Posts Tagged ‘Japan Central Bank’

Is Quantitative Easing working?

Sunday, August 30th, 2009

The US Government has embarked in unfamiliar territory in order to end the financial crisis: quantitative easing.

“Easing” just stands for making life easy for the banks, and indirectly for everyone, from an economic standpoint. “Quantitative” stands for quantity.

Ok, let us stop the bullshit for a minute. I find that one of the miracles of this new millennium is that a new widespread trend has emerged. The skill to rename old things with new names so that they seem to be completely novel and modern technologies, whereas there are simply rehashed old techniques. So to put it in plain English, quantitative easing simply means to print money.

This is certainly not new, and monarchs and emperors have used it since ancient time, any time they lacked the means to conduct the policies they wished to follow. Remember that Napoleon sold Louisiana (which was about one third of the United States by then) for a meager twenty million. So at least he had something to sell to finance his wars.

Earlier French Kings who did not have this luxury would routinely burn their Jewish bankers in the public square in order to cancel the royal debts and to get free assets in the process. Even earlier, since Antiquity the Royal Mint was the ideal medium to secretly change the composition of coins, hence creating many new coins from fewer old ones. When note bills became in use, it was much easier (literally and figuratively), as Government just had to go to the printing machine to get money.

Technically it is done differently nowadays thanks to the use of the digital money market and of sophisticated Central Bank operations. It is all a matter of orchestrating complicated monetary transactions through computers, networks and data center. Money is simply equivalent to how some bits are organized on some magnetic disks at some obscure data center.

Joke aside, financial markets have recovered nicely all over the World, not in small part because of the quantitative easing engineered from the United States. So far it seems to work.

Even though many non-believers doubt that this policy can work in the long term, it is clear that the recent economic maelstrom has lost is intensity and that a gentle global recovery is under way.

Following the Asian crisis in the late 1990s, a similar policy of quantitative easing was conducted by the Japanese Central Bank until 2006, adopting a zero interest rate policy, expanding banks’ balance sheets and purchasing long-term bonds. But this stimulus failed to materialize into any visible economic benefit, as banks continued to refuse to lend money even though that where overwhelmed with it.

This is what Keynes calls the liquidity trap, i.e. when interest rates are near zero, no more impetus can be gained from such monetary policy because interest rate cannot go below zero (usually). Fortunately the American and Japanese economies and cultures are radically different, so there is no need to believe that what occurred in the Land of the Rising Sun will repeat in America.

In particular their size and global economic importance differ, and one is a major exporting country whereas the other a major importing country. Also the US Government has adopted a wider policy than their Japanese counterparts.

It seems to work for now, but it is too early to tell the long-term consequence of financial easing in the USA. As his leading advocate, it is certainly one of the main arguments on how president Obama will be judged in the history books.