量的金融緩和, ryōteki kin’yū kanwa
The markets have been subjected to a softening up process over the past month or so, with regards to an expectation that further Q.E. will take place by the UK’s Bank of England possibly at their next monthly meeting. Given the topic is hot it may be worth taking a ‘lite-bite’ look at the origins, the mechanism and the questionable benefits of this unorthodox version of monetary policy that has become part of the lexicon of modern day language..
The question of more Q.E. and the accompanying intense narrative, has also been raised again in the USA. Each Fed meeting is accompanied by intense speculation and a search for clues as to whether or not the Fed (in the form of Ben Bernanke) is priming the markets for an announcement of Q.E. 3.
One interesting aspect of Q.E. is the fact that in modern day monetary terms the first incarnation was attempted by Japan in order to lift the nation out of what was then a stagnant economy which had previously suffered the ravages of stagflation. The prognosis was that the Japan version of Q.E. failed as evidenced by an economy still stagnated. Some commentators would suggest that despite being a manufacturing powerhouse, the third largest global economy has failed to improve measured over a circa 20 year+ period.
The combined debt versus GDP level of Japan is, in economic terms, terrifying. The combined debt versus GDP is over 600% and their quadrillion debt, (roughly $13 trillion) is a cause for concern as Japan’s debt is already the industrialised world’s biggest at around twice its GDP, after years of pump-priming measures by governments trying in vain to arrest a long economic decline. The government spending for the year to March is also expected to swell to a record 106.40 trillion as the series of extra budgets will exacerbate the nation’s already tricky fiscal condition..
Ignoring the question of just how ‘independent’ the Bank of England actually is when making Q.E. decisions, policy makers in the UK are apparently considering the use of further quantitative easing due to the contraction in the money supply.
The prospects of fresh action by the Bank of England (to indirectly boost growth) increased earlier this week after the BoE released figures showing a contraction in the money supply combined with weak borrowing by both companies and households. News of a drying up of credit left City analysts confident that a fresh round of quantitative easing would be announced by the Bank’s nine-strong monetary policy committee when it meets next week.
The BoE announced the first wave of QE in early 2009, buying £200bn of government gilts over the next 12 months. As the effects of the eurozone crisis spread across the Channel in autumn 2011, the Bank said it would purchase a further £75bn of gilts in a three-month programme. That is now about to come to an end.
Quantitative easing has been nicknamed “printing money” by the media and financial analysts. However, central banks state that the use of the newly created money is different in QE. With QE, the newly created money is used for buying government bonds or other financial assets, whereas the term printing money usually implies that the newly minted money is used to directly finance government deficits or pay off government debt (also known as monetizing the government debt).
Earliest Modern Day Use Of Quantitative Easing
The original Japanese expression for quantitative easing (量的金融緩和, ryōteki kin’yū kanwa)), was used for the first time by a Central Bank in the Bank of Japan’s publications. The Bank of Japan adopted a policy with this name on 19 March 2001. However, the Bank of Japan’s official monetary policy announcement of this date does not make any use of this expression (or any phrase using “quantitative”) in either the Japanese original statement or its English translation. Indeed, the Bank of Japan had for years, including as late as February 2001, claimed that “quantitative easing is not effective” and rejected its use for monetary policy.
What is Quantitative Easing (QE)?
Quantitative easing (QE) is a monetary policy used by central banks to stimulate the national economy when conventional monetary policy has become ineffective. A central bank buys financial assets to inject a pre-determined quantity of money into the economy. This is distinguished from the more usual policy of buying or selling government bonds to keep market interest rates at a specified target value.
A central bank implements quantitative easing by purchasing financial assets from banks and other private sector businesses with new electronically created money. This action increases the excess reserves of the banks, and also raises the prices of the financial assets bought, which lowers their yield.
Expansionary monetary policy typically involves the central bank buying short-term government bonds in order to lower short-term market interest rates (using a combination of standing lending facilities. However, when short-term interest rates are either at, or close to, zero, normal monetary policy can no longer lower interest rates. Quantitative easing may then be used by the monetary authorities to further stimulate the economy by purchasing assets of longer maturity than only short term government bonds, and thereby lowering longer-term interest rates further out on the yield curve.
Quantitative easing can be used to help ensure inflation does not fall below target. Risks include the policy being more effective than intended in acting against deflation – leading to higher inflation, or of not being effective enough – if banks do not lend out the additional reserves.
Does Quantitative Easing Work?
According to the IMF, the quantitative easing policies undertaken by central banks of the since the beginning of the late-2000s financial crisis have contributed to the reduction in systemic risks following the bankruptcy of Lehman Brothers. The IMF states that the policies also contributed to the improvements in market confidence and the bottoming out of the recession in the G-7 economies in the second half of 2009.
In November 2010, a group of conservative Republican economists and political activists released an open letter to USA Federal Reserve Chairman Ben Bernanke questioning the efficacy of the Fed’s QE program. The Fed responded that their actions reflected the economic environment of high unemployment and low inflation.
Quantitative easing may cause higher inflation than desired if the amount of easing required is overestimated, and too much money is created. Alternatively, it can fail if banks remain reluctant to lend money to small business and households in order to spur demand. Quantitative easing can ease the process of deleveraging as it lowers yields. But in the context of a global economy, lower interest rates may have indirectly created asset bubbles in other economies.
An increase in money supply has an inflationary effect (as indicated by an increase in the annual rate of inflation). There is a time lag between money growth and inflation, inflationary pressures associated with money growth from QE could build before the central bank acts to counter them. Inflationary risks are mitigated if the system’s economy outgrows the pace of the increase of the money supply from the easing. If production in an economy increases because of the increased money supply, the value of a unit of currency may also increase, even though there is more currency available.
For example, if a nation’s economy were to spur a significant increase in output at a rate at least as high as the amount of debt monetized, the inflationary pressures would be equalized. This can only happen if member banks actually lend the excess money out instead of hoarding the extra cash. During times of high economic output, the central bank always has the option of restoring the reserves back to higher levels through raising of interest rates or other means, effectively reversing the easing steps taken. In economies when the monetary demand is highly inelastic with respect to interest rates, or interest rates are close to zero (symptoms which imply a liquidity trap), quantitative easing can be implemented in order to boost monetary supply, and assuming that the economy is well below potential (inside the production possibilities frontier), the inflationary effect would not be present at all, or much smaller.
Increasing the money supply depreciates a country’s exchange rates versus other currencies. This feature of QE directly benefits exporters residing in the country performing QE and debtors whose debts are denominated in that currency, as the currency devalues so does the debt. However, it directly harms creditors and holders of the currency as the real value of their holdings decrease. Devaluation of a currency also directly harms importers as the cost of imported goods is inflated by the devaluation of the currency.
The new money could be used by the banks to invest in emerging markets, commodity-based economies, commodities themselves and non-local opportunities rather than to lend to local businesses that are having difficulty getting loans.