Quantitative Easing Monetary Policy: Potential Risk

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Quantitative Easing Monetary Policy Potential
Risk

• Dr. Xiaozhou Cheng
• Nov. 2012

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• 2012?11?

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What is the quantitative easing (QE)

• Is QE to print more currency? Answer NO
• Why?
• Balance sheet of central bank
• Assets side increase domestic securities by
  implementing QE
• Liabilities side increase the value of the
  reserve account of banks rather than the value of
  currency
• Printing money (bank notes) increase the value
  of currency

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QE increase reserve account

• Example US Fed

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QE increase assets of central bank

• Example US Fed

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What is QE

• QE monetary policy purchase treasury bond or
  private securities (mortgage back securities)
• QE monetary policy does not mean printing more
  banknotes (currency), and means to buy government
  bonds or private securities from investment
  institutes, such as pension funds, insurance
  company. The central bank create electronic money
  through purchasing these securities. These
  investment institutes would buy another
  securities using the money which has been
  received by selling the government bonds to the
  central bank.

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Extent of QE

• US Fed QE1, Nov. 2008, US 600 billion QE2,
  Nov. 2010, US 600 billion QE3 Sept, 13, 2012,
  US 40 billion every month until U.S. employment
  rate increase
• Bank of England purchased 200 billion gilts
  between March and Sept. 2009 purchased more 75
  billion gilts in Oct. 2011 in Feb. and July,
  2012, the Bank bought more 50 billion gilts
  respectively. The total assets that the bank
  purchased are 375 (during 2011 to 2012, the Bank
  of England increased the amounts purchased gilts)
• Bank of Japan and European Central Bank also
  purchased the government bonds and private
  securities by the QE program

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Intention of QE

• Intention lowers down the long term bond or
  securities interest rates
• Intention reduces the investment cost
• Intention stimulates the demand (investment and
  consumption)
• Intention outcome stimulates the economy

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Why choose QE

• Why central banks choose QE policy?
• Answer the conventional monetary policy tools
  have reached their limitations
• Overnight interest rates have been close zero.
• Central banks are impotent in using conventional
  monetary policy instruments
• QE is extraordinary monetary policy tool

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History of QE policy

• Japan used in its 1990s recession
• Bernanke, then a professor of Princeton
  University, raised the advice on QE policy to
  Bank of Japan
• US Fed reserve implemented QE1, QE2 and QE3 in
  recent recession
• European Central Bank implemented QE in recent
  recession
• Bank of England implemented QE in recent recession

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QE and Inflation

• One of intentions of QE policy boosting up the
  inflation rate (stimulate the economy)
• Experiences of QE policy with respect to either
  Japan in 1990s or US, European or England,
  inflation rates are still low, economy still
  undergo the recession
• Will inflation happen in the future due to QE?

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Why does the QE not work well

• By the economics text book, the QE should
  stimulate the economy, why the economy still
  undergoes the recession?
• Where has the extra money that the central bank
  injects through the QE gone?
• Does the extra money stay within the US? Answer
  NO!
• Where is it? Emerging markets
• Why has the extra money not stayed within US?
• Explanation By Keynesian economics, markets lost
  confidences on the future. It is not due to the
  high investment cost.

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Effect of the QE

• One of direct effects of QE is the assets of
  central banks are popped up
• The advanced economy the assets of central banks
  are popped up by QE through purchasing the
  government bonds and private securities
• Emerging economy the assets of central banks are
  popped up by central banks sterilization program
• The extra money which the advanced economy
  central banks injected by QE flowed into the
  emerging economy.
• The central banks in the emerging markets has to
  absorbed the inflow hot money in order to relive
  the pressure on appreciation of their currencies
• Sterilization the only choice for the emerging
  markets central banks
• Consequences the assets of central banks all
  over the world have increased dramatically for
  last four years

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Scales of the assets of the main central banks

