Quantitative Easing and its Implications

The United States administration has embarked on a new tactic to tide over the sub-prime economic crisis that originated in the year 2008 and one which it continues to reel from till date. The US economy has been characterised by high levels of unemployment (about 10 %) and stumpy economic growth (just 2%). Accordingly, to achieve higher growth rates, the policy makers are of the view that the amount of money flowing in the system should be enhanced. In order to increase the money supply, the Fed lowered the interest rates to record levels in addition to the enormous amount of money it pumped into the system through stimulus packages. It pumped in close to $1.75 trillion into the system. However, all these measures have failed to stimulate the economy and now it has resorted to quantitative easing to spur growth.
Quantitative easing is a mechanism through which the Fed prints fresh money to the tune of $600 billion and through open market operations wherein it would purchase financial assets and thus infuse money into the system. The increased money supply is supposed to bring a raise in the level of economic activity.
The policies of the current US government are strongly influenced by Neo-Keynesian economists lead by Nobel Laureate Paul Krugman. The fundamental assertion of Keynesian school of economics is that spending is imperative for the economic vigour of a nation and whenever private sector spending plummets due to an economic predicament the public sector has to intervene and spend money so that the level of economic activity doesn't fall. However common sense would dictate that saving is more important than spending. This unreasonable emphasis on spending encourages the government to spend more than it earns, which in turn drives the government to print more money to avoid a sovereign debt crisis and this increased money in the system creates inflation.
The major implication of quantitative easing is that the increased money supply in the system is bound to produce another bubble. If one were to examine the sub-prime crisis of 2007, it is amply clear that the causes for the crisis were the policies the US government followed on the aftermath of the dot com bust in 2001. The policies were aimed at increasing the amount of money circulating in the system. This massive infusion of money went straight into the real estate sector as it was perceived by the bankers as the most attractive and this resulted in the creation of a huge housing bubble. In fact even the dot com bust was due to the infusion of money that went into the technology enterprises as they were perceived as the most attractive then. However, now the banking system is uncertain of where to invest its money. That's the major cause for the liquidity crisis that the US economy is suffering from.
Another major implication of quantitative easing is that the increased money supply would create high levels of inflation. When there is more money in the system without a proportionate raise in the goods and services there is bound to be an increase in the price levels.
From an Indian perspective FII inflows are bound to increase further as the cheap money available can be invested in the Indian markets which offer the investors higher level of returns.
It is amply comprehensible from the policies being followed by successive US governments that that the government is yet to learn any lessons from its past mistakes. Instead of setting right the blemishes of the past the Fed seems to be continuing with the same path of action. I hope the US government realizes its folly and starts acting more responsibly.