The end of QE2 and the link to inflation in China

This next piece is awesome. This is as exciting for people who like economic content. OK, please don't stop reading, because this guy, Bob McTeer, a former president of the Dallas Fed writes really well. It has to do with the Feds various liquidity programs, commonly referred to as QE2, the second round. Of course QE stands for Quantitative Easing, and has been nicknamed after the monster passenger ship.

Investopedia have a *nice* definition of QE: "Central banks tend to use quantitative easing when interest rates have already been lowered to near 0% levels and have failed to produce the desired effect. The major risk of quantitative easing is that although more money is floating around, there is still a fixed amount of goods for sale. This will eventually lead to higher prices or inflation."

That last line is telling, because Bob McTeer basically argues that we have not seen any of this, read this fantastic piece titled China Chronicles. There are some great lines in there, like where he interrogates the Chinese about their inflation issues, asking whether or not 10 percent growth for a decade, could that be to blame to some extent for internal inflation? And then perhaps the funniest line, telling you everything that you need to know about the Chinese, we will entertain the subject only if it is in our best interests:

"The Chinese recently hosted a high-level conference on exchange rates and prohibited a discussion of the Yuan". Hah. And we think that we have problems about our currency. OK, but the part in the piece that I was most interested in is that inflation in the US is not a problem. And all the excessive "printing of money" has not created any runaway inflation. As of yet. And as the Federal Reserve tee up to exit from their programs at some stage, would the timing be perfect? Perhaps. Often the Fed are accused of being too slow to take the punch bowl away. This term taking the punch bowl was actually coined by William McChesney Martin, who is the longest serving Reserve Bank governor of all time. Longer than Alan Greenspan.

The Fed are actually cornered by a time frame, the end of June is when the US Treasury repurchase program ends. Excellent. The less extraordinary participation the better. The only question that remains, and this is often what the Fed will decide, do they continue or exit in an orderly fashion prior to the date. The Europeans have started tightening, perhaps it is time to take the last punch bowl away from the table. Sorry for everybody. I am pleased by this, the Fed acting when they need to. Be gone all you arm chair Fed chairman, let Ben "the measured" Bernanke do his job.