Friday, November 5, 2010

Quantitative Easing is about Payback!

When I heard the news that the Feds are again flooding the economy with USD600 billion, my first thought was that the Feds are doing it for the sake of proving to people that they are trying to do something, even though it will do nothing to help in the US unemployment rate.

However after reading some of the comments on this Quantitative Easing (QE2), it hits me that the reason for this round of easing has nothing to do with the unemployment rate or the economy. Personally, I think it's all about payback time to the economies that control their currencies.

What does QE2 guarantees? USD currency depreciation. Any difference between USD currency depreciating and other currencies appreciating? None that I can see.

My belief is that the Feds are going to continue doing QE2 as long as
  1. inflation is below average
  2. economy growth is below average
  3. other countries' currencies are strictly controlled by the respective governments from following the market

I believe the last point may be the deciding factor for the Feds. Therefore, the more you see some countries refusing to let the market decide the currency rates, well the more the Feds will continue their QE2. What can the other countries do about it? I guess none. Who wants to be the reserve currency of the world? I don't think anyone does.

It's payback time, at least from the US perspective.


Anonymous said...

The purpose of QE isn't to depreciate the US dollar and even that isn't guaranteed because the Fed isn't directly driving the exchange rate downwards by buying foreign currency with USD. It's just exchanging govt. securities for cash. People do agree that it will tend to depreciate the currency because of market expectations. In other words, depreciation occurs only because people think it will devalue.

QE2 is really nothing more than just your normal open market operations, except this time the Fed is buying longer term Treasuries. How that is supposed to bring down unemployment is beyond me.

chantc said...

Depends on how you look at it. The way I look at it, this will happen:

1 - Buying long term treasuries will free up the cash for businesses/people/etc.
2 - They will use the money to invest overseas because the returns are better (it's like GLP using the income from japan to invest in China).

End result? USD is being used to buy foreign currency. True that it is not guaranteed but I feel that most, if not all, will do that.

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