Research Problem
Quantitative Easing is the latest approach taken by some central banks of developed countries as a means of alleviating the impacts of an economic downturn. Ideally, the goal of quantitative easing is to ensure that there is money circulating in the economy, which in turn should lead to a positive economic growth. A country’s central bank takes this measure whenever the interest rates of the country’s commercial banks are almost at zero percent. Ideally, quantitative easing aims are to lend more money to commercial banks, businesses and individuals to enhance their spending. The main targets for this lending are at commercial banks (Kemp, 2008) since these are main vehicles through which money circulates in any economy. In his article on this subject, in relation to its application to the American economic downturn of 2008, Kemp (2008) reveals that the first country to have used quantitative easing was Japan.
The controversy that surrounds the use of quantitative easing is what I focused on for this analysis. The main reason behind the selection of this topic is that it presents an issue that has not found consensus amongst its users. The users here are the economists. To assess the general view from this group would require the analysis of each of their views, which is time consuming. Content analysis can help us infer the general views by sampling the views of some economists. The next step is the coding of the messages from the sample of economists. At this point, the researcher draws inferences from the latent and explicit meanings and intentions behind each economist’s views.
How the analysis was carried out
A single article from a reputable newspaper was selected as a sample. The criterion for the selection of this article was that the author of the article should have the relevant professional skills. Kemp’s profile fits in with this criterion (2008). He is a financial columnist in Reuters and has work experience in the financial industry. One of the ways of applying content analysis in this analysis was by carrying out quantitative analysis on an article by him. This mainly involved getting a word count of the main keyword. The main keyword chosen was “quantitative easing”. The keyword selected served as the main theme for the analysis. The keyword’s use was in extracting both the implied and explicit meanings, or the main thrust of the article selected. The relationships between the keyword and text from his article were noted to decipher the meaning behind the message.
John Kemp’s views on the fed’s use of quantitative easing
John Kemp is a financial columnist at Reuters. With his professional experience in the financial industry, he can provide an informed analysis on the area of quantitative easing. The article under review presents his views on the subject. The context of his article is within the time when the American economy was in economic recession. This was in the years of 2008 to 2009. The Federal Reserve chose to use quantitative easing as a means of increasing consumer spending. The Fed’s goal was to reverse the falling economic growth rate and reduce the time span of the economic downturn (Kemp, 2008).
To increase the liquidity levels within the economy, the Fed increasingly used its credit facilities to increase lending to American commercial banks (Kemp, 2008). The amount of money offered on credit terms to the banks increased to about 2.918 trillion dollars by August 27 of that year (Kemp, 2008). Through increased term auction credits and other credit facilities, the credit balance increased further by 114 billion dollars by November (Kemp, 2008). Kemp reveals that the Fed’s assets consisted of the deposits made by the Treasury into the special financial accounts that it operated in the bank.
These deposits were the main contributions to the growth of the Fed’s asset base (Kemp, 2008). He also reveals that the main reason why the effects of the changes to the Fed’s balance sheet had little effect on the economy was due to the Treasury’s dependence on the public borrowing to carry out its duties (Kemp, 2008). However, between October and early November, the money from Treasury’s deposits and the Fed’s cash reserves began to fall. For example, by October 29, the money in circulation was at 1.517 trillion dollars. By November 12, it had fallen to 1.467 trillion dollars (Kemp, 2008). The reason behind this was that commercial banks had increased volumes of deposits. This, in turn, led the banks to deposit more of their reserves with the Fed (Kemp, 2008). Kemp paints a scenario where the commercial banks, with high cash reserves in their possession, were now lending back to the central bank (2008). In short, the liquidity that the Fed was pumping into the economy had surpassed the demands of liquidity from the commercial banks (Kemp, 2008).
Kemp’s article shows clearly how the application of the quantitative easing measure in relation to the economic state of a country. His article is a classic example of its implementation in the real world. Although the article does not mention the word “quantitative easing” explicitly, it should be noted that its theme revolves entirely around this subject. A quantitative content analysis of the article, where by the researcher performs a word count of the keyword chosen in it, is inapplicable. Therefore, a qualitative content analysis is the best option.
Kemp, in this article, tries to salvage the importance of quantitative easing as one important monetary policy. However, we can see that he has also shown one of its weaknesses. The weakness of this policy lies in the mismatch between the central bank’s actions of increasing liquidity in the economy and the actual demand for more cash from the banks. The influence of his professional training clearly shows him that there is a problem in quantitative easing. With the banks lending back to the central bank, then that means that, the demand for loans from businesses and individuals is low. A deduction for this phenomenon can be that business people and individuals are facing uncertainties. Hence, the demand for credit from this group of people will below. One of the implications of the Federal Reserve’s action, as stated by Kemp, would lead to an increase in inflation. Interestingly, Kemp adds a little emphasis to this by signifying that the Fed failed in openly reporting it. Inflation affects the spending power of consumers. Increasing inflation leads to increased market prices, which inevitably leads to low demand. This has the net effect of slowing down the economy. These traces of information from the article reveal the author’s somewhat negative biases towards implementation of quantitative easing to solve an economic downturn.
Reference
Kemp, J., 2008. Quantitative Easing has begun, Reuters. Web.