Increased Money Supply Is Band Aid: Principal Global CEO

Quantitative easing, a government tool used to increase the money supply in a recessionary economy, could be effective as a temporary strategy, but it could have adverse effects if kept in place for an extended period of time, according to Jim McCaughan, CEO of Principal Global Investors.

“If it lasts too long it becomes a major distortion in the allocation of capital,” McCaughan told CNBC Monday.

McCaughan blames the need for quantitative easing on problems in the job market, which he attributes to government policies.

“The anti-job policies coming from Washington have been holding back the recovery, so QE2 (quantitative easing) is kind of a 'Band-Aid' over some pretty bad public policy,” he asserted.

Bad public policy, according to McCaughan, includes uncertainty over federal, state and local tax rates, accelerating health care costs and new financial regulations.

“Those are really the things that are holding back the creation of jobs by the part of America that creates jobs, which is not big bureaucracies, it’s small and medium businesses, new businesses," he said.

McCaughan said the real driver of US equity markets is the cyclical recovery in the economy. He said risks to that recovery, which include additional stimulus, the deficit and protectionist policies against China, could all be minimized if Republicans took the House.

“If Washington can’t do much, it can’t do much harm," he concluded.