Markets around the world over react to The Fed stimulus plans ignoring slowing growth, high unemployment and the possible inflationary effects of a new round of free money. The U.S. budget deficit rose $191-B in August to $1.164-T.

The government's F-Y ends in September. The August number was higher than the $134-B posted in the same month last year. Through 11 months in Y 2011, the total deficit was $1.234-T.

The risks of the Fed move are high, central banks in the United States, and the United Kingdom and other European countries have almost exhausted their conventional and unconventional arms - from pushing interest rates close to zero to adjusting policy targets from inflation to growth and "creating" money by implementing quantitative easing.

However, it seems that recession cannot be rectified by lowering interest rates and increasing money supply alone, because the global economic contraction has been more structural than cyclical.

One of the most striking features of the recession is large-scale deleveraging. This has also been called a "balance sheet recession", reflecting a sharp contraction in real capital, for example, credit and equity, and shrinking balance sheets because of a shortage of capable capital providers and recipients. Faced with a massive fall in asset prices, companies and households are typically forced to minimize or restructure debts. As a result, they tend to reduce investment and consumption, leading to a general economic contraction.

This process of deleveraging could be painfully long, lasting a decade or more. During this period, debts must be reduced through bankruptcies, haircuts and other forms of debt restructuring, and companies may jettison their profit-making priority, lowering their break-even levels by cutting costs.

In a balance sheet recession, monetary policy is mostly ineffective in creating credit because interest rates hit zero and cannot be lowered further, while borrowers remain over-indebted, making credit-stimulation less possible. Instead, the ultra-low interest rates may cause some unwanted side effects. Usually, the level of interest rates can be viewed as a price affecting saving and investment.

The Fed said it will buy $40 billion of mortgage-backed debt per month until the job market improves substantially as long as inflation remains contained - acting on its dual mandate to maintain price stability and tackle unemployment.

The U.S. central bank also said it was unlikely to raise interest rates from current lows until at least mid-2015, extending the time frame for such a move from late 2014.

Risk assets from Asian shares to commodities rallied while the dollar slipped further on Friday as markets digested the U.S. Federal Reserve's aggressive new stimulus to drive job creation in the U.S. economy.

The Fed's move supported the risk-positive momentum at work since the European Central Bank's bond-buying scheme to get borrowing costs down for struggling euro zone members was approved by Germany's constitutional court.

MSCI broadest index of Asia-Pacific shares outside Japan soared 2.2 percent to four-month highs after U.S. stocks scaled multi-year peaks, with the Standard & Poor's 500 Index .SPX hitting its loftiest close since December 2007 on Thursday.

Shayne Heffernan

Shayne Heffernan oversees the management of funds for institutions and high net worth individuals.

Shayne Heffernan holds a Ph.D. in Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and 1 that reached a peak market cap of $15b. He has managed and overseen start ups in Mining, Shipping, Technology and Financial Services.Read the Terms of Service