QE2 is in the news – no, not the monarch of Britain, but the second round of “quantitative easing” apparently being contemplated by the Fed. So here’s a roundup of enlightened chatter on the topic… So far monetary policy has not been as aggressive as it might seem if we looked only at nominal interest rates, Beckworth and Ruger argue, because inflation expectations are low. They argue for more monetary stimulus. Hugh makes the case that QE2 in one country can’t work, because it would threaten economic recoveries in Germany, Japan, and elsewhere. Those countries can’t undertake their own QE programs without risking inflation, he says (I’m not convinced on this point). R.A. at The Economist nevertheless sees recovery in the U.S. as particularly critical to reversing the protectionist tide.
From my vantage point, the threat of currency wars is overstated. The US and EU complained about the renminbi before the recession, and China has been grudgingly, gradually reforming it. Moreover, the economic advantages of depreciation (and disadvantages of appreciation) are easy to overstate. What matters is real, not nominal depreciation. If inflation expectations rise concomitantly (which is precisely the point of QE), the knock-on benefit to the trade balance doesn’t obtain. These considerations seem to allay some of the concern that might otherwise surround more aggressive monetary stimulus in the U.S.