1. Is Quantitative Easing BeneficialIs Quantitative Easing
Beneficial To Global Economy ?To Global Economy ? PRESENTED BY:
VEENA MOHANDAS (Test Engineer at BNP PARIBAS)
2. What is Quantitative Easing ?What is Quantitative Easing ?
Unconventional monetary policy used by some central banks to
stimulate their economy. The central bank creates money which it
uses to buy government bonds and other financial assets, in order
to increase the money supply and the excess reserves of the banking
system 3. How does QE work?How does QE work? The term quantitative
easing (QE) describes a form of monetary policy used by central
banks to increase the supply of money in an economy when the
central bank interest either at, or close to, zero. Fed supplies
money to banks Banks supplies specified bond instruments In QE US
Fed would buy the designated bonds from the US banks in exchange
for cash US Dollars 4. Fed supplies money to banks Banks supplies
designated bond instruments Banks lend the funds to consumers and
business QE is intended to improve the flow of credit in the
economy by flushing the banking system with funds 5. Effect on US
DollarEffect on US Dollar Excessive $ in the economy Flight of $ in
the emerging market Devaluation of $ Purchase of Treasury Bonds
Leads to Inflation For better returns Interest rate hike in India
to check inflation, it becomes favourite spot for hot money $ is
devaluated against Other Currencies With a higher interest rate
leading to overall flat liquidity in the market 6. Impact on Trade
DeficitImpact on Trade Deficit 7. 2007-2010 (US Crisis)2007-2010
(US Crisis) The financial position of US was set to weaken Macro
economic indicators were still weak Dollar index reached the lowest
point in Q4 2010 Diversification out of the Dollar Threat from the
Chinese Economy 8. (Cont....)(Cont....) Rush to dump the US Dollar
and to accumulate gold and other more stable currencies China had
started BILATERAL TRADE in Yuan with a number of Asian and African
Countries OPEC shifted to more stable currencies 9. Effect On
CommoditiesEffect On Commodities Commodities are $ denominated thus
along with the $ the commodity prices are likely to become cheaper
in currencies that revalue them This is likely to make countries
like CHINA hoard metal like copper to boost future growth thus
increasing its demand. This would lead to SPECULATIVE BUYING OF
COMMODITIES Furthermore, with LOW INTEREST RATES and high inflation
people like to hedge with commodities. This would lead to HIGHER
COMMODITIES PRICES Low interest rates make bank deposits useless
specially if the inflation is higher than the rate 10. Effect on
GoldEffect on Gold Gold is a HEDGE AGAINST INFLATION and
uncertainty With Low Interest Rates; slow and uncertain recovery of
the global economy of US, the GOLD PRICES ARE LIKELY TO HOLD
STRONG. Uncertainty of USD has prompted countries to SHIFT RESERVES
TO GOLD All major economies are shifting to Gold 11.
(Cont...)(Cont...) All major economies are shifting to Gold
Countries are diversifying the forex reserves US holds highest
volume of Gold in the world China gold holdings also surged to a
great level and now is the fifth largest Gold holder in the world
12. Effect on Oil prices and its impact onEffect on Oil prices and
its impact on both emerging and developed marketsboth emerging and
developed markets Uncertainty of USD will raise the Oil Prices Rise
in crude prices has an INFLATIONARY EFFECT Therefore, it will slow
down growth in the emerging markets 13. Impact on emerging
marketImpact on emerging market currencies and on its
economycurrencies and on its economy Flight of USD to emerging
markets has led to the appreciation of the Local currency. This has
ramifications on the exports of the country and overall BOP
Countries are artificially devaluing their currency to pep up
exports. US has lately asked to China to revalue to its currency as
they were in a disadvantageous position and threatened to retaliate
14. Understanding International DebtUnderstanding International
Debt Due to quantitative easing, USD and other major currencies are
devalued As a result repayment of debt becomes expensive 15. Effect
On BondsEffect On Bonds Excessive Demand Demand of Treasury Bills
likely to go up Go long as prices are expected to increase 16. QE
Impact onQE Impact on European UnionEuropean Union QE will induce
excess USD into the US economy This will lead to the Devaluation of
USD against other currencies This is not favourable for exports by
EU to US, thus will have a negative effect on EU 17. Impact On
Chinese EconomyImpact On Chinese Economy China artificially
maintains a devalued Yuan There is a limit to the amount of USD
which a central bank can hoard Excessive Yuan in the market will
lead to inflation Thus, it is inevitable that China revalues 18.
Reserves Of ChinaReserves Of China Due to artificial revaluation
large assets have been built up in China It is estimated that about
70% of Chinas foreign exchange reserves are invested in dollar
assets A stronger Yuan would attract Cross-Border Arbitrage funds
because of the countrys relatively higher interest rates 19.
(Cont..)(Cont..) Proceeds from exports would also rise as global
recovery generated demand for Chinese goods With FDI expected to
increase steadily, China will be facing greater pressures from the
rising amount of foreign exchange inflows. Any sudden revaluation
will prompt rapid sale and may cause a Bubble effect 20.
(Cont..)(Cont..) Gold purchases could help China reduce the risk of
holding large volumes of US dollar assets as a major part of its
foreign exchange reserves Purchases could push up gold prices
sharply. Also, the average long-term returns on investment in gold
are low. If China purchases gold on the international market price
will surge which would in turn affect Domestic Individual
Consumers
