Opinion

The Great Debate

Liquidity & inflation, lessons from the 1940s

John Kemp Great Debate– John Kemp is a Reuters columnist. The views expressed are his own –

Comparisons between the current downturn and the Great Contraction of 1929-33 have multiplied as commentators and investors have tried to forecast the recession’s likely depth and duration. But as the U.S. economy shows signs of stabilising and attention switches to future inflation the more useful comparison is actually with the 1940s.

The massive build up of highly liquid assets (cash and bank balances) during the Second World War is the closest parallel to the current escalation of bank reserves as a result of quantitative easing programmes in the United States and elsewhere around the world. The relatively modest pick up in consumer prices after the war ended may hold lessons for the outlook for inflation over the next five years.

There is a risk the commodity markets may have over-estimated the speed with which excess liquidity will be transformed into higher inflation and higher prices.

The outbreak of war was accompanied by an unprecedented build up of liquidity in the U.S. financial system. Deficit-financed spending on armaments and the war effort finally eliminated the persistent under-employment of the previous decade and ensured strong growth in corporate revenues and household incomes.

Africa and the global economic crisis

- Jorge Maia is head of Research and Information for Industrial Development Corporation of South Africa, established in 1940 to promote economic growth and industrial development. The opinions expressed are his own –

Serious shockwaves are hitting Africa’s shores as the global economic crisis unfolds.

The extent and depth of the damage is extremely difficult to assess or project, but it is clear that the pattern of financial flows associated with investment, lending and trading activity has been dramatically altered, with detrimental economic and social implications for the continent at large. The adverse impact has been gradually spreading from a regional perspective – a serious setback to Africa’s recent growth performance, which had averaged 6 percent a year from 2003 to 2008.

How will the Fed get off its Tiger?

James Saft Great Debate – James Saft is a Reuters columnist. The opinions expressed are his own –

The Federal Reserve and U.S. economy have two considerable risks now that quantitative easing is at hand: keeping the dollar from a disorderly decline and figuring out how to dismount from the tiger.

The Fed has cut interest rates to a range of zero to 0.25 percent and said it would use “all available tools” to get the economy growing again, including buying mortgage debt as well as exploring direct purchases of Treasuries.

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