QE2 in round trillions

More money printing and the likely effects...

Here is a back-of-an-envelope guess by David Greenlaw at Morgan Stanley on what the Fed can expect from a second blitz of bond purchases, or `Shock & Awe’ as he calls it.

If Ben Bernanke does a further $2 trillion (on top of the $1.7 trillion already in the bag) the yield on 10-year US Treasuries will drop 50 basis points to around 2.2pc.

GDP growth will be 0.3pc higher than otherwise in 2011 and 0.4pc higher in 2012.

The unemployment rate will be 0.3pc lower in 2011 and 0.5pc lower in 2012 — (in other words drop from 9.6pc to 9.1pc, ceteris paribus).

That looks like trivial returns for a collosal adventure into the unknown, with risks of dollar flight and mounting Chinese suspicions that the US intends to default on its external debts by debasement.

I had dinner recently with a former Goldman Sachs hedge fund guru, and while I can’t remember the exact details through a fog of Mersault Premier Cru, I am pretty sure he said it would take $30 trillion to do the job – given the scale of wealth destruction from the US property crash and ferocity of debt deleveraging still to come.

We will find out tomorrow whether Fed hawks from such districts as Dallas, Richmond, Kansas, and Philadelphia are really willing to sign off so soon on the next helicopter drop. It seems very strange that they should do so when the official line is that there will be no economic double-dip, and that this Summer’s slowdown is just a mid-cycle correction.

Read the rest here.