COST Action IS0902: Systemic Risks, Financial Crises and Credit
Indeed QE3 is not ging to work: it will not find its way into the real ecoomy, just keep the commodity boom going which is damaging.
The problem is debt. No new QE or new monetary instrument is going to take that away. There is too much debt relative to the economy's ability to pay. Either we continue trying to pay off those debts (as we do now) which shrinks economies and provokes regular debt crises. This is what most of the developing countries have had to do since the 1970s. Those who had a choce quit and defaulted (Argentina) , got rid of debt and of the IMF (Brasil), imposed capital controls (Malaysia) - all ways to escape from the debt trap. Now it's Europe's turn. It should just write off a large part of the debts that were unsustainably accumulated, the sooner the better. THis will hurt banks and investors (including pension funds), which must also be supported. THis is step one. Then it should restructure those institutions that led to the debt build up in the first place, to prevent a repetition. It should not shrink economies by austerity measures and insist on repaying debt that cannot be repaid. This leads nowhere but to more recessions and, if you keep it up long enough, social tensions, riots, revolutions and then wars. We are playing with fire.
The debt buildup was caused by deregulating banks and then giving them unrestricted access to markets where there loans could not be productively invested. If you look at Greece (as I did), you will find that its debt buildup and capital inflows (=loans) from the rest of Europe run almost 1:1. So the solution is to regulate credit flows, especially international cedit flows. This has been normal practice except for the last few decades (and in the 1920s).
Which currency will take over from the US$ is a separate matter. I expect a gradual diversification. Neither China nor Euroland can become monetary leaders on current principles, since they run trade surpluses. We could of course change the principles, see Keynes' BANCOR proposal. That's blue sky thinking.
Neil Lancastle said:
You are right, it seems flawed. The US (or any country wanting to loosen monetary policy) would need to underwite the SDRs they issue. There is no incentive for a weak currency to do that. Like you, I am troubled by the notion of QE3: it props up the banks but at what cost?
I have to say I was puzzled last week. The ECB wanted liquidity (US dollars) and China was offering to buy Euros. So you had a buyer and a seller... but the co-ordinated action was between Europe and the US.
Now the Fed has announced it will not go for QE3, there is a possible story: the US bowed to international demands to avoid inflationary pressures, and Operation Twist allows China and others to sell long-dated bonds to the Fed and buy other currencies. The trend to diversify away from the US Dollar continues, and the US regains some competitiveness.
That makes the row in Europe even more dramatic. The UK is proposing further QE, which will benefit the City at the expense of citizens. Europe wants to introduce a global financial transactions tax, which it will propose to the G20 in November. The Big Question is whether Europe, the US and China have done a deal on taxes. If they have, the UK will be isolated and the neo-liberal resurgence in Europe may be halted. If not, the prospects for European Union look shaky.