Yin Ee Kiong

REMEMBER Zimbabwe, the banana republic where inflation rose at the rate of 231,000 percent and people couldn’t get rid of the Zimbabwean dollar fast enough?

Zimbabwean President Robert Mugabe had to print single Z$100,000,000 notes so people did not have to carry sacks of money to do their daily marketing. He tried to solve his country’s economic problems by printing money and his people paid for it. In Zimbabwe’s case the problem was confined to that country.

In America’s case, creating money out of thin air affects the world because the U.S. dollar is the world’s currency.

So what will be the likely consequences of QE2, the new round of quantitative easing announced by the U.S. central bank early this month?

The torrent of freshly printed money that’s about to flood global markets will push stock and commodity markets higher. Already the prices of stocks and commodities have soared, and bond yields have collapsed. But a strong stock market, in this case, is not a reflection of a strong economy. It is built on the inflationary devaluation of the dollar.

The U.S. action will create an asset bubble and, having created it, it will have no choice but to keep expanding it hence QE3 and QE4 will be likely to follow — more confetti money. Cheap money as we know, will lead to excessive risk taking. But no bubble can keep expanding indefinitely, when the bubble bursts it will be worse than the one we saw in 2008.

Including QE2’s US$600 billion, the United States would have added US$2.3 trillion over 24 months. So much money created from thin air with nothing to back it up will have a dangerous inflationary impact on world economies. By its actions the United States is in fact exporting inflation to other countries.

What other consequences will come out of QE2?

What about a new version of stagflation? The last time we heard the word “stagflation” was in the 1970s. Stagflation occurs where inflation remains high but the economy doesn’t grow with it.

The monetary inflation from the United States will push up costs for businesses. It’s all very well if consumers continue to buy goods and services even though prices have gone up. But what if consumers and businesses don’t or can’t play ball. Remember, consumers have other demands on their money, for example mortgage repayments, basic food and necessities, so they won’t have much discretionary wealth to spend.

In such a situation businesses are going to find themselves having to deal with a rise in the cost of doing business while at the same time facing a lack of customer demand. The end result is no growth on the one hand and rising prices on the other. Stagflation.

What about unemployment?

To survive companies have to cut costs and increase margins any way they can to stay afloat. But with monetary inflation out of control, the only thing they can do is to reduce supply, that is produce less and sell at a higher price to those who can afford. That means the potential for higher unemployment as companies look to cut costs.

And we thought this exercise (of printing money) was supposed to be about creating jobs for Americans.

What about hyperinflation?

We won’t go down that road, we already know what happened to Zimbabwe.

The computations of scenarios are too many to contemplate. You will only give yourself a headache.

Frankly nobody knows how this is going to play out, least of all the United States, but that has not stopped her. The Fed is playing around with the markets based on what it hopes it can achieve but without knowing whether it will be right or wrong until it’s too late. Its actions will affect not only the U.S.A. but also other countries.

The United States has accused China of currency manipulation, what do you call the Fed’s reckless and risky action?

If you or I printed money without value it is called counterfeiting and we would be jailed. What do you call QE2?

(The author is a Malaysian published writer and editor, who has lived and worked in 10 countries.)