Apart from the U.S. elections, the news last week was heavily focused on the decision of the U.S. Federal Reserve to inject some $600 billion into the economy by purchasing treasury bills. The policy, referred to as quantitative easing, is a tool of monetary policy [glossary] intended to address the ongoing economic malaise in the United States. Because interest rates are already near zero, the traditional monetary policy of reducing interest rates is not viable.
The move has provoked considerable discussion, not least because it risks stimulating inflation, as Alex Evans at the Global Dashboard notes. The policy will certainly cause a decline in the value of the U.S. dollar, promoting U.S. exports and encouraging greater investment. The broader challenge, as Robert Reich observes, is that a dual economy system is emerging in the United States. On the one hand, the financial economy is doing well. The Dow has had its ups and downs, but the sharp declines of 2008 appear to be in the rear view mirror. On the other hand, the economy of American workers continues to be in the doldrums. Unemployment appears to be stuck at just under 10 percent, real wages are frozen, and workers continue to be skittish about future employment prospects. Will Bernanke’s efforts to stimulate the economy work? It depends on who you are. Financial markets may worry about the inflationary effects of quantitative easing, but the policy of keeping interest rates near zero has certainly been positive. For workers, however, monetary policy may not be as effective as fiscal policy [glossary]. Sustaining unemployment benefits, for example, may be more effective as an economic stimulus. But such a policy is politically untenable, particularly after the mid-term elections. However imperfect, quantitative easing may be the only policy tool left to address the ongoing economic crisis in the United States.