Page 4 - MEX Express - Vol 14

www.mexnepal.com MARKET’S PERSPECTIVE
Global Impact of Quantitative Easing in Developed Economies: A Retrospective View
The term ‘Quantitative Easing’ has been languish badly. Many countries
one of the most discussed topics in the in the world adopted a slew of
financial media circle. So, what is this Quantitative stimulus packages in a bid to
Easing? Why is there such a big hype about it in revive their ailing economies. And
the financial circles? one among them is Quantitative
Though ‘Quantitative Easing’ is a complex Easing policy. So, the major world
topic let us discuss the underlying basic principle economies like USA, U.K, the
in simple terms. ‘Quantitative Easing’ is a financial Euro Zone, and Japan, employed
policy that is employed by a country’s central bank Quantitative Easing (QE) with
to increase liquidity in the markets and in turn an intention to reboot economic
boost the growth of the economy. To achieve this, growth by increasing liquidity.
the Central Bank will infuse cash into the economy But, this QE apart from affecting
by purchasing assets from all the major Banks their own economies also started
and financial institutions in the country. This will to have a ripple effect all over the dull in the western world with gloomy economic
essentially provide a cash surplus to these banks globe, affecting many emerging economies in the
that are suffering from a credit crunch. Now, these Asian world.
banks can lend this surplus money to cash-strapped During the financial crisis, apart from
borrowers in the economy. Since borrowing is these four advanced economies many emerging
made easier the interest rates will drop, causing economies too employed QE like policies to prop
consumers to spend more and businesses will up the demand in their fluctuating economies.
start thriving again. As per the economic theories, While these emerging economies seem to have
increased spending means increase in consumption, overcome the crisis with bright prospects of
which will in turn fuel the demand for goods and economic growth, the same is not the case with
services. This results in an increase in production, these four major economies and the other western
creating more job opportunities. Ultimately, the countries. These countries are still battling with
intended result is to revitalize the ailing economy a sluggish economy, declining industrial outputs
of a country. and modest improvement in their unemployment
Due to the global financial and economic crisis reports. This has forced them to persist with their
of 2008, the leading economies of the western QE stimulus packages to create more demand in
world went into a deep recession, causing the their market and attempt to stimulate a growth in
unemployment rates soar and industrial growth to their declining industrial outputs.
Countries like US have increased their QE-
phase cash infusion to larger doses as part of their
third round of stimulus package. As a result of
the previous two rounds of Quantitative Easing
policies, the U.S Federal Reserve has increased its
Treasury notes to 2.054 trillion dollars from a mere
700 to 800 billion dollars held before the recession
set in. With the current unemployment rate still
around 7.6%, the US federal Bank plans to further
purchase around 40 billion dollars of mortgage-
backed securities per month until unemployment
rate declines below 6.5 percent.
Meanwhile, the European Central Bank (ECB)
is reported to have pumped around 489 billion
THE RACE OF SUPERPOWERS AND CURRENCY MANIPULATION -WILL
CHINA TAKE OVER U.S?
weapon to destroy its rival country, China in no
exception would allow itself to refrain from this
opportunity, particularly, when Washington is
finding hard to crack the nuts of its staggering
unemployment problem accompanied by huge
trade deficit which serves as the grave concern on
the super power status of the US.
The data till April 2, 2013 suggest, US debt
held by the public is approximately $11.959 trillion
or to put it differently, 75% of GDP. Moreover, if
we consider the intra-governmental debt too, then
the total public debt would toll $16.805 trillion
It might not be morning tea news of many which is more than 100% of GDP. In addition,
people preferably, the ongoing efforts of 47% of the debt held by the public is owned by
the nations to lord over the race of super powers. foreign investors, the largest of which are the
Yet, historians would always believe it as an event People’s Republic of China and Japan, just over
to discuss and remember as the first sign of the $1.1 trillion each. In the light above scenario,
undeclared soft war. However, unlike previous China can take some comfort in adopting beggars
wars, this won’t be fought with hard power thy neighbor policy by deploying the exchange
weapons like bombs and guns rather it would be rate of their currency via buying a disproportional
the forces of unfair economic strategies, the soft amount of dollars in order to keep their currency at
power weapons. US has been the superpower a rate lower than it would be in a free market. This
amongst all the nations since long but the scenario would allow them to produce export commodities
suggests that China would leave no stone unturned at cheaper rate and thereafter, the commodities
to strip off the economic power of its competitor like consumer electronics, clothing and machinery
(United States ) and thereafter enjoy the status of would be highly demanded by the US. And
being Superpower economy of the entire world. therefore, it could “steal” manufacturing jobs from
In pursuance of gaining the super power status, the United States by attracting companies with
several nations have been adopting the policy of cheaper costs than would otherwise be available
beggars thy neighbor that seeks to promote a under freer market circumstances. However,
home country’s economy at the expense of another prevailing wisdom may be wrong
country. While this policy stands by with a secret Notwithstanding all, ` China also buys so
Editorial Board: Ruchika Baidya / Shubhechchha Mulepati / Chittaranjan Pandey / Lakshman Pandit
Mercantile Exchange Nepal Limited, Alliance Tower, 4th Floor, Charkhal, Dillibazaar, Kathmandu, Nepal
Phone: +977-1-4011542/43/44, Fax: +977-1-4011545/6 | e-mail: editor@mexnepal.com
Euros into Eurozone in an effort to prop up the
collapsing economies of many member countries.
