Good Essay On Quantitative Easing Is Not Good Idea For Economic Recovery
When governments are faced by economic crises, many options are at their disposal to help stabilize the economy. One of such options is the Quantitative Easing (QE). In as much as this policy comes in handy during hardship, it has various drawbacks that any government using it must keep them in mind. QE is not one of the best polices since it has numerous drawbacks. In my view, it should not be used to help recover the economy as in most cases; it brings more drawbacks than positives.
QE is a monetary policy whose main idea is to reduce the value of the currency. It involves the central banks “printing” money that the government uses to exchange for monetary assets such as cooperate bonds or government bonds. With an increase in the supply of money, the currency so supplied would fall. In economic terms, supply and demand hold that as demand increase, the price of good usually go up. However, when the supply increases, the prices go down.
In the case of quantitative easing, the main idea is to help recover an ailing economy. But on a clear look, QE would lead to inflation (David Knox Barker, 2012) right from the beginning of implementation of the policy. Pumping more money into already ailing economy would lead to the prices of common good increasing. Inflation is typical tax imposed on the citizen by the government. Once the value of ones saving decreases, the dreams of such a person are shattered. For examples, one would no longer be able to afford school fee, homes, etc.; this may as indicated earlier, lead to more social problems that the government must reckon with.
When commodity prices such as that of oil increases due to QE policies, the prices of basic commodities would rise contributed to inflation. The dangers are that once the inflations spiral begins, it becomes a bigger challenge to stop. Therefore, it is evident that QE tends to cause some more serious problems than it solves. Inflation leads to miserable lives of the citizens as the majority would not be able to afford some of the basic needs. With struggling citizens, the nation finds itself trapped in providing basic service to its people whose economic power was destroyed by the same government.
On the same note, it is obvious for one to note that the initial idea of QE is to devalue the currency. Why would someone want to devalue the currency as if it is used locally only? Once the value of the dollar goes down, there is obvious economic ramification. A weaker dollar would hurt the exporters of goods and services from the country. Such may lead to lower profits. The danger here is that some of the export companies may be compromised to the extent of cutting down their business an idea that any ailing economy would never want to happen. In addition, the dollar is regarded as one of the major standard currencies in the world. Once the value of the dollar decreases, the status of it in the world might be put at risk.
When the banks are given more money by the governments than before, the risk-taking culture of the banks change from average to taking above average risks. The banks begin to take more risker decision some of which are economically not viable. Taking more risks during an economic crisis is unreasonable, and the result may lead to more crises in the country. In this case, the focus of the economist and the government changes from the main cause of the problems to a blanket quick solution. For example, once the government use QE, the focus on reducing deficits in the economy is ignored leading to an increased public debt.
The sugar-coated QE policy is therefore, ill-informed and unnecessary to say the least. It is time-wasting for the government to buy more time instead of focusing on the core issues facing its economy. QE slows the self-sustaining abilities of the government to recover (Paolo Raimondi, 2013). In fact, the QE tends to favor the rich who use it as an avenue to mint more money at the expense of the common citizen. The policy is crafted and implemented by some politician, and leaders whose main aim is to draw full benefits from it while postponing the actual problems facing the economy.
QE also affects interest rates. Low interest rate can only be good if their origin is from a higher base. Bringing down interest rate with the hope that they shall trigger economic growth gives way to more debts accumulating. In addition, QE does not only affect the local economy, but also affects the global economy. With the increased global economy, QE as a policy would destabilize the global financial stability. The fed does not help by introducing billions of dollars in to global economic system. Economic bubbles arise due to some insensitive policies like QE and hence, the danger is increased when more dollars are introduced in the economy as currency speculations takes centre stage.
In conclusion, it is evident that there are many negative effects of QE to the economy than there could be positives. It is therefore, not one of the best ways to help trigger economic growth during crisis. I believe that the government and the policy makers can use other viable methods of economic recovery other than QE.
Paolo Raimondi. Global Economy Endangered by “Quantitative Easing”: Towards a New Financial Derivatives Bubble? Global Research. December 13, 2013 Accessed on February 18, 2015 from <http://www.globalresearch.ca/global-economy-endangered-by- quantitative-easing-towards-a-new-financial-derivatives-bubble/5361439>.
David Knox Barker. The Fed's Inflation Target; QE3, QE4, QE5, etc. are in the Queue. 2012. Market Oracle. Accessed on February 18, 2015 from <http://www.marketoracle.co.uk/Article32867.html >