Introduction
The control of inflation and circulation of money within a nation must be handled with due diligence and care to prevent deterioration of the economy. In such dwellings, the European Central Bank (ECB) is evaluating the benefits and failures that may arise prior to the launch of quantitative easing. Quantitative easing is a strategic creation of electronic money through unconventional policies in a bid to purchase assets (Krishnamurthy & Jorgensen 2011). This strategy increases the spending of the private sector and returns the inflation to an acceptable position. This paper evaluates the use of the quantitative easing with its effects and purpose.
Goals and Intended Effects
Quantitative easing is applied when maintaining the inflation of a nation at a target and stable state. The purchase of bonds from the commercial banks and other private institutions allows increased lending which leads to improved supply of money. The presence and availability of money available to the people improve the conditions of business and boost the economic state of the nation. However, this strategy may lead to undesired outcomes when the estimation for the easing is not precise. It may happen if the money used to buy assets is excessive. It may also affect demand in cases where the lending institutions are not willing to avail money to the lenders. On the other hand, pressure of inflation associated to the QE money may rise if the central bank is not stringent to react on curbing it. Economic growth should be the determinant of the money circulating in a nation. The increment of the funds isolated for lending should be controlled through the interest rates. However, the government cannot target the direct interest rates from the managements of banks.
Instead, it controls the rates to discourage or encourage leading from the banks. Furthermore, the increased supply of money within a nation lowers the value of a nation’s currency. This aspect implies that imports are made at a higher cost whereas exports are done at a lower price since the value of the national currency has depreciated. The decrease of the rates in lending money to the private sectors and households allows money to circulate at a fast rate. Although this strategic approach is productive and reliable in the entire globe, it is unpredictable since surplus of money may drag while inflation increase. Essentially, inflation affects the value of pensions and savings since the money does not retain its worth. However, assets are not affected since they can be sold in accordance to their values. This aspect leads to increment of the income where wealth is not balanced within the economic boundaries. This unequal distribution triggers a system where distribution of wealth is unequal.
Economic Risks
There are many reasons to doubt the efficiency of quantitative easing in the euro area. Unlike the America QE strategy which reduces the cost of corporate borrowing to elevate the economic state, the credit of euro area is provided by banks instead of the markets. Technically, QE may introduce stronger bonds against foreign impacts on the economy of the euro zone. However, there are possibilities that it may uphold unmanaged spending and inflation within the nation. Furthermore, the differences in the cost of bonds between countries such as Greece and Germany are different. This aspect implies that high amounts of money are taxed from some nations depending on the bonds they need to repay. Such risky nations as Greece are subject to economic failure worse than the war-torn countries like Ukraine. Such a nation may be saved from the economic risk if it had secured bonds to cover divided from the ECB.
In addition, the purchase to large number of bonds may undermine the borrowing rates in the long-run while targeting the short-termed problems. This attribute may affect the state of economic growth and regional development with the individual nations. The easing allows extension of time while operating within a stable economic control but fails to resolve the original issues with the state of economy (Moosa 2014). In fact, the investors prefer to invest in risky but high profits earning corporations since the others provide low income. This aspect may cause problems after the economic state is restored where the borrowing is affected by the previous interest rates. When QE leads to improvement of the economy through greater extension of credit, it may introduce a subsequent flow of money released within the actual financial system. The ECB must remove money it had allocated to the bonds in order to reduce inflation and interest rates after the economic state is stable and growing smoothly. It implies that the printed money has to be removed from the economic system which causes a downward pressure depending on the amount of money incorporated into the cycle by ECB (Martin & Milas 2013). Therefore, the limitation of QE is primary to the central bank and the economic state since it may change the value of money instantaneously, which is hard to control. The problem that may arise from such easing would cause a more brutal condition on selling and buying of commodities and currency between nations. Counting on the fact that most nation pay attentions to imports and exports to control their economy, they may raise bolder economic stagflation than the initial one. Generally, the use of QE when solving issue involving the economy can implement solution or worsen the problems. A country that practices QE loses the value of its currency through a depreciation process and discourages domestic investors from investing in the subject nation. In essence, the loss of currency value encourages people to engage in foreign trade which draws money from the economic boundaries. It is a risky venture for a country to undertake often.
Recommendations
Such risky ventures to pursue at the stake of the national well-being should be limited as they can defragment a nation to a state that cannot be repaired within a short period. It should be the last resort of a nation’s management and government resolutions when all other strategies are inapplicable or ineffective. The government may invest heavily on issues leading to exportation of products and commodities, which bring new money to the nation. For instance, a nation may invest in the construction of vehicle that can be exported to other nations to facilitate economic improvement. Regulating the money leaving the nation in accordance to the amount getting in is fundamental. Essentially, a nation ought to receive more foreign income that it gives away. This aspect is directed towards facilitating the improvement of the economy where the country becomes richer in respect to the foreign income. Furthermore, it also covers the money leaving the nation without accountability within the economy. Such incidences happen when money is sent to other nations through illegal means or when commodities are imported to the nation through unlawful ways.
For ECB to solve the issue on stagflation within its economic boundaries, it must pay attention to other strategies that may raise the economic state through such aspect involving exportation and importation. Since the nation is already in a high inflation state, it would be too risky to try a strategy that can lead to further depreciation of the currency (Villiers 2013). Such a condition may make the government bankrupt if the interest rates it initiated increase in respect to the willingness of borrowing and holding of cash. If the cash is not held by the banking institutions, investors may be unwilling to make investments within the nation.
Conclusion
Quantitative Easing should be applied by the central bank when other strategies of controlling stagflations have failed. This aspect is attributed to the possible effects and resultant issues that may arise prior to improper estimations. Essentially, the government should evaluate whether it has allocated sufficient considerations to the delivery of services and products that provide foreign income. Furthermore, it must control the economy by implementing strict regulatory policies that discourage illegal importations. When these techniques among others fail to stabilize the economy, QE is applied through strict precaution to avoid other issues of stagflation. In this respect, the results may be a stable economy with back up measures to retain its state. This attribute implies that methods of retaining foreign income and reducing the amount of money leaving the nation are used. However, it remains factual that the outcomes of QE are not guaranteed since they work on assumptions and speculations made by the central bank in conjunction with the government.
References
Krishnamurthy, A & Jorgensen, A 2011, The effects of quantitative easing on interest rates channels and implications for policy, National Bureau of Economic Research, Cambridge, Mass.
Martin, C & Milas, C 2013, ‘Quantitative easing: A sceptical survey’, Oxford Review of Economic Policy, vol. 13, no. 67, pp. 750-764.
Moosa, I 2014, Quantitative easing as a highway to hyperinflation, World Scientific Pub, Singapore.
Villiers, J 2013, ‘Quantitative Easing: Entrance and Exit Strategies’, CFA Digest, vol. 6, no. 9, pp. 28-30.