money that is out there can be lent on.They need to do so at a sensible pace, to avoid an inflationary blow out again. the good news is that the leading commercial banks now have levels of cash and capital last seen in the prudent 1990s, before the extraordinary relaxation of money and bank capital controls seen in the period 2000-2007.