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Others pay the price for US' woes
Publication Date : 19-09-2012
Fed's new round of quantitative easing will cause asset bubbles, inflate bulk commodities and cut wealth of debt holders
The US Federal Reserve has launched a new round of quantitative easing, which follows its announcement that its low-interest rate policy will be extended to 2015, a year longer than it had previously committed to, and that the "accommodative monetary policy" will continue even after the economic recovery gets moving again. The Fed also said it will purchase additional agency mortgage-backed securities at a pace of US$40 billion per month in an effort to stimulate the struggling US economy.
Rather than setting a goal for a specific amount of money to enter the market as it did with the past two rounds of quantitative easing, or QE, the Fed instead said it will just keep buying those mortgage-backed securities until labour market conditions improve, an open-ended timetable for QE3.
The new round of quantitative easing marks one of the most noticeable changes in the Fed's monetary policy since the 2008-2009 global financial crisis, as indicated by the Fed's decision to bind monetary policy to the US' economic recovery and promise not to change it before the economic situation improves.
The Fed believes that the extension of a low interest rate policy will boost the US economy and its purchase of mortgage-backed securities will directly lower borrowing costs for homebuyers. It also believes that an expected dollar depreciation following the new round of quantitative easing, together with a low interest rate policy, will help drive US investment and increase spending in the US.
But under current economic situations at home and abroad, QE3 will not bring the US the expected economic effects. A new round of quantitative easing is not likely to result in the flow of newly increased liquidity to the US' real economy. Instead, it will directly result in the influx of additional liquidity to high-risk assets, bulk commodities and emerging overseas markets, which will fuel asset bubbles and cause repercussions to overseas financial markets and monetary systems.
In the wake of the collapse of Lehman Brothers in September 2008, the Fed rushed to launch its first round of quantitative easing, or QE1, to prevent a domino effect and an economic recession. By the end of March 2010, the Fed had purchased a total of $1.725 trillion mortgage securities and government debt, which caused its debt to increase from $880 billion to $2.3 trillion. Such a large-scale bond and debt issuance did help stabilise the US markets and financial system, but it failed to boost employment and consumption.
The second round of quantitative easing launched by the Fed also failed to raise banks' ability to clean up bad debts and reduce their debt defaults. The Troubled Asset Relief Programme pushed by the US Department of the Treasury also failed to ease the bad debt pressures on US banks and boost their willingness to lend. Following the launch of QE2, cash increased to 10 per cent in the proportion of banks' assets from a historical average of 3.2 per cent while the growth of consumption, commercial and immovable property mortgage loans declined to record low.
QE3 is said to be aimed at creating jobs, but Fed Chairman Ben Bernanke should be well aware that the discouraging US employment situation is a result of the US' structural unemployment caused by its industrial structural imbalances. So, improvements in the US' employment situation will only result from economic structural adjustments and optimisation. The Fed's monetary policy should be aimed at resolving the US' long-running economic structural problems rather than further aggravating distorted credit allocation as it is now.
Continuous quantitative easing will increase the risk of the monetisation of US debts and put additional pressures on financing government deficits in the future. It is also likely to increase the costs and risks when the Fed exits these policies and fuel inflation. As a matter of fact, the US dollar has remained weak since the end of July because of expectations of a new round of quantitative easing and the return ratio of the US' national debt has increased.
There is only a slim possibility of a new round of quantitative easing boosting the US economy, but it will do serious damage to the global economy, and in particular, emerging economies, as part of the huge liquidity will flow to emerging markets in pursuit of short-term profits, which will negatively affect the independent decision-making of their monetary authorities.
Subsequent rebounds in the prices of bulk commodities will also cause huge damage to their economic development. The prices of international grain have already risen, and oil prices have also rebounded to a high, which, if unchecked, will bring a new round of imported inflation to emerging economies and add more difficulties to their macroeconomic regulations.
Worse, the possible considerable depreciation of the dollar following the new round of quantitative easing will cause other countries to pay for the US' crisis and accelerate the transfer and redistribution of global wealth, as their enormous dollar-denominated reserves drastically shrink.
The author is an economics researcher with the State Information Centre.