Wen Wei Po, Hong Kong
America Needs to Face the Harm of Relying on Quantitative Easing
Translated By Caroline Moreno
1 February 2013
Edited by Jane Lee
Hong Kong - Wen Wei Po - Original Article (Chinese)
The U.S. Federal Reserve Board announced on Jan. 30 that it will maintain the current highly accommodative stance toward monetary policy to stimulate employment growth and economic recovery. Moreover, it admitted that U.S. economic growth fell into stagnation over the past few months. Having been impacted by the "fiscal cliff," the U.S. economy shrank, and by the look of things, the economic recovery has been interrupted. Even more noteworthy is that the United States is unwilling to start with increasing taxes and cutting expenses to reverse its fiscal predicament. On the contrary, the United States is stubbornly relying on an infinite amount of quantitative easing policies, which are delaying the economic crisis, and consequently, will only cause hot money to be channeled in all directions, push the asset bubble of emerging economies higher and increase the risk of producing great upheaval in the world economy.
America's 2012 fourth quarter gross domestic product value fell 0.1 percent, far worse than the predicted growth of 1.1 percent and third quarter growth of 2.9 percent. Furthermore, this became the worst-performing quarter since the second quarter of 2009, which was the U.S. economic recession. The sudden reduction in defense expenditures and enterprise destocking were obviously caused by the "fiscal cliff." At the end of last year, congressional negotiations between the two parties on how to resolve the "fiscal cliff" fell into a deadlock, which led to 2012 fourth quarter defense expenditures seeing the largest rate of reduction in 40 years and economic growth being dragged down by 1.28 percentage points. Additionally, due to worries about suddenly falling down the "fiscal cliff," taxes on residents increased and consumption ability decreased, while businesses successively chose a conservative wait-and-see outlook and consumed their reserves to control risk. Enterprise destocking also dragged down economic growth by 1.27 percentage points. Although the "fiscal cliff" issue was brought to a temporary close, it inadvertently caused negative economic growth and triggered the market to fall into a new round of dread regarding a U.S. decline. Economic recovery is weak, and the two distant objectives of a reduction of the unemployment rate to 6.5 percent, and an increase of the inflation rate to 2 percent are linked to the removal of quantitative easing; the Fed has to maintain highly accommodative policies.
Since the 2008 financial tidal wave, the United States has pushed four rounds of quantitative easing policies, and the current indefinite duration for purchasing securities is yet more quantitative easing in disguise. What is a shame is that the economic stimulation effects of quantitative easing policies are weaker and weaker; the huge amount of floating capital flowing into real economies is limited and flows even more toward speculative arbitrage in developing markets, pushing high the prices of assets. The Hong Kong property market is precisely a typical capital market. Time and time again, the special zone pushed to constrain the hot attraction of the property market. Driven by hot money, each wave of the property market grew higher than the last, and it became completely disjointed from the local economy and incomes. This continued for a long time, and the asset bubble expanded until it was difficult to sustain, and the misfortune of the bubble popping was inevitable. Apparently, the United States is using the reason of shaking off the fiscal crisis for unbridled money printing, yet it wants the entire world to pay the price for this.
Negative economic growth occurred under accommodating U.S. monetary policies, issuing warnings to economic policymakers, urging them to earnestly resolve the unresolved budget problems. Relying on money printing alone cannot fundamentally change fiscal imbalance problems. In formulating fiscal austerity measures, on one hand, they could use tax increases to broaden revenue, and on another hand, they could curtail expenditures. Only through these means can the American economy gradually be reinvigorated. Both the Republicans and the Democrats should consider overall U.S. interests and world interests and resolve the problems appropriately instead of becoming entangled in endless political arguments.
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