Quantitative Easing, Will it Help the U.S. Economy?

With the economic recession deepening at a frightening pace, interest rates all over the world are getting closer to zero. So, since central banks cannot lower rates any further, many are trying to boost the economy by buying government securities hoping to bring down longer term interest rates and fight any deflationary cycles. But, can the so called quantitative easing bring the necessary relief to our distressed financial markets?

At Trading Economics, we think that the influence of quantitative easing on the economy is very controversial at least since it is very difficult to assess how much money supply is needed to boost credit markets and for how long those measures should be implemented. There is also another danger by the corner since the ability of new money to boost incomes depends on its velocity”. In fact, institutions expecting further deterioration of the economy may simply put the capital obtained from selling treasuries into deposits instead of investing them. Also, a lot of Treasuries are owned by financial institutions abroad, not by the companies and families that need them the most.

Furthermore, there is no example of a country on which quantitative easing have had a significant effect. The only economy in recent years to have tried its full-scale version for a significant period was Japan. The Bank of Japan was adding reserves to the banking system and keeping the zero interest rate policy for five years, from 2001 to 2006. Instead, a lot of economists argue that the liquidity problems of Japan were solved by capital injections and guarantees to the banks and not by quantitative. Moreover, the Japanese experienced high oil prices and a big program of government spending, so it’s difficult to assess the real influence of quantitative easing on Japan’s fight against deflation.

Anna Fedec, contact@tradingeconomics.com
3/19/2009 2:11:57 PM