Janet Yellen, chairman of the US Federal Reserve and its Board of Governors cannot afford to haerken to several voices calling for a new round of Quantitative Easing QE. As China authority devalues her currency and with its effect on the global market, some traders at Wall Street are jettery and are beginning to call for a QE. But should all road heads to QE? I respectfully diagree for Quantitative Easing may not turn around the market and US economy, without fundamental changes.
Quantitative Easing as a last resort of a monetary policy has its limitations. When the economy is in bad shape bedeviled with high unemployment, large debts and deficits, the power of Quantitative Easing might likely become waned. Years ago during recession, when the former Fed’s Chairman Bernanke meddled in the capital market with $600 billion to buy up Treasury bonds in the open market inorder to boost the economy , the result was not really successful.
It was a mixed result, the big firms at Wall Street were saturated with liquity and lot of cash while the average Joe at the Main street did not experience any significant increase in wage or higher standard of living.
With the recent slumping in the market, Mr. Roy Dalio, Bridgewater Associates chief “argues in a post on his LinkedIn account that the growing risk of deflation — not inflation — is pressuring the U.S. central bank’s decision on raising interest rates, something it has not done since 2006. The looming deflation factor is perhaps best seen in commodity prices. Crude-oil futures CLV5, -7.01% for example, have plunged 17% this month alone, much of it blamed on sluggish energy demand in China.
“China’s slowing economy, underscored by Beijing’s decision Tuesday to cut its benchmark interest rate after a fresh 7.6% slide in the Shanghai Composite SHCOMP, -1.23% has been a deep source of worry for global markets.”
Many market observers and executives do not agree with QE as economy’s boosting tool including Stephen D. Williamson, vice president of the St. Louis Fed:
“In a white paper dissecting the U.S. central bank’s actions to stem the financial crisis in 2008 and 2009, Stephen D. Williamson, vice president of the St. Louis Fed, finds fault with three key policy tenets.”
“Specifically, he believes the zero interest rates in place since 2008 that were designed to spark good inflation actually have resulted in just the opposite. And he believes the “forward guidance” the Fed has used to communicate its intentions has instead been a muddle of broken vows that has served only to confuse investors. Finally, he asserts that quantitative easing, or the monthly debt purchases that swelled the central bank’s balance sheet past the $4.5 trillion mark, have at best a tenuous link to actual economic improvements.”
The idea is to stimulate the weaken economy by buying up government securities which in turn will lower the bond interest rate. The exercise will supposedly make more money available to American households to spend in order to increase economic activity and tame the lingering recession.
Lately the idea of stimulating the economy has not been the monopoly embellished only by the Federal Reserve Bank; the executive arm of the government has tried it with $800 billion Obama’s stimulus and with the most recent tax cut bill signed into the law by the president. It is beginning to look that nothing works and therefore nobody can blame Chairman Ben Bernanke for trying to do something in the face of high unemployment rate of almost 10 percent and the slumping economy, together with the probability of deflation lurking around the corner.
Even with the best of intention, it looks like the exercise is in futility because instead of the interest rate coming down, reverse is the case and the bond interest rate is surging higher. The marketers and bond holders are rushing to dispose their bonds due to their perceived waning confidence in the economy and in the market. The crust of the matter is large deficits and the increasing American debts are becoming a serious issue that cannot be easily deflected.
Quantitative Easing by itself is not the panacea to US economic downturn. United States has financial and structural imbalances that must be sufficiently be addressed for any of these fiscal and monetary policies to become functional and productive. The issue of debts, deficits and spending must be addressed at the rudimentary level. Spending must be minimal zed especially wasteful spending that does not generate and enable wealth creation.
The tax codes must be addressed; to impel and to attract foreign investments and to give solace to local industries. The manufacturing industries are needed in the country where semi-skilled and unskilled labor can be employed. The high unemployment of 9.4 percent cannot be allowed to linger for a long time and employment benefits cannot replace a real job that pays a livable income with its perks and security.
On international level many American competitors especially China and India will see the quantitative easing as part of the emerging currency war, whereby America is deliberately lowering the value of its dollar to stimulate her export. And China may continue to devalue her currency to maintain an edge over United States and who know India may join them. Then everything will fall apart.
The risk involves with the pumping of large sums of money into the monetary base comes with the danger of inflation. With higher spending and over liquefying of the capital market opens the door to higher inflationary trend in the economy with almost zero interest rate. Moreover, other nations including BRICS nations might see it as currency manipulation to favors America’s export.
Since the formation of Federal Reserve Bank, it has played a significant role in the economic development. The monetary policy has been applied by the chairman of the Reserve Bank to regulate the economy by tinkering with the interest rate and by so doing control inflation and economic expansion or contraction, as the case might be.
Federal Reserve Bank can now deduce that the application of extra monetary policy especially quantitative easing has it limitation in the presence of overwhelming structural and financial imbalances. The pursue of full employment as was mandate by the congress to the Bernanke’s Federal Reserve Bank may not be realize because there are so many factors involve for affirmative economic output, with subsequent lower unemployment. The executive arm of the government with its fiscal policy has a major role to play and congress must make prudent laws for full employment policy to be realized by the chairman of the Federal Reserve Bank.