Quantitative easing (QE) has become a household word, yet the monetary policy tool has a very brief history.
Slightly more than a decade ago, the Bank of Japan invented it when the country’s ailing economy was in dire need of a booster shot.
The central bank began buying bonds issued by Japan’s Ministry of Finance in March 2001, and liquidity totaling 30 trillion yen (US$2.48 trillion) was injected into the market during the next four years. But the economy still failed to turn around.
Former US Federal Reserve chairman Ben Bernanke, dubbed “Helicopter Ben” for his suggestion that he would drop money from a helicopter to fight deflation, set the money-printing machines in motion in the thick of the 2008 financial crisis.
His report card on QE looks pretty good. Bernanke pumped astronomically large amounts of “fiat money”, US$3 trillion in total, into the US economy and effectively lifted it out of the dire straits in which it found itself.
Common sense tells us a central bank’s purchase of government bonds is an extraordinary measure introduced under exceptional circumstances, so at an appropriate time, it needs to sell these bonds on the market.
But that will send out a chilling signal of credit tightening and push up interest rates, which the authorities may not want.
Conventional wisdom suggests QE on the massive scale seen in recent years will inevitably bring runaway inflation, but we are now in a different world.
Data from major economies with perceived excessive “money printing” indicates that inflation is not an imminent threat; in fact, some of these countries even show signs of disinflation.
Overall consumer prices rose just 0.8 percent year on year in the United States at the end of last year. In Britain they rose a mere 0.3 percent, and in the euro zone 0.6 percent (in January from a year earlier).
Denmark, Israel, Singapore, Sweden, Switzerland and Taiwan have fallen under the shadow of deflation.
Why does QE no longer lead to inflation?
One explanation is the sweeping globalization in the past decade that has slashed production costs.
Two in every seven people on this planet live on less than US$2 a day, World Bank figures show, so wage-driven inflation is still unlikely on a global scale.
When a place loses its edge of cheap labor (like China), foreign investors can set up alternative production lines elsewhere (such as in Southeast Asian countries).
Also, virtually all sectors face different levels of overcapacity, so products cannot be sold at high prices.
It has been estimated that in 10 years, robots will take almost a quarter of all manufacturing jobs, with projected overall production costs falling at least a third.
By deploying an army of robots, producers can attain a higher profit margin while lowering production costs and product prices at the same time.
The new normal now looks like this: overissuing banknotes may not necessarily court the disaster of inflation.
Governments issuing bonds and central banks printing notes to buy these bonds may resemble a Ponzi scheme, but policymakers still resort to QE, as the consequences of a money-printing spree are paltry, compared with those of a recession.
The European Central Bank’s latest move to purchase public-sector assets earlier this month — €60 billion (US$63.4 billion) per month in mostly government bonds between March this year and September next year – is therefore not bad news.
If the authorities can leverage this “cost-free” money to fund innovation and the cultivation of high-caliber talent, the economy will thrive in real terms.
Governments can and will do anything.
They will use every means within their legal scope of powers, like QE, to make sure the economy can weather the storm.
This article appeared in the Hong Kong Economic Journal on March 11.
Translation by Frank Chen
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