प रत स पर ध त मक म द र क सहजत क र कन

China s Monetary Sterilization

He argued that QE is not nearly as unconventional as its critics claim.

NEW YORK The European Central Bank has finally launched a policy of quantitative easing (QE). The key question at this stage is whether Germany will give the ECB the freedom of maneuver needed to carry out this monetary expansion with sufficient boldness.

The crucial policy issue ahead, however, is how to time and sequence the exit strategy from this massive monetary and fiscal easing.

And policymakers have moved to a risky credit easing policy as QE s effectiveness has waned.

The Fed s monetary easing did temporarily contribute to a weaker dollar, which boosted net exports.

The market s lack of response was an important indicator that monetary easing is no longer a useful tool for increasing economic activity.

But, following monetary easing and fiscal expansion, it is Abenomics third arrow that will prove most important and most politically challenging.

The BoJ has already announced it, the Bank of England (BoE) is likely to do so soon, and the Fed will certainly announce it at its November meeting. In principle, there is little difference between monetary easing lower policy rates or more QE that leads to currency weakening and direct intervention in currency markets to achieve the same goal.

More monetary and credit easing is also required for the US Federal Reserve, the Bank of Japan, the Bank of England, and the Swiss National Bank.

That is both logical and rational and thus not something that the US Federal Reserve can offset with unconventional monetary easing.

Third, the foreign exchange channel of QE transmission the currency weakening implied by monetary easing is ineffective if several major central banks pursue QE at the same time.

The framework for US macroeconomic policy changed dramatically when the international monetary system broke down in 1971.

First, the exit strategy from monetary and fiscal easing could be botched, because policymakers are damned if they do and damned if they don t.

The problem comes when expansionary monetary policy via standard open market operations and central bank guarantees of orderly markets prove insufficient.

Monetary easing and fiscal stimulus, combined with structural measures to restore private firms to financial health, would stimulate household expenditure and business investment.

A quantitative easing policy in which a central bank buys risky assets can prevent price fluctuations and restore the value of financial wealth.

The monetary easing undertaken by the US Federal Reserve raised expectations for a devaluation of the US dollar that might help US exports.

Simply put, we live in a world in which there is too much supply and too little demand. The result is persistent disinflationary, if not deflationary, pressure, despite aggressive monetary easing.

Because the ECB has already been using its balance sheet to help bring down borrowing costs in the eurozone s periphery, it has been cautious in its approach to monetary easing.

The cult of the Greenspan put stemmed from the previous Fed chairman s avowed belief that the Fed should not try to resist a sharply rising stock market, except to the extent that such a market undermines the long term stability of prices for ordinary goods.

As a result, the US Federal Reserve s policy of so called quantitative easing is going south, where it takes the form of foreign exchange intervention.

Facilitation

In both 2010 and 2011, leading economic indicators showed that the first half slowdown had bottomed out, and that growth was already accelerating before the announcement of monetary easing.

Precisely because so much emotion has been invested in QE, the psychological effects of returning to normalcy are going to be perilous and unpredictable.

The biggest policy risk is that the exit strategy from monetary and fiscal easing is somehow botched, because policymakers are damned if they do and damned if they don t.

Hard to be Easing

C. Facilitation

The Bank of England has moved from QE to CE (credit easing), and the Bank of Japan has repeatedly increased the size of its QE operations.

The intensity of the market reaction was surprising, at least given the received wisdom about how the Fed s quantitative easing policy works.

After all, while the previous rounds of US monetary easing have been associated with a persistent increase in equity prices, the size and duration of QE3 are more substantial. But, despite the Fed s impressive commitment to aggressive monetary easing, its effects on the real economy and on US equities could well be smaller and more fleeting than those of previous QE rounds.

The Lemmings of QE

Occupy QE

Quantitative Easing and the Renminbi

Now it is essentially sustained by a Ponzi scheme, with the Fed s policy of quantitative easing keeping the price of Treasuries artificially high.

The Fed s policy of quantitative easing exacerbates the flow of excess liquidity, which could result in dangerous bubbles in emerging markets.

Even if monetary easing is phased out later rather than sooner when the economic recovery is more robust markets and investors need clarity in advance on the parameters that will determine the timing and speed of the exit.

Global interest rates have risen 100 basis points since the US Federal Reserve started suggesting quite prematurely, in my view that it would wind down its policy of quantitative easing.

And the US Federal Reserve s quantitative easing (QEII) made the demise of the ideology of unfettered markets inevitable money goes to where markets think returns are highest.

Monetary Mystification

The Fed cannot reduce short term interest rates below zero, so it is attempting via this policy of quantitative easing to reduce longer term interest rates.

When the first arrow of Abenomics a fiscal stimulus program was launched nearly two years ago, asset markets' immediate response was positive. The second arrow of Abenomics monetary easing intensified these effects.

The current round of monetary easing underway in many advanced countries, together with strong expectations of renminbi appreciation, are also fueling currency speculation, placing further upward pressure on the exchange rate.

Who s Afraid of Tapering?