Central banks which endorse it make simple case for quantitative easing (QE): if they print billions or trillions more of currency, the existing stock will be worth less and so it will depreciate. But is this happening? The Wall Street Journal few weeks ago observed that the unorthodox policy hadn’t been the sure bet in the currency markets it was often made out to be.
Quantitative easing announcements by the US Federal Reserve, Bank of England and Bank of Japan had led to expectations of dollar collapse, weaker pound and (more recently) sustained reversal of the yen’s long rise. And sure, finance markets reporter Tom Lauricella found there had been shorter-term declines in currencies around QE announcements. Over the long term, however, the predictions hadn’t panned out. Why not?
Elsa Lignos, currency strategist at RBC Capital Markets in London, ventured (1) the mechanism from QE to the currency is complex and (2) central bank efforts were all largely offsetting each other, limiting any big moves. More fascinating, Lignos said the Fed and other central banks had succeeded in boosting prices of financial assets, such as stocks, but there was little upward price pressure on the horizon in the real economy. “If you don’t have inflation then you haven’t diluted the value of the currency,” she said.
In other words, inflation – or the expectation of it – is necessary for quantitative easing to bring currency down. Paradoxically, critics of this policy warn against the inflationary consequences that – according to Lignos – are necessary for the policy to work.
There’s another way of doing it, as was pointed out to the Wall Street Journal by Jonathon Griggs, global chief investment officer of currencies for JP Morgan Asset Management in London. central bank needs to directly aim at the currency market, as the Swiss National Bank has successfully done in containing its currency by drawing line through which it wouldn’t allow the franc to rise. The Swiss policy, by the way, won the approval of the International Monetary Fund.
The Wall Street Journal isn’t alone in examining the pros and cons of quantitative easing. Econbrowser, an online analysis of current economic conditions and policy in the US, on 28 January, headed an item “Currency Wars in the Era of Unconventional Monetary Policies”.
The item was written by Menzie Chinn, professor of public affairs and economics at the University of Wisconsin, who explored an important question: can expansionary monetary policy influence exchange rates in an era of unconventional monetary policy? And even if it can’t affect exchange rates, is that reason for not pursuing expansionary policy? His reply was tentative: “I think the answer is yes.”
Chinn’s thinking was influenced by the Economist, which some months ago noted that the usual determinants of (advanced country) exchange rates no longer seemed to affect currency values in the traditional fashion. Among other things, the Economist considered the notion that QE is form of protectionism for rich countries, aimed at stealing market share from the developing world. The evidence for this was “pretty shaky”.
Arguing the case for or against quantitative, and whether or not it should be added to the Reserve Bank’s toolkit in this country, is not the point of this column. The point is simply that quantitative easing is not dismissed by overseas experts as economic quackery. Not so here, where it has been championed by the Greens and by Labour. Prime Minister John Key found the idea “wacky”. ACT leader John Banks said it would be nice if nuttynomics on the left was quarantined to New Zealand First and the Greens, but alas Labour “sees merit” in the policy.
Economic Development Minister Steven Joyce described the Green Party’s proposals as half-baked, saying change isn’t needed because the economy is stable. Finance Minister Bill English said big risks were involved with it “and it is just barmy to suggest that in an economy growing at all that you would do it”. If scorn is better than robust debate at shaping good policy, we are in good hands. M
Bob Edlin is leading economic commentator and NZ Management’s regular economics columnist.
