Quantitative easing in recent times
Updated: May 17
Peoples quantitative easing is a form of unconventional monetary policy in which a central bank purchases longer-term securities from the open market in order to increase the money supply and encourage lending and investment. By this textbook definition of sorts, in theory, QE should give money to the rich through asset priced inflation, to the middle classes through house price inflation and employment, and to the poor through employment and social benefits. But in reality it has exacerbated inequality, partly by helping banks in handing them big amounts of money while doing little to support small firms and households. We’ve seen examples of quantitative easing implemented in the UK, the EU, but perhaps the most vividly remembered instance was in the United States.
The Japan originated policy found its way to the united states during the aftermath of the subprime mortgage crisis in 2008. Though the failure of the policy in Japan urged critics to deter the Fed from pursuing this policy, the Fed remained undeterred. Mortgage backed securities had no market given the high risk they were associated with, and hence no one was willing to invest in them. To solve this, the central bank basically took the entire market on their own balance sheet. In a total of 2 rounds, The Fed purchased troubles assets and private mortgage backed securities and used the money plowed back from those investments, along with some of their own to purchase as many treasury securities as it could. This was done in order to avoid what could have been a catastrophe of historical proportions as well as the economic and geopolitical implications that the crisis would have resulted in.
However, It is argued by many that QE in the US, especially round 1 did not entirely work. Brian Domitrovic mentions in his Forbes article on why QE was a failure, “QE implied that the problem that stalked the economy circa 2008 was mainly one of liquidity. In implying such a vision, it [QE] further implied all of the following: there was no major problem with the U.S. monetary regime; tax rates were fine; there was no need for deregulation; government spending was not an issue. If the chief problem was liquidity, then the chief problem was none of these other things.”
During George W. Bush’s presidency, tax cuts expired as capital gains and other rates also went up during the QE period. In the last full year of round 2 in 2012, government spending displaced 38% of the economy, a level only once reached during the Great Recession since World War II. By the end of the year, the fiscal cliff, a combination of expiring tax cuts and aggregate government spending cuts, came into light.
Though quantitative easing is a relatively new concept, it has seen its fair share of successes and losses. But, one thing has always remained in common, the policy has only been employed in developed nations. So what does this mean for emerging economies that need to be rescued out of the deep recession they will suffer from, in the post COVID-19 era? In the past, the use of QE in just the united states was able to affect developing nations across the world. So how large would the impact be on those countries, when several more developed economies use the policy all at once?
When the Quantitative Easing policy comes into existence, securities become the exclusive investment avenues for the government, private portfolio investors will find that they have limited avenues to invest in their own countries. This would result in them looking for newer and more profitable areas to park their investments; in countries like Russia, India, Brazil, and South Africa. Exorbitant amounts of money will then be flushed in these markets, causing the stock markets and the economies of these nations to a boom.
The large influx of money is bound to cause inflation. However, in the case of such emerging economies, most of the inflation will find its way to asset prices, leaving little to no change in prices of daily survival commodities. This is precisely due to investors spending in stocks, bonds and real estate markets in these countries. This will also likely cause an unprecedented asset price boom. The contingency to this however, is that the boom is expected to collapse as soon as countries introduce the Quantitative Easing tapering policy.
As the price of a developed nation’s currency relative to an under/developing currencies rises, they will be able to afford more products on the international market because of the higher purchasing power. Therefore, foreign QE will essentially create a scenario wherein the emerging markets can consistently export their goods and stimulate their economy through international trade.
Though this may sound like an ineffably ideal situation, central banks need to closely monitor as to when the situation goes from economically stimulating to out of control, because as many economists would account for, boom and bust cycles are undesirable for an efficient economy.
That aside, what about developing nations that are to adopt a quantitative easing policy for their own countries, much like how prime minister Modi announced for India in its near future? With the advantages procured from foreign QE policies, and the country’s Atma Nirbhar economic package, we should expect slowdown times to end as soon as they can, and the economy to find its way to a proud standpoint. An aspect to keep in check however, around 66% of the country’s total population being rural, it is imperative that the positive effect of the Rs. 20 lakh crore allotted for the economic package hits the poor people, small businesses, and other semi/fully dependant entities primarily, as promised by the prime minister and the financial minister of India. It is far too often that the wealthy are the largest beneficiaries of all monetary policies that are introduced. The rich have, are, and always will thrive with or without the government’s money. It is futile to prosper the already prosperous, only to leave the more deserving and less fortunate, hanging in desperation once again.
Author : Saumya Bothra