What is Quantitative Easing?

Quantitative easing mainly refers to the intervention of the central bank after the implementation of the zero interest rate or near zero interest rate policy by purchasing medium and long-term bonds such as government bonds, increasing the base money supply, and injecting a large amount of liquid funds into the market to encourage spending and borrowing. Simplified terrain is the indirect printing of banknotes.

Quantitative easing

Taking the quantitative easing implemented by the Federal Reserve as an example, its policy implementation can be roughly divided into four stages

Zero interest rate policy

The starting point for quantitative easing is often a sharp drop in interest rates. When interest rate instruments fail, the central bank will consider regulating the economy through quantitative easing. Since August 2007, the Federal Reserve has cut interest rates 10 times in a row, and the overnight lending rate has dropped from 5.25% to 0% to 0.25%.

Supplement liquidity

From the outbreak of the financial crisis in 2007 to the collapse of Lehman Brothers in 2008, the Fed saved the market as the "last lender". Acquire some non-performing assets of some companies and launch a series of credit instruments to prevent excessively severe liquidity shortages in domestic and foreign financial markets and financial institutions. At this stage, the Fed will expand the target of replenishing liquidity (in fact, injecting money) from traditional commercial banks to non-bank financial institutions.

Active release of liquidity

From 2008 to 2009, the Fed decided to buy 300 billion U.S. dollars in long-term Treasury bonds and acquire a large number of mortgage-backed securities issued by Fannie Mae and Freddie Mac. At this stage, the Fed began to directly intervene in the market and directly invested in supporting troubled companies; it directly acted as an intermediary and directly released liquidity to the market.

Guide the market's long-term interest rates down

In 2009, financial institutions in the United States gradually stabilized, and the Federal Reserve gradually purchased U.S. Treasury bonds through open market operations. Attempts to guide the market through this operation to lower long-term interest rates and reduce the interest burden on debtors. At this stage, the Fed is gradually returning from behind the scenes to backstage, providing funds to the society's economy through quantitative easing. ^[1]

Quantitative easing is a relatively young term in economics. It was first proposed by the Bank of Japan in 2001. Between 2001 and 2006, in response to the continued decline of the domestic economy and investment decline, the Bank of Japan

Contents of QE1

On November 25, 2008, the Fed announced for the first time that it would purchase agency bonds and MBS, marking the beginning of the first round of quantitative easing. On April 28, 2010, the Fed's first round of quantitative easing policy officially ended. QE1 will purchase direct real estate-related debts of Fannie Mae, Freddie Mac, and the Federal Housing Loan Bank for government-backed enterprises (GSEs). It will also purchase mortgages guaranteed by two houses, the Federal Government Mortgage Association (Ginnie Mae) Loan Supported Securities (MBS). On March 18, 2009, the purchase of institutional mortgage-backed securities increased to a maximum of US $ 1.25 trillion, and the purchase of institutional bonds increased to a maximum of US $ 200 billion. In addition, to promote the improvement of the state of the private credit market, the Fed also decided to purchase up to 300 billion US dollars of longer-term Treasury securities in the next six months. The Fed purchased a total of $ 1.725 trillion in assets during the implementation of the first round of quantitative easing.

The main body of QE1 is to purchase problematic financial assets guaranteed by the state, rebuild the credit of financial institutions, and inject liquidity into the credit market, with the intention of stabilizing the credit market. It is worth noting that the Fed's purpose is only to "stabilize" the market, not to "stimulate" the economy, which is very different from the quantitative easing of the People's Bank of China. Obviously, the Fed is no different from exercising the administrative functions. The Fed's quantitative and cost controls are in place. What is particularly amazing is that the Fed has maintained a dynamic balance between the total amount of the US dollar currency and the total amount of its corresponding commodities.

Contents of QE2

The US Federal Reserve announced on November 4, 2010 that it has launched the second round of quantitative easing plans, and plans to further acquire US $ 600 billion of longer-term US Treasury bonds by the second quarter of 2011. The QE2 easing program ended in June 2011, and only US Treasuries were purchased. The connotation of QE2 is U.S. Treasury bonds. In fact, it is to solve the US government's fiscal crisis by increasing the base currency. At the same time, the Fed then "sells" national debt to other countries, cashing it back into US dollar cash, increasing the size of its reserves (the reserves have increased significantly), and preparing ammunition to resolve future financial crises.

In essence, QE2 is very different from QE1. Its main purpose is not to provide liquidity, but to solve problems for the government. The Fed is not easy! It's all about financial institutions; it's all about the US government. Ingeniously, the Fed has indirectly expanded the reserve scale while resolving the concerns of the government. What needs to be alert is that most of the US Treasury bonds purchased by the Fed are absorbed by the Chinese government. Instead, the Fed is expanding its reserves.

