THE DISTILLERY: QE3 question marks

Jotters cast another look over QE3, brushing off inflation risks to focus on the effect the plan will have on US lenders.

Analysis of the Federal Reserve’s third round of quantitative easing, which hit Friday morning (Australia time) continued over the weekend. Our country’s business commentators are, broadly speaking, less concerned about the inflation risk and more focused on the actual impact on US lenders.

The Australian Financial Review’s economics editor Alan Mitchell delivers a considered and concise analysis of the Fed’s latest move. He points out that the key question is whether the lower interest rates will coax the banks into actually lending to borrowers that aren’t the highest rated.

His colleague David Bassanese seeks to rub out some of the distortions about QE3, first of which is the imagery of the Fed printing money and then dropping it out of a helicopter.

"They in effect involve the Fed offering to buy certain securities from its panel of primary dealers (largely investment banks) at competitive auctions – in exchange for which newly created ‘cash’ is deposited into the dealers’ accounts. From the dealers’ perspective, their net-asset position has not changed – they merely hold more cash and less Treasury bonds or other private sector debt sold to the Fed. This is quite different from dropping cash from a helicopter, as the latter would boost the net financial asset position of those receiving the cash – they’d feel wealthier and some more inclined to spend.

"With more cash chasing the same amount of goods, dropping cash from a helicopter would be more likely to be inflationary – as in Zimbabwe – especially if the economy is close to full employment. But in a country at less than full employment – arguably where America is today – even dropping cash from a helicopter need not be immediately inflationary. It might merely serve as the catalyst for higher spending by consumer and business alike, bringing idle resources into operation.”

Fairfax’s Malcolm Maiden also touches on the inflation question, explaining that the inflationary risk is present but the Fed’s approach is shifting.

"The open-ended nature of the stimulus is one measure of how hard the Fed is now pushing. Another is the fact that it has softened a focus on containing inflation that has dominated central bank thinking for decades. Bernanke insisted yesterday that the Fed was not intentionally trying to raise inflation to a point where it more aggressively depreciated America's daunting $US16 trillion debt load, an option that has been there from the moment the global crisis began. It was, however, ‘not going to [be] premature in removing policy accommodation’, he said, adding: ‘Even after the economy starts to recover more quickly, even after the unemployment rate begins to move down more decisively, we're not going to rush to begin to tighten policy. We're going to give it some time to make sure the recovery is well established.’”

Maiden’s colleague Michael West also deals with QE3, but makes that point that Washington is relying heavily on the central bank to deliver stabilising policy decision because of the incapacity of lawmakers to do the same.

Meanwhile, The Australian Financial Review’s Karen Maley has a talk with Hayman Capital global strategist Richard Howard about the unsustainable debt burdens in Europe, the US and Japan. But it’s his concerns about China that are most troubling for Australian readers.

"We are concerned that we’re on the verge of a significant structural slowdown in China and that country’s long-term growth prospects will have to be reassessed. Instead of seeing the Chinese economy grow at 7-9 per cent in perpetuity, we’re likely to see growth rates of around 5-6 per cent for the next half a decade, followed by growth rates of 4-5 per cent. This will have a really big impact on future demand, not only for commodities but also for anybody who trades with China.”

The Australian’s editor-at-Large Paul Kelly says business leaders are calling time on Australia collecting cheap money from China’s growth, following The Australian-Wall Street Journal "China Century" conference over the weekend.

In company news, Fairfax’s Clancy Yeates looks at the technological challenges facing traditional business models: the irony of JB Hi-Fi pushing iPhones that are encouraging the personal digital revolution that undermines its model is front and centre.

Fairfax’s Michael West digs into the past of Peter McIntyre, who is now managing director of transmission giant TransGrid. He finds that in mid-2009, when he was further down the pecking order, McIntyre told an audience openly "it is not TransGrid’s role to implement policies to lower demand”.

The Australian’s John Durie revisits the Fortescue-Rio Tinto rail access dispute amid a solid warning from the High Court of Australia to the Australian Competition Tribunal about overreach.

And finally, Fairfax’s Elizabeth Knight sits down with retail supremo Gerry Harvey, who’s fighting back after a report in the columnist’s newspaper called for the billionaire to sack himself from Harvey Norman.

Norman offers a scattergun-style defence of his record, which largely centres on his contention that the internet’s relevance to his business is over-emphasised. It’s still a good read though with insights, profanities and horse castration references scattered through.



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