Economic policy’s time has come

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The rally in risky assets in September took us by surprise, since our basic macroeconomic scenario has been quite correct. Developed economies, led by the United States, have indeed slowed significantly in recent months. According to our route map, such a slowdown would lead to a new policy mix, including a second round of quantitative easing in US monetary policy.We know that Ben Bernanke has an unparalleled understanding of the mechanisms at work in a balance-sheet recession. In such a recession, the monetary-policy transmission variable is no longer interest rates, but the price of assets, houses and stocks. However, we thought that he would wait for a new episode of stress in the markets to ensure the necessary political consensus to deploy a new programme of asset purchases using the Fed’s balance sheet.

We were wrong.The lack of recovery in US employment and the resulting stress among US politicians have already created the conditions for the FOMC to pre-announce ‘QE2’ (quantitative easing 2). In a broken credit system, you can’t win both ways. Either one manages to stimulate asset prices and the currency declines, or the dollar rises and the S&P500 goes down.To benefit from this monetary stimulus, we must buy assets in dollars or dollar-related commodities, while hedging against currency risk. Otherwise, measured against a stable value standard, the real gain is much lower or even zero: in gold or Swiss francs, the S&P has made just half its gain in dollars since QE2 has been in the air.