Contents of QE3

In the early morning of September 14, 2012, Beijing time, the Federal Reserve's Federal Open Market Committee (FOMC) announced that after the two-day meeting, the maintenance period of 0-0.25% ultra-low interest rates will be extended to mid-2015, from 15 Japan has launched a further quantitative easing policy (QE3), purchasing $ 40 billion of mortgage-backed securities (MBS) per month, and maintaining its existing twisted operations (OT). The content is that before the end of June 2012, US $ 400 billion of US Treasury bonds were purchased, and the remaining maturity time was between 6 and 30 years. At the same time, the same amount of US Treasury bonds were sold, and the remaining maturity time was 3 years or less. This plan was subsequently extended to the end of June this year. The Federal Reserve Open Market Committee (FOMC) ordered the Federal Reserve Bank of New York's open market operations desk to purchase more institutional mortgage-backed securities (MBS) for $ 40 billion per month on September 13, 2012. The FOMC also instructed the open market operation desk to continue to implement the plan announced in June by the end of the year, that is, to extend the maturity period of the securities held, and continue to use the funds withdrawn from the maturity securities to continue to be used by the purchasing agency MBS. The FOMC emphasized that these operations will increase the long-term securities holdings held by the Commission by US $ 85 billion per month by the end of the year, which will put downward pressure on long-term interest rates, support the mortgage market, and help the overall financial market environment. More relaxed.

Contents of QE4

In the early morning of December 13, 2012, the Federal Reserve announced the launch of the fourth round of quantitative easing QE4, which purchases 45 billion US dollars of Treasury bonds per month, instead of distorting operations. In addition to QE3's easing quota of 40 billion US dollars per month, the Federal Reserve's monthly asset purchases reached $ 85 billion. In addition to the strong medicine for quantitative easing, the Fed has maintained a zero interest rate policy, keeping interest rates at a very low level of 0 to 0.25%. ^[2]

United States of America 2008

In September 2008, the Fed began expanding its balance sheet. The Fed has adopted two objectives for quantitative easing. One is to buy securities in the market in order to "activate" the banking system; the other is to take part of the unwillingness of the private sector.

Zhang Bin, a researcher at the Institute of World Economics and Politics of the Chinese Academy of Social Sciences, said that the policy measures to deal with the new round of global quantitative easing policies include the following aspects: First, actively hedge against the impact of short-term capital flows on the domestic base money supply and maintain domestic Monetary policy is stable. Quantitative easing policies in developed countries will stimulate the rise in commodity prices, and the extent to which the increase in imported commodity prices is passed on to the country, ultimately depends on domestic monetary conditions. Maintaining domestic monetary policy stability is the core guarantee for preventing a new round of price increases. Considering that China's economic policy has a decisive influence on international commodity prices, maintaining a stable domestic monetary policy is also conducive to preventing further increases in the prices of imported commodities. Secondly, the use of tax reductions and easing of market access to reduce the negative impact of rising prices of imported commodities on the supply side of China's economy. Imported commodity prices will further worsen the living conditions of domestic enterprises, and it is necessary to reduce the burden on enterprises. The best way is to take into account the long-term and short-term benefits of tax cuts and relax market access. Third, increase the flexibility of the RMB exchange rate. If faced with a new round of short-term capital inflow shocks, increasing the flexibility of the RMB exchange rate will have two positive effects. One is to weaken the continued inflow of speculative capital through the fluctuation of the exchange rate itself; Finally, I call for the reform of the international monetary system, especially for reserve currency issuers to consider the spillover effects of their monetary policies and strengthen monetary discipline.

Of course, in order to completely change China's monetary policy under the control of people, the most fundamental thing is to implement a new industrialization strategy and further optimize the industrial structure and product structure. Governments at all levels should pay particular attention to the development of import substitution industries, such as alternative energy and machinery products, expand imports of commodities such as oil, and establish energy reserve mechanisms as soon as possible. At the same time, the most important thing is to develop domestic related industries, so as to solve the risk of economic imbalance and reduce the pressure of imported inflation. In particular, it is necessary to increase agricultural investment, increase subsidies for agricultural production, work hard to increase the production of basic necessities such as grains, oils, meats and vegetables, strengthen market supervision, and alleviate the upward pressure on food prices. In addition, China should promote China-EU economic cooperation, while strengthening coordination with India, Brazil, and Russia, and demand that the United States and Japan control the rate of depreciation of the US dollar. Although countries such as India, Brazil, and Russia are not the main targets of the United States, they have also been hit by the "four-time quantitative easing" of the United States, which is under great pressure from inflation and hot money. If these countries can work together, on the one hand, it can ease the pressure on China, on the other hand, it can contain the devaluation policies promoted by the United States and Japan, and prevent the currency war from worsening. ^[8]