Following the global recession, many countries still lack resurgence in their economic growth levels. Many central banks around the world have used their primary tool, aggressive quantitative easing, to try and revive economic growth.
One issue with quantitative easing is that it can drive a currency downward in value. This can have some positive effects in improving economic growth by making that nation’s goods cheaper and driving exports; although it can hurt economic growth, as the price of imports rise, driving up inflation.
This is a tough goal to achieve, in trying to increase economic growth through a very blunt tool, that of quantitative easing. Whereas some initiatives have laser-like precision, quantitative easing is not one of them.
One nation that has recently embarked on a very aggressive quantitative easing program, and will continue to do so, is Japan. In November, Japan elected a new Prime Minister, Shinzo Abe, who called for a very large quantitative easing program to jump-start economic growth. Since the election of Abe in Japan, the yen has fallen by approximately 15% against the U.S. dollar.
This has certainly helped Japanese car makers. Recently, the CEO of Ford Motor Company (NYSE/F), Alan Mulally, voiced his concerns that the Japanese yen’s decrease is increasing the level of competitiveness for Japanese car makers. According to the American Automotive Policy Council, Japanese car makers have a currency advantage worth approximately $5,700 per vehicle. (Source: Philip, S., “Ford CEO Says He’s Concerned About Effect of Weaker Yen,” Bloomberg Businessweek, March 26, 2013.)
The natural question is: if quantitative easing does help economic growth, why doesn’t every nation just do this? Several reasons. The first is that if every nation started a similar quantitative easing program, the net result would be neutral. Currencies are traded on a relative basis; if you increase your supply by five percent, and I increase my supply of currency by five percent, then neither currency should move that much since the net increase is the same amount.
A negative effect of quantitative easing is that inflation can become a problem. This case is quite unique, as Japan has a deflationary problem. A small level of inflation is a good thing, compared to deflation. Economic growth simply won’t occur in a deflationary environment. After all, what consumer or business would spend money today when they know the product will be cheaper tomorrow? This results in a hoarding of capital.
The real problem is that while quantitative easing can be used for a short-term liquidity crisis, for long-term economic growth, the real need is for structural reforms. Weakening a currency does not build wealth. Long-term economic growth comes from cutting-edge industries, new innovations, and a workforce that is skilled and dynamic, as an economy moves forward.
Many investors are looking to the safety of gold, as nations continue quantitative easing. While money can be printed, gold can’t. There are no easy solutions to long-term economic growth. The truth is that we need more policies that help businesses grow and innovate, increasing the level of flexibility to try new ideas.
We don’t want to get into an endless loop of relying on quantitative easing to prop up economic growth, because politicians are too scared to make the tough choices. Unfortunately, I think we might be too late, as Washington has now given up and relies completely on the Federal Reserve, allowing politicians to evade making any decisions at all that could help long-term economic growth.
By: Sasha Cekerevac
Posted: April 2, 2013, 3:15 pm
We believe the stock market and the economy have been propped up since 2009 by artificially low interest rates, never-ending government borrowing and an unprecedented expansion of our money supply....