• China (2011, the ratio 59.4 (GDP 47288160
  million yuan, assets 28097760 million yuan). By
  estimating 2012 the ratio will be more than 60
• US Fed (2012 Oct Fed assets 2.8 trillion, the
  ratio more than 20)
• European (eurosystem assets 2012 sep. 5.49
  trillion, 2011 Dec. assets, 4.7 trillion the
  ratio 2011 GDP 9.42 trillion. the ratio in
  2011 49.89
• England (the ratio 26)
• Japan (total assets 139 trillion by the end of
  march 2012)
• India (total asset 10.81 trillion ruppe by the
  end of sept. 2012. the ratio 13.3)
• Russia (total assets 18.56 trillion rubles by end
  of 2011, the ratio is 31.16)
• Brazil (total assets 1.58 trillion Real. the
  ratio 35 by the end of 2011)
• The ratio of the assets of central bank to GDP is
  more than 30 already

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Example US Fed Reserve
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Example US Fed Reserve
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Bank of England

• Assets (source the Bank of England)

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Bank of England

• Liabilities (source the Bank of England)

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Hazard of large scale assets of central banks

• International financial system stabilities
• Financial assets bubble in the future (there is a
  time lag)
• Changing the foreign exchange rates and the term
  of trade in arena of international economic system

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QE pro up the prices of food and resources

• High prices of the food and resources impeded
  recovering the markets confidences

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Food price index up

• Food price index has been up since 2007 (Source
  Food and Agriculture organization of United
  Nation)

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Example China CPI and Food Price
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Cooper price has been up

• Cooper price has been up since 2008 (Sources
  www.kitco.com)

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Crude oil price is up

• Crude oil price (Brent Crude Oil markets five
  years)

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Crude oil price is up

• Crude oil price has been up since 2008 (WTI crude
  oil markets, 5 years range)

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Gold price has been up

• Gold price has been up dramatically

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Gold price has been up

• Gold price has been up dramatically since 2008
  (source www.goldprice.org)

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Gold price has been up

• The extent of gold price move by US dollar
• 2009 up 23.4 2010, up 27.1, 2011, up 10.1,
  2012 (to Oct.), up 6.9

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Impact on foreign exchange rate

• Emerging markets currency facing pressure on
  appreciation against US dollar, Euro and British
  Pound. For example, China renminbi,
• Resource-rich country currency facing pressure on
  appreciation against US dollar, Euro, and British
  Pound. For example, Canadian dollar, Australian
  Dollar
• Japan Yen, Switzerland franc and Hong Kong dollar
  are also facing appreciation pressure

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Impact on China economy

• Impeded China economy recovering from the latest
  world economic recession
• China has implemented export-oriented economic
  development strategy for last three decades the
  high growth rate of economy in China has been
  dependent on this strategy and fast growing world
  demand.
• China economy has already slowed down since 2009
  because of the slowing down demand of the western
  world.
• Appreciating Chinese currency, renminbi, reduces
  the competitive of Chinese goods in the world
  markets

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Impact on Canadian economy

• Canadian, although live a resource-rich country,
  has not get benefits from the high price of the
  resources.
• Canadian has to pay more money to gas and food,
  since the prices of oil and food in the
  international markets have been hiking up.
  Consumers are losing confidence due to high
  living cost
• The exchange rate of Canadian dollar against US
  dollar has been up for last ten years because of
  Canada is a resource-rich country
• High Canadian dollar worse the term of trade of
  Canada

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Impacts on Japan, Switzerland and Hong Kong

• The terms of trade of these countries are worse
  off since the values of their currencies against
  US dollar is up
• The central banks or monetary authority in the
  country and region have to sterilize the
  inflowing capital and keep their own currency
  value stable.
• These economic entities are facing high pressure
  on inflation

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QE monetary policy hurdles the world economy from
fast recovering

• High food prices and high gas prices degrades the
  consumer confidences on the future
• Appreciated currencies of emerging markets and
  declining demand of the western markets impeded
  recovering economy of emerging markets
• High values of Japanese Yen and Canadian dollar
  hurdled the economic recovering from this
  five-year recession