Doves, hawks and other ominous birds' names  

This is not a late conversion to ornithology. We are, of course, referring to the monetary policy debate now raging; not as sophists wanting to hear a good argument, but more prosaically as asset managers contemplating the repercussions for our investment policy of monetary policies being pursued in the main regions in which we invest. The economic and financial highlight of early November, the Federal Reserve's announcement of another round of quantitative easing, is fuelling a sometimes stormy and usually dogmatic debate as we find ourselves in a largely unprecedented situation in terms of the nature and scope of the measures implemented. But let us first consider the essential question: did Ben Bernanke have any choice? Our answer is a definite no.  
Barely two years after coming to power, the government paid a heavy price for its domestic economic policy at the mid-term elections. The unemployment rate remains close to 10%, or 17% if we include those who, feeling despondent, have given up looking for a job. Hundreds of thousands of homes have been repossessed and account for nearly 35% of house sales. In light of these two factors, a better outcome was never really likely. It is precisely because the measures taken during the 2008 crisis were too mild - not enough to generate self-sustaining, job-creating growth, or to offset the deflationary effects of the US economy's deleveraging - that voters punished the government at the ballot box.  

Realising this at the end of the summer, the Fed's "doves" - so called because they advocate an accommodative monetary policy that supports economic activity - started to evoke the possibility of implementing further quantitative easing. With core inflation below 1% on an annual basis, fears of deflation have justifiably heightened. The Fed will increase the money supply by printing dollars to buy Treasury bills and keep yields low all along the curve. Hence the term "quantitative easing". As proponents of a more orthodox monetary system, the hawks have naturally opposed this new policy with disagreements emerging within the Federal Open Market Committee. Their argument is that the inflationary consequences of these measures will become uncontrollable and lead to more financial and economic crises. Worse still, Bernanke has been saddled with a couple of other names such as Madoff and Ponzi. This seems excessive, especially as a large percentage of US debt is held by foreigners and the dollar will be the variable according to which the "value" of this debt will be adjusted.

Would it have been better to wait and do nothing like Japan for all these years. The yen is now a hair's breadth away from its record highs of 1995, choking exporters. For example, industrial output was down 1.9% in September, the fourth consecutive month of decline, with an even worse figure expected for October. Exports are falling, deflation has settled at -1.1% on an annual basis, and the prospect of another recession is starting to materialise. As for the Bank of Japan's plan to weaken the yen by injecting $62 billion (¥5 trillion) into the economy, this has been dwarfed by the $600 billion programme announced by the Fed (55% of the estimated federal deficit for 2011). The Fed has a dual mandate that includes full employment. Given the parliamentary paralysis likely on Capitol Hill over the coming months, Bernanke could not stand idly by. It is risky but we have to credit his audacity. Should we be worried about the inflationary consequences of these measures? We doubt it as the Fed's very intention is to generate inflation in order to curb the deflationary pressures of deleveraging. Should we fear bubbles on the asset markets? This seems premature. The Fed is targeting a re-appreciation of financial and real (property) assets as a means of channelling its monetary policy measures to the real economy. The weakness of the dollar should boost exports. The wealth effect should encourage firms to hire and invest. It should also stabilise the property sector and improve the outlook for consumer spending through a drop in long-term interest rates and an increase in households' nominal income. This is obviously the ideal scenario, the materialisation of which is merely a possibility.