Quantitative Wheezing

Several pundits are at pains to point out that there is a key difference between the US quantitative easing programme and the prior art of this technique (i.e. Japan in the 1990s). The argument is that the Fed is buying a range of non-government assets (MBS, commercial paper, loans...) rather than just Treasuries. Unlike Japan, this should spur a broader economic boost rather than simply rebooting bank lending. In other words, it's different this time.

"Different this time?" I've heard that one before. The problem here is that all these measures are of limited firepower at this stage. Every macroeconomic indicator of note is pointing due South, and it would be naive to assume that the consumer will suddenly revert to type as unemployment ratchets up. The economy is simply out of breath, and force feeding liquidity to the patient is not going to help.

However, all this liquidity will have a long term impact. Unless the Fed can snatch it back the second the economy starts to turn, we will face a horrible rise in inflation. Given their past record (thank you Mr Greenspan) I have my doubts that the Fed has the nerve to slam the brakes once prices start to move.

Trichet gets a lot of stick for his hawkish position on rates. Well we'll see - 2009 will either break the ECB's credibility, or seal its reputation as a new reserve currency manager.