Past weeks have seen the US (and world) financial media aflutter with talk that the US Federal Reserve will initiate a second round of Quantitative Easing (QE) aimed at boosting economic growth. This QE2 is generally expected to consist of open market operations such as purchasing financial assets - government bonds, mortgage-backed securities and corporate bonds. QE2 will be a bad idea.

Why would QE2 be a bad idea?

• QE2 will weaken the dollar and hence raise oil prices (which are denominated in dollars). Costlier oil will act as a drag on growth. The Fed believes that the positive effects of a weaker dollar (such as cheaper exports) will outweigh negative effects, but this belief is not sufficiently grounded in empirical experience. 
  
• Economists don't know enough about how QE affects inflation; such a policy may well cause inflation to surge. 
  
• Easy funds arising out of QE2 will chase higher returns outside the US; the wall of liquidity already descending on emerging markets in the past few months is thus likely to grow even bigger. This will not only cause QE2's effects to leak out of the US economy, but will also lead to asset price bubbles in emerging markets. QE2 may well thus cause the US to export financial instability to the emerging world.
  
• The biggest reason why QE2 will be a bad idea, however, is that there just isn't enough evidence to show that such a policy would work. Prior uses of QE include Japan during the early 2000s and the financial stimulus used in the US and Eurozone in the aftermath of the 2008-09 crisis (i.e., QE1). The Japanese experience was hardly edifying, failing to achieve either higher growth or deliverance from chronic deflation. In any case any extrapolation from Japan to the US would be inappropriate - the US is a far larger economy (almost 3 times the size of Japan), and is a far more diversified, open and vibrant economy, with a currency that is also the world's reserve currency.

I had written on this very blog in April 2009  that the US and global economies would begin their recovery from recession in July 2009. This opinion was based on five factors, all publicly known.

The opinion was considerably at odds with that of eminent economists and world leaders at the time: Uber-gurus such as Nobel Laureate Paul Krugman  and Robert Reich (a member of President Clinton's cabinet and ranked among America's Top Ten Business Thinkers) were predicting another Great Depression; the IMF and OECD were in March 2009 foreseeing a recovery for the world economy starting only in 2010  . President Bush said in his final press conference that his economic advisors believed that "the economic situation could be worse than the Great Depression". The US Federal Reserve warned in February 2009 that "the crippled U.S. economy would deteriorate throughout 2009".

Now comes heartening news: The US National Bureau of Economic Research (NBER)'s Business Cycle Dating Committee (which certifies the start and end of recessions in the US economy) said three weeks ago  that the recession ended in June 2009, and a recovery began that month. It also said the basis for this decision was "the length and strength of the recovery to date".

My analysis and opinion on the end of the recession have thus been proven remarkably accurate, despite having appeared outlandish, over-optimistic and contrary to prevailing expert wisdom in April 2009 when they were written.

Sadly however, it appears that in matters economic, we must continue to stumble from one surprise to another. Earlier too, in March 2007 and August 2005, I had written forewarning of an impending implosion of financial markets - here I wasn't alone but among an unheeded minority that had forewarned of such an eventuality.

A guest column I've written in CEO World magazine in February 2010 analyzes recent economic events and shows that neither the recession nor its end should have come as a surprise.

Of course many people don't believe a recovery has begun even now (some reasons in this blog post). Also, the above only means that the recession ended mid-2009 and the recovery began then - it certainly doesn't mean the US or world economies are perfect as can be. 

A few thoughts on longer-term structural changes (some rocky, some benign) in store for the world economy in coming years are this blog post. They include:

v      No lessons have been learnt from the recent financial crisis, and so there will be more crises.

v      As the world rebalances, global wealth distribution is shifting inexorably. In 2025 the world will look more like it did in the late 19th century (in terms of relative apportioning of wealth, not in terms of absolute standards of living or technological advancement) !