US averts inflation by further QEs
- By Luo Lan
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E-mail China.org.cn, March 29, 2013
The United States has not yet shown any indication that it will halt quantitative easing (QE) efforts. Federal Reserve Chairman Ben Bernanke reaffirmed on March 20 that an "accommodative stance of monetary policy will remain appropriate for a considerable period of time." Bernanke did not elaborate on when such policies will end after "asset purchase program ends and the economic recovery strengthens"
Quantitative easing will inevitably increase money supply, which in turn will exacerbate other countries' inflation risks due to excessive liquidity. In light of this situation, China ought to shift its mode of economic growth away from dependence on exports, and shake off negative impacts via promoting domestic consumption.
US' continued QE policy
The Federal Reserve announced it would maintain a benchmark interest rate of 0-0.25 percent and reiterated its decision to "continue purchasing additional agency mortgage-backed securities (MBS) at a pace of US$40 billion per month and longer-term Treasury securities at a pace of US$45 billion per month.
"The U.S. decided to continue with its loose monetary policy just out of consideration of its own domestic economy," said Xie Taifeng, dean at the School of Banking and Finance, University of International Business and Economics.
Xie noted every country's monetary policies are only meant for its own purposes. The U.S. is currently enjoying improved domestic employment opportunities, signifying that the earlier rounds of QE have worked well. In addition, QE has also brought growth momentum back to the U.S. from abroad.
Unemployment rate in the U.S. has dropped by 0.4 percent during the past six months; some 205,000 people were put to work in non-agricultural jobs during the corresponding time period. But Bernanke said such an improvement is not sufficient to halt the Federal Reserves' purchasing of debt. Instead, it needs another several months to evaluate whether this improvement will continue.
In explaining the scale of QE, Bernanke said he feared that restrictive fiscal policy might slow down growth, while most people in the Federal Reserve Committee deemed that asset purchases have fueled economic growth.
Averting inflation by printing money
QE has assisted the U.S. in profiting from both domestic economic growth and increased trade with foreign countries. Xie said that developed countries often rely on domestic consumption to boost economic growth, and when demand exceeds production they simply import additional products.
The U.S. is a perfect example of this practice. The Fed increases the volume of currency on the market by means of quantitative easing, boosting consumption. This expanded market requires more goods to be imported from abroad.
With the U.S. dollar as the world's reserve currency, excessive liquidity will not lead to higher prices on its domestic market, and any resulting inflation will be transferred to its trading partners. The dollar's resulting depreciation eases the U.S. government's actual debt burden.
Naturally, the U.S. is addicted to printing money, and despite U.S. profits, its international trading partners are losing out. The more the U.S. dollar is used to settle international payments, the higher the loss.
China's central bank Governor Zhou Xiaochuan has long expressed concerns over this issue. He said the U.S. dollar's special status can easily affect the international economy.
Changing growth mode to shake off negative impact
QE impacts China in similar ways as it does other developing countries that rely on exports for economic growth.
There are also concerns that the U.S.' excessive liquidity would result in more hot money flowing into China, hence disrupting normal financial operations. Quantitative easing also directly depreciates China's foreign reserve.
Boosting China's domestic demand is a fundamental way to reduce QE's negative impact. The key is to raise people's income, making them financially capable of spending more money.
The author is a reporter with the People's Daily.
This article was first published in Chinese and translated by Chen Boyuan.
Opinion articles reflect the views of their authors, not necessarily those of China.org.cn.
