QE and global liquidity probblem

The sluggish recovery in the U.S. economy is prompting the Fed to refocus on "quantitative easing" (i.e., buying more long-maturity securities to lower the borrowing costs). That may serve to flood the financial system with even more liquidity. Professor Joseph Stiglitz talks about the potential consequences:




The Fed’s move towards more quantitative easing, conveyed in its recent policy statement issued in September, follows Japanese intervention to weaken the yen and Swiss National Bank actions aimed at its currency.

Increasing exports by weakening the dollar is one channel by which the easing could boost the US economy. But it is impossible for every country to weaken its currency and export its way to higher growth at the same time. So we're looking at the competitive devaluation scenario of global currencies. This is one of the most strong supports for gold prices. More QE would mean even higher gold prices, unless we enter into another recession.

The Fed is facing another major conundrum, not unlike the one faced by Mr. Greenspan back in 2005. Back then, the global "savings glut" was seeking outlets in the U.S., pushing the yields ever lower for the long-term assets. The liquidity found its way to private equities and the real estate market, which led to the financial meltdown of 2007-2009.

The money supply has never gone away. And the Fed is adding to it.

More easing may do very little as the rates are already very low and there aren't many credit-worthy borrowers. On the other hand, there isn't any other option for the Fed to counter deflation risk in the face of high unemployment and consumer deleveraging.

The economy is sick, and drinking more liquid may not help.