Tit-for-Tat: ECM to increase QE in response to Fed holding rate at zero?

There was a worrying report in the Money and Investing section of today’s US print edition of the Wall Street Journal.  In “Stronger Euro May Put Pressure on ECM“, Brian Blackstone suggests that, “[t]he Federal Reserve’s decision to keep interest rates near zero could put added pressure on the European Central Bank to step up its own stimulous efforts to keep the euro’s exchange rate from strengthening too much and derailing Europe’s fragile economic recover.” 

This is madness.  We cannot have uncoordinated tit-for-tat behavior between the US, Europe, China and Japan.  The four largest economic areas need to align policy if we are to get out of this mess.  This is not a free market: we have four very large monetary systems that are in lock-down mode.  Every decision in one quarter might seem to further the advantage of one region; and so another decides to act to preserve their own position.  This is a ‘race to the bottom’ problem that is holding global growth back.  We need either:

  • Central banks to be closed down in order for financial markets to re-settle at a new normal on their own
  • Central banks to coordinate policy globally so they can do the best they can to ‘raise all boats’.

The first option won’t work – though I suspect there will be increasing calls for this kind of idea.  Rand Paul is a fan already.  But the second idea has a chance, even if the the method reaks of top-down control.  The current efforts are competitive (yes) but we are watching the steering of very well centrally managed monetary systems in uncharted territory.  We either need free markets up, or provide better coordination.  If the ECB increases, for example, its QE program as a means to help the euro, you can bet either China, Japan or the US will respond, or the Fed will have additional doubts in Q1 2016 concerning rate rises again.

If this was not enough, here is another article that suggests the pressure now is on Japan to increase easing.  I have no other choice but to refer to my Open Letter to Christine Laguarde, head of the IMF, for a new Bretton Woods Agreement.  At this point we need more hard and firm collaboration in monetary poilicy, not tit-for-tat, race to the bottom competition.  

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