The past week saw US policy makers unleash a fresh wave of monetary policy action in the form of the so-called "QE2", or Quantitative Easing Two, programme. What we will never know is what the economic landscape would have been in the absence of quantitative easing (also known as wildly printing money in older textbooks) and fiscal profligacy. Things may have been worse. Things may have been better. We will never know.

What we do know, though, is that US policy makers, the lead steers in the world's biggest economy, remain convinced that the financial crisis that has been building over the past twenty or thirty years can be remedied with aggressive policy action. Moreover, the policy stance remains that normality - by which is meant high economic growth rates, rising income levels, low price inflation rates and broader economic wellbeing - is just around the corner. However, the evidence we have from economic history suggests that not only is this view wildly misguided, but that it also smacks of double standards (I've written on this topic before).

A person who is sympathetic to this view is my old friend Nigel Dunn who now is based in Cape Town. This week he put out a note to which he gave the uncomfortable titled 'Is the US a Menace to Society?'. His note, which makes for compelling reading and makes a number of probing points, is reproduced below with his permission.

Enjoy the read.

Is the US a Menace to Society?

One cannot help but ponder by what set of standards the US lives by. The cynics would probably say they do not have any, and personally I would struggle to make a case for, that would not make me look like the laughing stock of the sane, rational and decent amongst you. Geithner and others have lead a chorus of disapproval against the Chinese recently, accusing them of being currency manipulators, just like the Japanese were thirty odd years ago. Previously I would not have disagreed with that observation, but under the stewardship of Ben Bernanke the US have usurped the Chinese, and are now unquestionably the biggest currency manipulators in the world. In essence quantitative easing of the magnitude undertaken by Bernanke has ensured that the US Dollar will become increasingly worthless as the printing press is cranked up, and ever greater amounts of Dollars are created, seemingly out of thin air. I will caveat this statement by saying that will be the case as long as one of those pesky European PIGS does not default first, calling into question the future of the EU. If that happens then Ben may have a problem, and I for one am dying to see what rabbit he then pulls out of his veritable bag of tricks as money would then flow back into the Dollar by default. Or secondly enough Americans wake up to what is happening and start to put an end to this lunacy. Or thirdly we witness a failed Treasury note auction that serves as the catalyst to end this multi decade bull market of cheap money.

Let me make my case for calling the US a menace to society, as I believe their current policies are not only ineffectual, but are busy sowing the seeds for the next crisis, one that in my opinion will make the demise of Lehman’s look like a moderately bad day at the office. The Federal Reserve appear to have learned nothing, their ridiculously loose easy monetary policy encouraged multiple huge debt fuelled bubbles to inflate, initially it was dot.com in the late 1990’s early 2000, and more recently the housing market. So what does Bernanke do, the same thing, only this time the scale makes “Easy Al Greenspan” look like he was Scrooge. Encouraged by the “Bernanke put option” and pitiful yields in the US, investors are piling into commodities and emerging markets in particular, many of whom neither need the inflows or are capable of dealing with them. As a result many of the emerging market currencies are now way overvalued and are starting to inhibit rather than encourage economic growth. China already has the means for sterilizing some of these inflows but many others do not, South Africa included, and there is mounting evidence that some are now seriously starting to consider capital controls of some sort or another, or even worse, protectionism, where there are no winners as people start to look in rather than out.

Interestingly Xia Bin, a Chinese central bank advisor wrote a piece this morning in which he said “unbridled printing of dollars is the biggest risk to the global economy”. As long as the world exercises no restraint in issuing global currencies such as the Dollar, then the occurrence of another crisis is inevitable. China must set up a firewall via currency policy and capital controls, to cushion itself from external shocks”.

Rather than attempt to place artificial props under multiple asset classes, the US should look at fiscal measures that aim to create growth and employment in the US. Investment in their run down infrastructure, payroll cuts that make the US more competitive with the emerging world and a sensible energy policy come readily to mind. Some reports indicate that the US is sitting on shale deposits that exceed the total oil deposits of the entire Middle East. Only a politician could explain to me why so little has been done to bring some of that on line.

The latest IMF growth forecast for next year estimates the global economy will expand at about 4%, this is not far off the pre 2008 crisis levels, fuelled primarily by the emerging world which now accounts for slightly more than half global GDP. It thus seems pretty senseless to me to implement a policy that is barely going to add to US growth whilst at the same time holds the possibility for negatively impacting on growth in the areas with maximum potential. But then again Bernanke strikes me as being one of those intellectual zealots who is never wrong, much like Gordon Brown was when he assumed the role of Prime Minister in the UK, and we all know how his tenure ended.

It appears to me as if like Bernanke’s policies are busy fuelling a bubble in the areas of the world that hold the most potential. Bubbles all come to and end, as usual the difficult part will be the timing. As I sign off we are up another 500 points for the day, with someone buying our futures like there is no tomorrow. It reminds me of that nameless US banking CEO who famously bragged in 2008 that as long as the music was playing you had to be dancing. He is now an infamous ex US banking CEO!

Finally this all leaves me wondering what Obama, Geithner and Bernanke’s objectives are. If they think they are going to force China’s hand on the Renminbi, I suggest they think again as it will not make an iota’s difference. Do they really want a repeat of the Asian emerging market crisis of 1997/98? I sincerely hope not as this time the fall out will be much greater with a lot more collateral damage. Are they so myopic in their thinking that they are focused solely on the here and now and seemingly blinded to any other better alternatives ?, Or do they simply just not care ?

Nigel Dunn, Cape Town, November 2010