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Enforcing Quantitative Easing – Not that easy as the name suggests

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Quantitative Easing

Quantitative Easing – the name sounds too fancy in these modern, fast developing and rapidly growing world. It is very well known that with the growing inability of traditional monetary tools, QE has been a preferred weapon to fight out dry economies. However, one of the major concerns is “If pouring in billions of dollars into the market via indirect measures will help the economy head in the desired direction in long run or Not?” “Is it just the money which is required in the system to make it perform better, or is it something else which is required as well?

The use of these unconventional monetary tools has been recent and infrequent, thus it does not provide many instances to measure the degree of efficiency or effectiveness. Neither the critique is available to analyze the efficiency of the method based on the historical trend.

The recent economic developments, however, very well tries to extrapolate the implications of easing process, which would lead to a consensus if QE is a boon or a curse for an economy.

It goes on without saying that one of the prime reason behind enforcing easing is to make the institutions and banks available with sufficient liquid money which can be used for lending purposes, thereby prompting more investments and a higher growth in production eventually. If we carefully drill down into the concept to reach its roots we see that under QE, no new money is printed which means that easing is a means just to divert the flow of liquid money in the economy from one destination to the other.

Read More What QE Infinity means – Intelligent Reactions to Limitless Quantities Easing by the US Federal Reserve.

Concerns

Now when the technicalities of QE are cleared, there are three major concerns to decide on the fate of money which include What, Where and How. Following are the concerns:

  • It is important to know the current base of the liquid money, from where it needs to be hived off.
  • The end destination of the money where it will be routed is important.
  • How shall the diversion of this money be carried out?

It is needless to point that if any of the three tabs is missing the whole plot of digressing money to the right front will be easily ruined.

One of the rationales behind Quantitative easing might be the requirement to boost investment by lowering the interest rates especially when credit channels are bunged.

One of the important questions to answer about QE, as already mentioned is that does pouring in billions of dollars into the market via these indirect measures really spurs the economy in the desired direction in long run? How long can we bank upon these ancillary measures?

It is very important for both the Indian and the American economies to overcome the structural deficiencies impeding investments. It is a known fact that by easing credits, one can push investments only when the fundamental platform for investing is paved with a strong foundation. Going by the current situation in the Indian economy where bureaucracy prevails in its highest form and a dense spiral of corruption is prevailing; too lowest of the interest rates will not help making investment, as the person is entangled in such steeple-chases. Thus there is neither any creation of jobs nor any sign of growth, seen in the economy.

Also Read 5 Factors Why Quantitative Easing by USA will badly affect Indian Stocks.

Conclusion

Thus to conclude we can say that despite the fact that quantitative easing is a key step to an economy‘s success, it is still a difficult and cumbersome task to implement upfront in any economy without taking care of the other key problems which are already present in the economy. QE is definitely a blessing, a boon when the structure in the economy is at place. It is very important to understand at this point that easing is not a means to create additional money, and neither a way to absorb money. Easing is just the “re-routing” the money from one base to the other.

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PG

Niraj Satnalika

Niraj is an MBA in International Business (Finance). Prior to this he completed B.Tech in Electronics and Instrumentation. He is currently working with Confederation of Indian Industry (CII), Kolkata in capacity of Consultant. Satnalika is actively involved with an NGO and works towards promoting education among the underprivileged.

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