QE Explained :In normal times the FED will try and intervene in the market economic activity by targeting the FED rates , typically the FED does the open market operations (FED interventions by buying large amount of short term treasuries from general market) increasing the supply which decreases the demand for cash and thus lowering the interest rates. The idea of open market operations is to lower the interest rates.
Now rather than traditional open market operations the FED is not just buying just short term treasury securities, but going after long term treasury securities ,mortgage backed securities again mainly to inject cash in the market (Quantities Easing)
History : Japan did this back in 2001(from where the QE term is derived) and we are doing the same (Credit easing ) but with a little difference essentially we are printing money and rather than buying short term treasury assets we are spreading the composition of our shopping (MBS,AAA Corporate debt,long term treasury securities) which will affect the credit conditions for households and business.
Consequences :Direct injections of money into the economy can have a number of effects. The sellers of the assets have more money so may go out and spend it. That will help to boost growth. Or like in reality they may buy other assets instead, such as shares (share buy back policies) or company bonds which we have seen in past, the corporations have money ,they are already sitting on a lot of cash.
Buying MBS,AAA Corporate debt,long term treasury securities the FED’s anticipation of reenergizing economic activities looks too audacious
Wednesday, June 22, 2011
Thursday, June 9, 2011
Inflation, Inflation,Inflation....
Zero Inflation or stable price level policy norm goes back to classical economics and has inspired many governmental policies over last decades
In this economic situation price stability goes hand in hand with total spending or aggregate demand measured in dollar terms .Producers usually like this because puts them in a comfort zone of avoiding shortages or excess inventories in the products they produce.
This stability in aggregate demand avoids fluctuations in the real market and thus this idea works in a stationary economy only and advantages of this policy only in a stationary economy would be as follows
• This claims to stop unfair transfer of wealth from creditors and borrowers (when prices fall creditors profit and when they rise debtors profit and stability in prices halts these movements)
• This will allow the price –system to do its job by minimum of money price changes by purging any need for general price changes to compensate changes in the supply of or demand for money.
• Uncertainty in markets
Issues with Zero inflation
• Suggested salary increases are not quantifiable
• Investments halt or slowdown
• Would work in a stationary economy which is not practical
In this economic situation price stability goes hand in hand with total spending or aggregate demand measured in dollar terms .Producers usually like this because puts them in a comfort zone of avoiding shortages or excess inventories in the products they produce.
This stability in aggregate demand avoids fluctuations in the real market and thus this idea works in a stationary economy only and advantages of this policy only in a stationary economy would be as follows
• This claims to stop unfair transfer of wealth from creditors and borrowers (when prices fall creditors profit and when they rise debtors profit and stability in prices halts these movements)
• This will allow the price –system to do its job by minimum of money price changes by purging any need for general price changes to compensate changes in the supply of or demand for money.
• Uncertainty in markets
Issues with Zero inflation
• Suggested salary increases are not quantifiable
• Investments halt or slowdown
• Would work in a stationary economy which is not practical
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