We are seeing the interplay between the forces of globalization and policy mistakes. Globalization has severely restricted the effectiveness of economic stimulus. Trade plus FDI are half of the global GDP. Trade is visible in terms of stimulus leakage. But, where investment occurs in response to demand growth is far more important. Multinationals can invest anywhere in response to demand. It cuts the linkage between demand stimulus and investment response. The latter is crucial to employment growth, which is necessary for sustaining demand growth beyond stimulus. Essentially, demand is local, but supply is global. This is why the old assumptions on stimulus are no longer reliable.

The above analysis always applies to a small, open economy. A typical macroeconomics textbook will study the extreme cases of a small, open economy and a large, closed economy. In the former, the leakage is so powerful that stimulus is futile. The latter has no leakage and has maximum stimulus effectiveness. The economies in the real world are in between. A large economy like the U.S.'s is always assumed to resemble a closed economy, while a small trade-oriented economy like Singapore's is close to a completely open economy.

Multinational-led globalization has made large economies behave like small, open economies. Demand is still local, but supply is global. When the Fed or the ECB tries to stimulate, they are actually stimulating the global economy as a whole. Water, no matter where it comes from, flows downwards. Stimulus, similarly, flows to where costs are low and banking systems are healthy. If you believe this logic, the actions of the Fed and the ECB fuel inflation and asset bubbles in emerging economies rather than stimulate growth at home.

Eoin Treacy's view One of the basic tenets of capitalism is that the most productive assets will attract investor interest. Therefore, when credit conditions ease in one jurisdiction because of a need to stimulate the local economy there is nothing to stop investors accessing a cheap source of finance and investing it where they can get a better return. The popularity of Asian and Latin American markets has grown considerably as their respective currencies have proved resilient and their stock markets outperform.

This chart of US M2 multiplied by the Velocity of M2 indicates that M2 creation has not kept pace with the decline in the velocity with which money is moving around the system. The loss of momentum in what has been a smooth advance since at least the early 1980s is a clear demonstration of the deleveraging that is underway in the US economy. The corollary is that additional quantitative easing is unlikely to have an inflationary effect, at least in the USA, as long as it does not cause the above relationship between supply and the velocity of money to accelerate higher which at present looks to be an unlikely scenario.

Given the increased likelihood of additional measures to support the domestic US economy, there remains the near certainty that this additional money supply will not be confined to the USA and will find its way to jurisdictions with a higher potential rate of return.