On the other hand, the U.K’s QE policy is reported
to have infused liquidity to the tune of 375 billion
pounds with a goal of reviving its ailing economy.
Lately, Japan struggling with fluctuating markets
and stagnant economic growth has decided to
further pump 1.4 trillion dollars into its economy
in the next two years.
All of these economic stimulus packages had
created a lot of liquidity in the western economies
and markets. But, the market sentiments being
forecasts and near zero interest rates; it inevitably
caused huge capital outflows towards other
more promising economies. Since the emerging
economies were having moderate growth and
bullish markets, the western financial institutions
invested huge capital in these markets to take
advantage of the better returns and interest rates.
Though this provided huge capital inflow to the
emerging economies like Asian countries, it also
inflated the debt in the balance sheets of their
companies. Their companies kept increasingly
borrowing the foreign capital that flowed from
the countries in QE-phases. This has made these
companies that previously had healthy debt to
equity ratios more risk prone and vulnerable. This
has placed them in a precarious position where
they are now vulnerable to the future changes in
interest rates in these countries and other western
countries. This foreign capital inflow also put an
additional pressure on inflation rates in emerging
economies like India that were already struggling
to rein in their spiraling inflation.
As a consequence of these inherent risks,
in the recent week the world saw an unusual
volatility in the currencies of India, Brazil and
other emerging economies. This was indeed
triggered by the fears of an early wind-up of the
QE policies in developed nations like U.S. As the
interest rates started rising, the bond markets in
the U.S became more attractive. This caused the
western institutional investors to pull out of their
investments in debt assets of emerging economies,
many U.S. Treasury notes that it is now the largest
lender to the U.S. Government. As of January
2013, the U.S. debt to China was $1.264 trillion,
23% of the total public debt. Many are concerned
that this gives China political leverage over U.S.
fiscal policy, since it could call off its loan.
Whatever may be the China’s interest in
buying treasury notes, but the predominant cause
for which China is striving for is to widen the
trade deficit for its rival US as its trade deficit with in dollar is that it wouldn’t be in a position to
China will compel U.S. companies to either lower
their costs or go out of business. To lower their
costs, many companies have started outsourcing
jobs to India and China, Vietnam being another
favorite destination, adding to U.S. unemployment.
Industries with high production and operational
costs have simply dried up. US manufacturing,
as measured by the number of jobs, declined
34% between 1998 and 2010. As these industries
declined, so has the U.S. competitiveness too in
the global marketplace.
Now let’s look into the secret plot of China
to destroy dollar hegemony. Currently,China is
holding $3.2 trillion of US reserves which nearly
accounts to one-fifth of US GDP and, OPEC
countries which also hold substantial amount of
dollar after China. Under these circumstances, if
China & OPEC, who have been the perfect rivals
of US, tend to convert their dollars into Euro, then
there would be no way out for US dollars than
to fall sharply overnights. Perhaps, falling dollar
overnight or rapid dollar devaluation may lead to
panic for those who deal in dollar. Therefore, all
Volume: 5 • Issue: 2 • Year: 2013 A.D
on a sudden and massive scale. This put a huge
pressure on the exchange currency rates of these
emerging economies and the world witnessed one
of the most rapid intraday decline in the Asian
currencies, especially in India whose INR touched
a life time low of 58.98 against the USD. This
has led the emerging economies, especially the
BRICS nations, to criticize the countries with QE
policies.
Apart from the effect on emerging nations the
QE policy also had considerable effect on the prices
of bullion and other commodities like the crude oil.
The Gold and crude oil prices fluctuated due to the
prospects of an early QE policy wind-up. History
shows how the previous QE policies adopted by
countries like Japan had adversely affected the
Asian economies and had partly caused the Asian
financial crisis in 1998. The countries with QE
also form the global basket of reserve currency
and hence play a major role in the fluctuations
of the currencies of emerging economies. So, it
would be in the best interest of global economy, if
the countries pursued their QE stimulus packages
with adequate caution and responsibility towards
the Asian and other emerging economies of the
world. One has to wait and watch, whether these
countries’ next round of QE policy, whose effects
have already jeopardized the currencies of Asian
and emerging economies, further cast them into a
deep financial crisis.
Bir Bahadhur Dura
Executive Director
Fewa Trade
those who hold dollars would be bound to sell them
at any cost. Here, the sellers which include: foreign
governments who hold U.S. Treasuries, traders in
exchange rate futures who trade the dollar versus
other currencies, and individual investors would
demand any other currency or assets than having
dollars with them.
Apart from this, the biggest problem that US
would have to suffer on account of the sharp fall
raise capital from selling treasury bonds as people
would find it unreliable to be invested in.
In a nutshell, the race of superpowers though
seems to be favoring China as the top candidate for
the same, however, the sole triumph on economic
front wouldn’t be enough to decide the fate of
superpowers rather it also requires the ability of
a nation to build international cooperation with
Rest of the World (ROW) in its foreign policy
and most importantly, the ability to manipulate
the international institutions like UN,World Bank,
IMF etc. will be crucial to decide on the fate of
superpowers.
Pawan Singh
MA Economics, 2nd Year
Central Department of Economics
Tribhuvan University, Kirtipur
pawanleads@yahoo.com
Page 04