US faces dreadful choices ahead
THE US Federal Reserve’s decision not to embark on a third round of quantitative easing (QE) — a means of boosting money supply by buying bonds rather than cutting interest rates — has been hailed by some economists as a turning point in the global financial crisis.
Indeed, it can be argued that QE2, a $600bn purchase programme that draws to a close at the end of this month, has done its job. The US economy has been prevented from slipping back into recession, averaging 2,8% annualised growth since the recovery began in 2009, and fears of deflation have all but disappeared. The injection of cash into the economy — more than $2-trillion in two rounds of QE — has encouraged investors to buy shares and other more risky assets and kept the dollar from appreciating, boosting US exports.
Seen from this perspective, there is little justification for further stimulus, especially since interest rates are close to zero and seem set to remain at this level for some time to come. However, economic growth of close to the long-term average is hardly the bounce-back the Fed’s monetary policy chiefs were hoping for.
The US economy could grow at a far quicker rate and under normal circumstances would be doing so, given the injection of cash and availability of cheap credit. And — most worrying from a political perspective — the anaemic recovery does nothing to boost job creation.
By some measures, the US economy is no bigger now than it was in 2006 and employment is worse than it was at the lowest point of the recession. Under the circumstances, the Fed’s decision not to embark on a QE3 could well be a milestone in the global economy’s recovery, but not in a good way. It may indicate that US policy makers have all but run out of options. Further stimulus is tempting, but more monetary easing would bring with it significant economic and political risk.
The thinking behind QE was that it could be used to jump-start the US economy while inflation was low and the banking system was repairing its collective balance sheet. Once the economy was back on track and unemployment on its way down, attention could be turned to tackling the federal debt, which has been rising unsustainably for years.
However, now that the first part of the plan hasn’t worked out, it is difficult to implement the second part without plunging the economy back into recession. The US is not yet on the verge of defaulting on its debt a la Greece, but it has to act soon to cut the budget deficit, at least. This can be achieved either by spending less or raising revenue through higher taxes, both of which are negative for growth and highly unpopular among voters.
In other words, the US is caught between a rock and a hard place. This situation could lead to policy paralysis in much the same way that Japan experienced a "lost decade" when it failed to tackle its debt problems in a decisive manner and the economy stagnated.
The US is not quite without options, though, especially if global economic growth picks up as Japan recovers from its earthquake and tsunami. In this case the US might be able to muddle through with a combination of short-term tax cuts and longer-term spending reduction , assuming political consensus can be reached. Trouble is, there is no certainty that the rest of the world will play ball. Europe’s sovereign debt woes are far from over, and China’s economy has structural flaws that threaten a hard landing as growth slows.
The neutral monetary policy now adopted by the Fed should be positive for the dollar and bearish for commodity prices, which have been boosted by an outflow of dollars seeking yield. But it is unlikely to prompt an exodus from emerging markets as long as US interest rates remain at historic lows. The ending of QE in the US is a significant event in the economic cycle, but it would be a mistake to expect fireworks. The recovery is going to be a drawn- out affair. There is no quick fix.
A most special singular malt
THERE are genuinely few people who could live up to the oft -cited tribute "he will be missed", but Kader Asmal is surely one of them. Like many anti-apartheid stalwarts, he shared a life-long dedication to human rights, freedom and compassion. In his various government portfolios, most notably as education minister, he served the country with distinction.
But in addition, he brought to political life in SA a real distinctive quality. He was thoroughly outspoken, speaking up in a totally forthright and fearless way on the occasions when he disagreed with his colleagues or with government policy. He could do so because he responded instinctively, with humility and with total honesty.
The list of his disagreements with the African National Congress (ANC) touch on some of the most gratuitous errors of governance and policy, including on Zimbabwe, the disbandment of the Scorpions, and the recent press censorship bills .
By doing so, he provided a genuine internal reality check, a much- needed honest broker, importantly from within the movement. He earned his right to criticise partly from a rigorous academic background, which included a 27-year period as law professor at Trinity College in Dublin.
Apart from starting the British and the Irish anti-apartheid movements, his legal training and knowledge of international law and human rights law provided him and the ANC with invaluable intellectual heft during the constitutional negotiations. Our constitution owes a debt to his intellectual rigour and his assertive resolve to craft a modern document informed by human rights values, rooted essentially in the grand liberal tradition. His particular contribution was an insistence that gender equality be included as a human right.
The deaths of Asmal and Albertina Sisulu represent the gradual demise of a generation whose contributions and guidance will be sorely missed. Unlike the tendentiousness of the younger generation, they saw themselves as striving for the implementation of ideas premised on principle, rather than notions derived from hedonistic populism.
Asmal’s great good humour, his conviviality and his candour mean he will be remembered not only with respect but also with affection.
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