It is important to note that “money” is different from
“currency”.
Consider it like this:
For a theater that can seat 1200 people, if the owner
prints 5000 tickets for one show – the “excess” 3800 tickets will have no
value.
Similarly, if the central bankers print “currency” that is
more than the amount required for transacting the real goods and services
produced in the economy, the “excess” currency will have no value and hence it
is not “money”.
The unprecedented bond purchase program of global central
bankers, under various schemes and programs, collectively referred to as
quantitative easing or QE, has been subject of intense debate in past four
years. QE in instant case has two primary objective - (a) lend stability to
global financial system which witnessed a complete collapse post Lehman Bros.
bankruptcy in 2008; and (b) bring the global economy back to a sustainable
higher growth path.
The stability witnessed in the global financial market in the
wake of recent crisis in Cyprus does indicate to the success of QE program in
bringing a reasonable degree of stability to the global financial system.
However, the critics find it worth little use in promoting economic growth and
hence call for its withdrawal. Any suggestion of withdrawal of QE usually
evokes nervous response from investors.
In our view, QE is now a matter of fact and will remain so till
it completely outlives its utility – not likely in next 3yrs at the least, most
likely till the time EU economy shows definite signs of revival, Japan achieves
its objective of creating nominal inflation in the economy and gets out of
decades of stagnation, and global trade rebalancing especially in relation to
China makes steady progress.
Insofar as the extent and impact of QE is concerned, there are
many sensational reports doing the rounds. We would like to take a rather
simplistic view of the situation.
We all know that currency is nothing but an “unsecured zero
interest bond” that usually loses its value with the passage of time. Under
various QE programs, central bankers in the developed world, especially US
Federal Reserve (Fed), European Central Bank (ECB), Bank of Japan (BoJ) and
Bank of England (BoE), have been exchanging interest bearing sovereign and
corporate bonds with virtual currency – thereby augmenting the state income at
the expense of fearful savers. If they are successful in creating acceptable
level of inflation in the global economy, they will also make capital gains as
the “currency” in the hands of savers depreciates in its value. Moreover, this
has created artificial scarcity in the global debt market and hence allowing
the governments to borrow at lower cost. (see
here)
Those who fear “withdrawal” need to understand that QE is a
goose that is laying diamond eggs (gold is not a good analogy these days) every
day. Why would someone kill it?
For records, Cumulative bond buying since 2008 by four major
central banks alone - the Fed, Bank of Japan, European Central Bank and Bank of
England - reached more than $4 trillion this year. Added to existing holdings,
that brings their total to $5.2 trillion.
With new Fed purchases of Treasury bonds set to top $1 trillion
in 2013 and Bank of Japan bond buying more than half that amount, the year-end
total will be about $6.5 trillion.
And as both the Fed's and the Bank of Japan's bond buying will
exceed new bond sales by their governments by at least $100 billion this year,
there will be fewer bonds around this year than last despite all the new debt
sales.
