Uncle Sam fires up the printers, again

Illustration: Rocco Fazzari.
Illustration: Rocco Fazzari.

That's that, then. Central banks are on the case, pumping up the world economy and she'll be right. The market is on the mend.


It loves the newest upgrade of quantitative easing or QE3, which is - and I promise to be brief - about printing enough US dollars to give the lackadaisical US economy a good shove.

Or to be technical (should you want to impress your friends, though I didn't have much luck), the central bank buys bits of paper from banks so they have more money to lend, which should result in more spending and jobs.

It's a ploy the US Federal Reserve has tried twice, though the second time produced less oomph than the first, which, as you will have gathered, wore off pretty quickly. So fingers crossed third time lucky.

Not only that, it's promised to keep the official interest rate at virtually zero until halfway through 2015 at the earliest.

Trouble is, nobody's borrowing, but with an offer like that they're bound to get around to it.

Weird, isn't it? Too much debt got the world into a mess, but recovery relies on even more of it.

Europe is also having a shot at a quantitative easing but, as you'd expect, in its own way. Its central bank is buying up government bonds from the various basket-case member states, which is to say most of its clients, but paying for them by selling pieces of paper to others.

Then no new euros are created and those already out there are safe. Commodities, which are priced in shrinking US dollars, boomed after the other QEs because the less the US dollar is worth, the higher the price of something denominated in it.

Little wonder that since the US and European central banks got on the front foot, the iron-ore price has recovered a lot of lost ground, though it's still well below where it was a few months ago.

Yet, at the same time, China's demand for steel is falling.

Oh dear, there's always a catch.

Or several in China's case, beginning with an infrastructure boom that created roads going nowhere, banks with bad debts, local government authorities nearly bankrupt from over borrowing, houses in modern ghost cities nobody can afford to buy thanks to a property bubble, steel mills that lose money or soaring skyscrapers that serve no useful purpose.

Uh, did I mention it's been wasting a lot of money? Great for a few years of super growth, but at the cost of running up its own debt. China is in no position to spend up big on infrastructure as it did after the GFC, when commodity prices were able to build momentum from the earlier QEs.

Never mind, the market is always most accommodating when US dollars are being thrown about, so enjoy it while it lasts.

Follow David on Twitter @moneypotts

This story Uncle Sam fires up the printers, again first appeared on The Sydney Morning Herald.