QE3: US Quantitative Easing Policies Benefit the US by Harming Others

In order to stimulate the sluggish U.S. economy, the Federal Reserve under the Obama administration launched a third round of quantitative easing (QE3) before the presidential election. Unlike QE1 and QE2, QE3 has no limit on time and quantity. The Fed can either purchase mortgage-backed securities (MBS) or government bonds. The major policies of the QE3 allow the Fed to inject $40 billion monthly to purchase MBS and to invest $45 billion a month on Treasury securities to extend “Operation Twist.” With the first two measures combined, the Fed will invest $85 billion per month to purchase MBS and Treasuries. QE3 will also increase the liabilities of the Fed from $2.3 trillion to $2.8 trillion, and the zero interest rate policy will be extended to 2015.

The benefits of quantitative easing policy to the U.S. economy are obvious. First, QE1 and QE2 improved the U.S. GDP by 3 percent. Second, less interest expense will reduce the deficit. For example, the Fed can print new dollar bills to buy bonds and get interest from the Department of the Treasury. They can also extract interest by investing in mortgage-backed securities. Then, most of these gains in the Fed will again flow into the U.S. Treasury. In 2011, $75 billion transferred from the Fed back into the U.S. Treasury. In the 2011 fiscal year, the government’s net interest expense is equivalent to 1.5 percent of the annual GDP, far below the average level of the past 30 years. If we take into account the funds that the Fed remitted, the net interest expense is only equivalent to about 1 percent of the annual GDP. Also, these policies adopted by the Fed can help reduce the annual operating deficit of the U.S. government. Third, these policies can help drive down long-term interest rates (especially mortgage rates). Fourth, they are conducive to large banks. QE3 will not encounter the stumbling block QE1 and QE2 once faced, because banking conditions have improved. The willingness of banks to expand the lending scale has been strengthened. In the second quarter, private deposit-taking financial institutions held a total of $11.21 trillion in credit market instruments (including U.S. Treasury bonds, mortgages and credit card debt), which has increased by 3.8 percent compared to the same period last year, the largest increase since the second quarter of 2008. Despite the fact that this is lower than the 50-year average (7.3 percent), due to the rise in house prices, more borrowers are able to get rid of negative equity, which will accelerate growth. Fifth, the policies have pushed the stock market upward. The Dow Jones Industrial Average rose to nearly 14,000 points from 6,000 points. Sixth, these policies can reduce household debt, increasing consumption. U.S. household debt level has been lower than four years ago at the outbreak of the financial crisis. In the first quarter of this year, American families’ total liabilities are $13.4 trillion, down from a record $14.4 trillion in the third quarter of 2008. Seventh, the policies will depreciate the U.S. dollar, expanding exports and helping to achieve the goal of doubling U.S. exports.

However, the U.S. quantitative easing policy was carried out at the expense of the world’s long-term economic development. First, the acceleration of banknote printing has made the scale of the Fed’s liabilities expand to nearly $3 trillion from less than $1 trillion before the financial crisis. The excessive money printing has led to the depreciation of the U.S. dollar. From the first time the Fed chairman, Ben Bernanke, proposed QE2 in August 2010 to June 2011, when QE2 was completed, The Wall Street Journal Dollar Index fell by 10 percent. Second, the quantitative easing policy will increase the risk of national debt monetization, as well as the risk of global inflation, which will raise global commodity prices caused by imported inflation and asset price inflation. Third, the depreciation of the U.S. dollar will force other currencies to appreciate. In order to prevent QE3 from damaging their national economies, countries all over the world followed the U.S. “rescue” plan to engage in a wide variety of quantitative easing, causing countries to initiate suicidal and competitive devaluation. The European Central Bank launched a bond purchase plan; the Bank of England learned from the Fed to adopt a “non-write-off” bond-buying program; the Bank of Japan launched an 80- trillion-yen* QE; the Swiss central bank continued to buy an unlimited amount of the euro to prevent the Swiss franc from appreciating; and Brazil, Turkey and other countries with emerging markets have also adopted policies that utilize various means to suppress currency appreciation. Fourth, the global “currency war” may trigger a global trade war, making the weak recovery of the world economy worse. Fifth, it will pose a serious challenge to China’s foreign reserve, foreign trade and monetary policy. The currently fierce debate in China over whether to implement a 4 trillion RMB investment stimulus plan “version 2.0” is the instinctive reaction to this challenge.

*Editor’s note: This amount was incorrectly stated as 80 billion yen in the original article.