effects of easy quantative money on the global economy

8/7/2019 effects of easy quantative money on the global economy

1/6

1 | P a g e

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.


2/6

2 | P a g e

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.


3/6

3 | P a g e

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.


4/6


5/6


6/6

6 | P a g e

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

effects of easy quantative money on the global economy

Documents