One aspect of a globalized economy that some are forgetting is that Ben Bernanke's fiefdom is merely one of many across the world. In addition to the Fed, there are 3 more key central banks out there: the BoE, the ECB and the BoJ (not to mention the PBoC). And while we already know that the Fed has no plan to stop printing money for the foreseeable future (and nobody has accounted for the massive revenue shortfall that the US will experience courtesy of an extension of the Bush taxcuts - likely to add an additional $500 billion in bond issuance requirements over the next year) and will not raise rates in this lifetime, here is what other central banks are planning on doing as of now. It appears that in the developed world, only the Fed and England are the monetarily irresponsible transgressors: the BOJ and the ECB are the two central banks that so far have demonstrated remarkable restraint when it comes to devaluing their currency, and destroying their middle class. This is visualized on the chart below from SocGen. The question then becomes how long before the last two rational entities throw in the towel and join the printing fray. With the EUR now trading over $1.4 consistently, a level where it will stay absent some monetary action out of Trichet (and hammer European exports), we believe that both central banks will soon be forced to push the max overdrive button on their respective printers.
While the chart above is on a relative indexed basis, it will be interesting to quantify the new liquidity rush coming from the BoE, and soon, from the BOJ and the ECB.
Here is the additional narrative from SocGen's Aneta Markowska:
What next? Over the coming week, we have a full schedule of Fed speakers from both ends of the hawk-dove spectrum. The Fed's decision is pretty clear in terms of operational details, but what the markets will want to hear is how the Fed expects the new policy to impact the economy. How will the Fed gauge and assess whether the policy is working? We are among those sceptical about the effectiveness of QE2 beyond its ability to anchor inflation expectations from below.
The country has spoken... and it is sick of government spending. With QE2 out of the way, policy watching will now shift to the fiscal front. Following a republican victory in the mid-term elections, fiscal policy is bound to undergo significant changes. The Bush tax cuts are increasingly likely to be extended for all income levels, but after that we see thin prospects for additional fiscal stimulus. The country has spoken, and policy will respond. Republicans are already promising budget cuts to the tune of $100 bn and the Democrats will likely become more sensitive to the issue of fiscal responsibility. Where Republicans and Democrats could potentially agree is on tax breaks for businesses.
To the last point: the incremental debt required to fill the tax break hole is precisely where the UST will come up and fill the void with additional issuance... Which the Fed will promptly gobble up as part of QE2 (and Lite) and set the stage for QE3 which will be priced into the market some time in H2 2011, at an expected size of several trillion.