An international strategic monetary gaming has begun

Comments on Stephen Koukoulas “Don't cool the world growth jets too early”, 29/01/2013, http://www.businessspectator.com.au/bs.nsf/Article/global-economic-growth-GDP-stock-market-rebound-pd20130129-4DRQN?OpenDocument&src=sph&src=rot

The risks now are not on the side of cooling too early. Instead, they are on the side of pending worldwide inflation. In the new competitive loosing monetary policies internationally (at least in major western industrialised countries including the US and EU, and now Japan has joined), would any stimulating policies of such type have any effect on the real economies in those countries and the world as a whole?

The effects of loosing monetary policy in all the countries when they already face the liquidity trap are likely to be no effects on real outputs of those economies.

In the short run, they may boost assets prices such as the stock markets and cause hot money to flow to the major emerging economies to cause headaches to their economies. In return, the authorities in those countries will have to respond by taking measures to keep their exchange rates not rising too much.

In the longer term, international inflations are likely to rise significantly, causing policy makers headaches and forcing costly adjusts.

The world economy is having a wild run in the near future. In such a worldwide monetary policy game to compete with each other, who will be the winners and who will be the losers are unclear.

The game started with the Fed. It has now turned to a strategic gaming internationally.

The skills for relatively good policies in a country to win the game eventually are required not only for this stage of monetary easing, but also for the period in its wake to combat inflation and to continually stay internationally competitive.

In that sense, your concluding sentence is very insightful: “These market trends appear to be sustainable as the sensible policy makers have thrown their text books and ideologies out of the window and are willing to have policy settings that have, in broad terms, averted economic depression and are working to support economic growth.”

Australian authorities have to and must be ready for this.