effects of easy quantative money on the global economy
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Effects of quantitative easy money on the global economy
Introduction:
A government monetary
policy occasionally used to
increase the money supply by
buying government securities or
other securities from the
market. Quantitative easing
increases the money supply by
flooding financial institutions with
capital in an effort to promote
increased lending and liquidity.
In its simplest form, quantitative easing is nothing more than the Federal Reserve printing more
money. The Fed has hinted that it plans to purchase treasuries to push interest rates even
lower. That is supposed to spur more lending, which in turn should help kick start the economy.
The federal funds rate is virtually zero, so the Fed can't lower rates any further. Quantitative
easing is one of the few tools that the Fed has left.
Quantitative easing measures have expanded as the United States Federal Reserve has opted to
pump another $600 billion into the economy. US policy-makers announced further emergency
measures to prop up the recovery of the world's biggest economy. The Federal Reserve said it
would pump an extra $600 billion into its economy over the next eight months in a second
round of quantitative easing.
Quantitative easing policy is exacerbating global economic imbalances, because of this policy by
affecting the global volatility of major currencies, contributing to global trade imbalances and
global inflationary pressures, which in turn lead to further imbalance in the global economy.
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Short-Term Effects of Quantitative Easing on US economy:
QE should ease credit markets and stimulate economic activity. This is good for the economy in
the short term as it wards of another recession or, even worse, depression.
QE could cause a significant rally in the U.S. Dollar. The rally would not be due to an actual
appreciation of the U.S. Dollar in investors' eyes, but it would be a flight-to-quality
move. Investors may look at further QE decisions from the Fed as a sign of a very poor
economy, which could cause them to run for safety in the U.S. Dollar.
Long-Term Effects of Quantitative Easing on US economy:
Before we get into the possible long-term effects of QE, it is important to realize that QE has
never been implemented by a developed nation as quickly as it has in the U.S., so we do not
truly have a historical precedent for what QE may do to our economy in the long-
term. However, there is speculation that it could have several effects.
Inflation is definitely the most significant threat of QE. As the Federal Reserve injects a massive
supply of U.S. Dollars into the economy, basic economic theory postulates that inflation will
result. However, as evidenced over the last two years, we are not seeing inflation in the U.S. Infact, deflation is currently much more of a threat than inflation. However, in the long-term
inflation could still be a major side-effect of further QE measures.
A loss of investor confidence in the U.S. Dollar. The U.S. government is currently the most
trusted government in the world. Because of this incredible trust, the U.S. is able to
continuously finance its enormous debt. QE could serve to undermine investor confidence, and
this would be disastrous for the future of the U.S. Dollar and the U.S. as a nation.
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Effects on Chinas economy:
The United States and China are again locked in a familiar debate over currency manipulation.
In the past, the United States has claimed that China keeps its currency, the Yuan, at artificially
low levels, which gives it unfair trade advantages
This time around, China is pointing its finger at the United States over its plans to pursue
another round of quantitative easing.
Quantitative easing would dilute the value of the dollar because more dollars will be in
circulation. Since the dollar is still considered the world's reserve currency, many products,
most notably commodities, are priced in dollars. If the value of the dollar goes down, the price
of commodities will also go up. That's why China is concerned.
China's trade minister Chen Deming was recently quoted in a Chinese newspaper as saying:
"Uncontrolled printing of dollars and rising international prices for commodities are causing an
imported inflationary 'shock' for China and are a key factor behind increasing uncertainty."
The injection of this money can lead to inflation the whole economy and as the Chinas
economy mainly based on products so inflation rate is watched closely in China. Their whole
economy revolves around buying raw materials and putting them to work those raw materials
and commodities would get more expensive, and so therefore they're chasing higher prices
with the same amount of goods, which is inflation.
Japanese economy
The Japanese economy has stagnated (grown below potential) ever since its 1980s bubble
burst.
The economic situation is dire. The immediate policy response should be to end deflation.
Japan desperately needs a positive rate of inflation. This will help prevent real debt burden
rising. Inflation will reduce the value of the Yen, making exports more competitive.
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References:
http://money.usnews.com/money/business-economy/articles/ 2010/10/29/why-china-has-a-point-
about-quantitative-easing.html?s_cid=rss:why-china-has-a-point-about-quantitative-easing
http://www.investopedia.com/articles/economics/10/quantitative-easing.asp
http://www.isnare.com/?aid=667319&ca=Business
http://www.forextraders.com/forex-news/understanding-quantitative-easing-and-its-effects-on-the-u-
s-economy-and-the-u-s-dollar-part-2.html
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