“Faced with these two decidedly different routes to “level the playing field” it seems obvious that the United States is opting for “Easy Street” as opposed to “Buckle Down Road.” Granted, “The Ben Bernank” as a YouTube cartoon rather hilariously labeled him, has for several months importuned Congress and the Executive Branch to institute substantive reforms, while he attempts to keep the patient alive via non-conventional monetary policy. But very few others are willing to extract their heads from the sand. The President’s debt commission with its insistence on low personal and corporate income tax rates and a mere 15 cent increase in the gasoline tax was one example. The Republicans’ reluctance to advance detailed ideas for budget balancing is another. And the Democrats’ two-year focus on the biggest entitlement program since Social Security – healthcare – as opposed to fundamental reforms to counter our lack of global competitiveness – is perhaps the most grievous example of lost opportunity. Unlike the United Kingdom, where Prime Minister Cameron has championed fiscal conservatism, or even Euroland, which is being forced in the direction of Angela Merkel’s Germanic work ethic, the United States seems to acknowledge no bounds to what it can spend to bolster consumption or how much it can print to support its asset markets. We will more than likely continue to “level the playing field” via currency devaluation and an increasing emphasis on trade barriers and immigration, as opposed to constructive policies to make this country more competitive in the global marketplace.”

http://www.pimco.com/Pages/AllentownDecember2010.aspx

Quantitative easing refers to a process that involves the Fed printing new money to buy long-term treasury bonds.  The practice aims to stimulate demand and prevent deflation by lowering long-term interest rates, but QE also has many other effects.  QE raises the risk of inflation, distorts risky asset prices and disturbs currency markets.  Low US interest rates have created a “carry trade” where investors borrow dollars at superficially low rates and invest abroad.  This does nothing to help the US economy and has the potential to distort foreign asset prices.  Finally, to cap it off, QE supports our current fiscal irresponsibility by keeping the government’s borrowing costs artificially low.

I side with Feldstein on this one.

http://www.ft.com/cms/s/0/9ba381d0-e6b5-11df-99b3-00144feab49a.html

http://www.nytimes.com/2010/11/04/business/04leonhardt.html?partner=rss&emc=rss

Also note the international implications:

http://www.reuters.com/article/idUSTRE6A30PY20101104?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+reuters/businessNews+(News+/+US+/+Business+News)&utm_content=Google+Feedfetcher

http://www.project-syndicate.org/commentary/stiglitz124/English

Mr Wen said China would continue to reform its currency system. But he pushed back strongly against international pressure on the level of the exchange rate, which is becoming a major flashpoint in relations with the US.”

http://www.ft.com/cms/s/0/d2d18014-2f34-11df-9153-00144feabdc0.html?ftcamp=rss

It’s Mr. Wen’s own currency subsidy that constitutes a potent form of protectionism.  If the Chinese authorities are so confident that the renminbi is fairly valued – which they probably know full well is quite unlikely – then they have no reason to maintain a peg policy.

http://faculty.chicagobooth.edu/christian.broda/US_World.jpg

http://www.nytimes.com/2010/02/25/business/25hummer.html?partner=rss&emc=rss

http://www.nytimes.com/2010/02/19/opinion/19brooks.html?emc=eta1

How the mortgage market will react when the Fed halts its MBS purchase program remains a significant question.  I have a hard time believing private sector demand will suddenly rise to offset the Fed’s departure and prevent a noticeable price decline.

‘At the end of March, the Fed is also expected to end its purchases of mortgage-backed securities. At some point later, it will start selling those securities. Earlier this week, aides on Capitol Hill said that in questioning Mr Bernanke lawmakers would probably focus on the end of the support for the housing market, which has shown some signs of stabilisation but continues to struggle because of high foreclosure rates, prices that are still falling, and a glut of unsold homes.

Some economists have warned that the end of the Fed’s mortgage purchase programme could raise mortgage rates and stifle any nascent rebound in the housing market. Supporters of the plan believe that it will only marginally lead to an increase in rates, and is a necessary step towards normalisation of US mortgage markets.

“The question is whether the private markets will be able to pick up the slack,” said one aide, who said that lawmakers would focus on the issue because it is what matters most to voters.’

http://www.ft.com/cms/s/0/a9cc355a-15a9-11df-ad7e-00144feab49a.html?ftcamp=rss