Clinging to the liferaft  [By Jiao Haiyang/China.org.cn]

The decision by the US Federal Reserve to carry out a $600 billion "quantitative easing programme" (the polite name used for printing money to buy US bonds) has been criticised even by traditional friends of the United States such as the German and Japanese governments.

It is easy to see why. Most of this new money will not end up in the U.S. but in other economies – adding to inflationary pressures in countries such as China, India and Brazil. What has not been so widely commented on is the link between this policy and the reasons for the failure of US stimulus programmes to revive its domestic economy. American citizens and the rest of the world are paying a very heavy price for the "anti-state" ideology that has hobbled the US response to the financial crisis.

The driving force of the US Great Recession is clear. Investment in the U.S. has fallen drastically. Figure 1 shows that, in constant price terms, by the 3rd quarter of 2010, US GDP was $103 billion below its peak level in the 4th quarter of 2007. However, most components of US GDP were already above their peak – net exports, private inventories, and government expenditure together were up by $280 billion. Personal consumption had declined, but only marginally by $8 billion.

In contrast, US private fixed investment had declined by $409 billion. This fall accounted for the entire drop in US GDP. A similar pattern of investment decline has taken place in other major economies but the U.S. is one of the most extreme cases.

This decline is not caused by shortage of funds for US companies to invest. Although they do not like to advertise the fact, the Great Recession has been profitable for US companies. US domestic business savings rose from $244 billion, at the peak of the previous business cycle in the last quarter of 2007, to $480 billion in the last available data. US company undistributed profits rose from $500 billion to $654 billion in the same period.