Friday, March 27, 2015

Central Bankers quantitative easing programs – a hint of financial or currency wars?

The Bank of Japan (BOJ) launched its quantitative easing program two years ago with the intention of recovering from the global financial crisis which rocked it along with other major economies in 2007-08.

America also implemented a quantitative easing program for the same objective. It has made the dollar stronger than other major currencies and it is still going strong. Falling oil prices and the favorable unemployment ratio for 2015 are considered one of the best points of its economy this year.

There are no war bonds in the market!
Credit: Wikimedia Commons
The Eurozone under the European Central Bank kicked off its quantitative easing program earlier this month. This week, there were signs that earlier than expected, production in European factories is at a four-year high, the euro is appreciating and investing in European debt instruments is very attractive.

Is it likely that the Central Bankers in the world’s major economies are at the center of currency wars? Not likely. If you listen to the rhetoric from the BOJ, the Feds and ECB, they are concentrating on a recovery from the global crisis of circa 2008. Quantitative easing is not a sure and tested response for a recovery. Quantitative easing is a response that is accepted when other fundamental monetary policy responses have failed.

If you take a look at the balance sheet of Central Bankers, you will notice that government bonds are one of its major assets. Rather than sell more bonds and increase interest rates, when monetary discipline involves sticking to a target inflation figure (i.e 2%), by buying corporate bonds and bank financial instruments, they are drawing down rates across board and increasing their exposure to foreign investment.

By the way, have you noticed that none of the central banks have the idea of overseas quantitative easing? They think local, only of the banks and the financial situation within their jurisdiction, not with respect to any other.

So, as some writers have propounded on the Internet, it is unlikely that a currency war is going on. The euro’s recent appreciation, this week, is favorable to the Feds. Else, why did the Fed not hike up interest rates as expected in order to stem the expected movement of investors to Europe?

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