QE2 is not working

In my post of 27th August 2010, I made this statement:

"The WPM is still recommending war-time economics but it looks like they'll be ignored again and the governments will incur further debt to prevent a double dip recession. But the market will see through this and the 2nd dip will eventually take place. This gives us a clue as to what is needed."

The trouble makers (those who caused the credit crunch) will give the Governments false information which implies that Quantitative Easing is a necessary evil in a similar way that Austerity measures are a necessary evil. I'm not implying that austerity measures are wrong - it's better to make them early rather than them being forced upon us as they forced upon Greece and now Ireland.

QE2 in America is NOT having the desired effect. In my opinion, QE by itself does not solve the problem because investors are looking for value and QE does not create value. Quite the reverse, QE destroys value by devaluing the currency. The aim is to inject liquidity into the financial markets but what happens to that extra liquidity? Instead of interest rate going down, which is the intended effect, they're going up.

The Government could've done better by borrowing money and investing it directly in industry in tranches based on results. However, as was seen from the last stimulus package, when the money ran out, the growth fell in leaps and bounds. In the USA Q4 2009 GDP was 5%; in Q1 2010 it was 3.4%; and in Q2 it was 1.6% and people started talking about a double dip recession. Thankfully this hasn't happened - yet.

The lesson for the UK is that they shouldn't start their version of QE2. The austerity measures may take money out of the economy thus reducing liquidity thus prompting calls for QE2. If this happens, then QE2 will invalidate the austerity measures and the UK will still lose its credit rating as international investors will see through it as they saw through America's QE2. The UK will lose it's credit rating despite the austerity measures. This implies that either the UK is heading for a credit downgrade or it isn't. If it is heading for a downgrade, then the Government must make sure that liquidity in industry does not dry up necessitating QE2 even if it means diverting some of the money saved from the austerity measured into industry. Actually, as much money as necessary.

The WPM has nailed its 2011 repossession forecast to the mast at 32,000. With the above in mind plus austerity measures will make it difficult to achieve 32,000 or even 33,000 - the lower the result the more positive the economy is. Actually, it's the performance of the economy that has a positive effect on the repossession rate.