From Chinese Press

Financial side effects of US polls

(China Daily)
Updated: 2010-11-05 07:38

The United States' midterm election has affected the country's economy and politics both. Now that the Democrats have lost control of the House of Representatives the Federal Reserve is likely to launch phase-2 of quantitative easing (QE2) to stimulate the economy, which will raise a storm in the global finance market, says an article in Takungpao. Excerpts:

This week is critical for stock markets across the globe for reasons economic as well as political (the US midterm election).

The ruling Democratic Party has lost control of the House of Representatives and is almost evenly balanced with the Republican Party in the Senate. This will make things more difficult for the Democratic Party and it may be able to propel the economy through financial measures.

Given the situation, the Federal Reserve (Fed) would have to take the task of economic recovery on its shoulders. But then the Fed cannot lower interest rates further.

Therefore, the only road ahead for it is to print more currency notes to support the QE2 program. The logic is simple: By setting targets for inflation, the Fed could lower the factual interest rates and thus stimulate economic growth.

But the US economy has not yet recovered fully from the financial and economic mess, and the QE2 program is not likely to do much to stimulate the economy.

Besides, the QE2 program will have strong side effects such as creating more bubbles and a false sense of prosperity. In these critical times, such developments will create unimaginable shocks in the global financial market. In fact, a financial tsunami could already be brewing.