Sunday, November 28, 2010
Is the feds plan working?
In this article, the author explains that in order to truly know if the feds "QE2" plan is working, we need to look at the performance of foreign equities. The main purpose of this 600 billion dollars plan is to stimulate risk taking among investors. However the risk taking is not limited to the US. If investors are investing in foreign equities, that is a good sign, since it reaffirms the idea that the investors are willing to take risks. By the looks of it, this is already coming true. The Morgan Stanley International emerging market fund has had a 13 % increase in its value. Also the MSCI EAFE index for foreign stocks in developed nations has grown by 5.9 % since august 31. There is already some evidence that this plan will work. However, there are certain political events happening around the world which might leave this plan in the lurch. The recent North Korean aggression against South Korea, The bailouts happening in Europe and Chinas tightening monetary policies are all events that could have a potentially negative effect on this intricate process.
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I feel that the QE2 will have the desired effect. After all as we showed in class the reason why we call it the "Great Depression" is because government did not increase its supply of money.
ReplyDeleteThe increase in supply of money will only have an effect if the demand for goods is expressed. Currently, the deflationary prices are due to extremely low demand for goods as consumers are afraid to spend. This could have a negative effect on expectations as people will stop spending and this will increase unemployment. Consumers must start spending!
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