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Unwinding the Unnecessary: QE and the Periphery

August 23, 2013 in Economics

By John P. Cochran

In today’s Wall Street Journal an editorial examines the impact of Fed Policy on the developing world (Ben Bernanke’s Global Adventure : The markets show unwinding QE is not so easy).  The emphasis is, as it maybe should be for now, on the difficulty facing not only the U.S, but the world economy if and when the Fed begins to unwind QE infinity:

This week’s turmoil nonetheless shows that it’s a rocky road from here to there, and the market tribulations should be on American policy makers’ minds. Monetary optimists have argued that, when the time comes, the Fed will be able to taper its easy money relatively smoothly. Perhaps, but a global repricing of risk in line with changing rates in America will also unsettle the very economies to which American companies increasingly turn for revenue growth.

However, attention should be paid to the world wide monetary misdirections of production created by the Fed’s misguided attempts to bolster the U.S. economy with Mondustrial Policy and other new tools of monetary central planning. As in many cases Austrian-based analysis is ahead of much of the main stream.

As examples see:

Nicolas Cachanosky (Metropolitan State University of Denver) U. S. Monetary Policy’s Impact on Latin America’s Structure of Production (1960-2010)which extends ABCT and capital-based macroeconomics in the international arena, especially as it applies to the ‘periphery’.

The abstract:

I study the effects of U.S. monetary policy on Latin America’s structure of production prior to two recent economic crises. I find that changes in the Federal Funds rate produced uneven effects across economic sectors. Those industries that are more capital intensive and relative long-term projects are more sensitive to changes in the Federal Funds rate than projects that are less capital intensive and relative short-term in duration. Therefore, periods of loose monetary policy resulted in a misallocation of resources that has been costly to correct during the bust. This result finds a particular pattern of economic distortion during an unsustainable boom.

And

Andreas Hoffman’s “Zero Interest Rate Policy and the Unintended Consequences on Emerging Markets.

Abstract:
In response to the subprime crisis and Great Recession central banks in advanced economies have cut interest rates towards zero and increased monetary accommodation to step-up domestic growth. In this paper I attempt to describe the unintended consequences of the low interest rate policies in emerging markets. I argue based on the …read more

Source: MISES INSTITUTE

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