21 october 2010, dread the launching of the bad ship qe2

Blanket news in the uk is fiscal, with a fearful "spending review" (see the attached) slashing more spending than any time since 1273 bc. The real date with destiny though though is november 3rd, and its monetary, as the good ship quantative easing prepares to set sail again. It's back - and this time its going to be mind-bogglingly bigger than ever. First off the blocks dropping bucketfuls of money from helicopters will be america, followed a day later by the bank of england. This is very bad news. Qe2 might help steady the bigger ship of state in the short term, holding down interest rates and devaluing the currency (the dollar is already falling in anticipation), so boosting exports, but this is bugger-thy-neighbour stuff and stores up many, many troubles, not least inflation - which is already running well above target despite desperately bad economic times. With dollar purchases potentially massive, central banks are increasingly taking over the markets themselves, the fed to create more dollars, the others to keep their own currencies steady against a sinking global reserve, with anyone that dares hold out (that's you, euro) likely to be clobbered by rapid strengthening, as japan just found out. Surely, even the dollar though has limits somewhere to its elasticity and ability to export inflation. Managing the world's main global reserve currency is the goose that lays the golden egg, but it is being slowly strangled - and who knows what happens then ? The biggest problem is where the bucketloads of money actually land, and as consumers in the west are going to remain cautious however cheap money is (it's already virtually free), a huge part of it finds its way to where interest rates are higher and profits are being made: the emerging economies, who are then staring at sustained inflation down the barrels of whatever weapons come to hand in the currency war that is surely really soon to be upon us. This is uncharted territory all around. Bon voyage - not.

Attached File: csr.doc