Monday, October 18, 2010

US economic fix: print money

US AUTHORITIES are boosting the Australian dollar by turning to the "disastrous" economic tactics deployed by Zimbabwean dictator Robert Mugabe, a finance expert says. 

Mr Mugabe has printed so much money over such a long period that its national currency has become almost worthless, with hyper-inflation leading to a loaf of bread costing billions of Zimbabwean dollars.

The US Federal Reserve, the equivalent to the Reserve Bank, hinted last weekend it would pursue another round of "quantitative easing", effectively printing more money, in an effort to stimulate its economy and reduce the likelihood of deflation, said Peter Swan, a finance professor from the Australian School of Business, University of New South Wales.

Deflation, or the threat of deflation, tends to reduce economic activity as people defer spending and can lead to higher unemployment.

Dollar boost: strong Australia, weak US

The hints by the US Fed that it would print more money, together with the strength of the Australian economy, has led to an unprecedented rise in the Australian dollar this year.
Last week, the dollar briefly touched parity with the greenback, for the first time since the currency was floated in 1983. At midday (AEDT) today, the dollar was trading at US98.75c, down from Friday's close of US99.28c.

Since the Global Financial Crisis, the US has failed to boost its economy using the traditional tools of monetary and fiscal policy, Professor Swan said.

"The US Federal Reserve has lowered interest rates to close to zero again, as it did in the lead up to the Sub-Prime Crisis (forerunner of GFC)," he said.
"(And) the US Government has tried to use stimulus spending to boost the economy.
"This transferred bad debts from the private to the public sector and has led to the US Government's record $US1.3 trillion budget deficit.
"But this stimulus didn't work and US unemployment still rose to a very high rates of about 10 per cent and there is still the prospect of a double-dip recession there."

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