2012-10-04 - Monetary mystification

2012-10-04 - Monetary mystification - Monetary...

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Monetary mystification By Joseph Stiglitz October 4, 2012 – Project Syndicate Central banks on both sides of the Atlantic took extraordinary monetary-policy measures in September: the long awaited “QE3” (the third dose of quantitative easing by the United States Federal Reserve), and the European Central Bank’s announcement that it will pur- chase unlimited volumes of troubled eurozone members’ government bonds. Markets re- sponded euphorically, with stock prices in the US, for example, reaching post-recession highs. Others, especially on the political right, wor- ried that the latest monetary measures would fuel future inflation and encourage unbridled government spending. In fact, both the critics’ fears and the opti- mists’ euphoria are unwarranted. With so much underutilized productive capacity today, and with immediate economic prospects so dismal, the risk of serious inflation is minimal. Nonetheless, the Fed and ECB actions sent three messages that should have given the markets pause. First, they were saying that previous actions have not worked; indeed, the major central banks deserve much of the blame for the crisis. But their ability to undo their mistakes is limited. Second, the Fed’s announcement that it will keep interest rates at extraordinarily low levels through mid-2015 implied that it does not ex- pect recovery anytime soon. That should be a warning for Europe, whose economy is now far weaker than America’s. Finally, the Fed and the ECB were saying that markets will not quickly restore full employ- ment on their own. A stimulus is needed. That should serve as a rejoinder to those in Europe
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