Is Quantitative Easing Working? Appears Such!
Unconventional monetary measures, which primarily reckon quantitative easing, have drawn a lot of flak from economists and market experts across the world, for long. The discussion forums, be in any part of the globe, sharply debate the utility of easy money printing. There is no dearth of economists who question such kind of deleveraging from various Central Banks, led by the US Fed.
Their disceptation may have held weight just prior to the Lehman Crisis, nothing appears to be working for them present-day. Neither inflation spiral is a significant concern, nor market volatility is a regular fear.
Does it mean quantitative easing or zero-rate-policy is doctor’s prescription for the world economy presently? Well, the answer shouldn’t be an astronomical yes surely; but easy money has emphatically helped many countries to control their burgeoning fiscal deficits.
Germany is an ideal case study. The European Union member is observing 0 percent interest rates at the moment, from four percent in 2008. The bonds are trading at around 0.1 percent.
Has the rate cut helped? Yes, since savings in interest payouts helped Germany report the first fiscal surplus last year, after 1969. As a result, Debt/GDP for Germany reduced from around 75 percent to 72 percent in 2015.
The story of the US is no contrary. The lowering of borrowing costs have helped it to generate higher government revenues. It’s fiscal deficit was recorded $439 billion last year, which was at 2.5 percent of GDP, and the lowest since 2007.
And, now talking about Spain, easy monetary policy observed by the European Central Bank (ECB) has assisted it to get bailed out of the economic mess in a significant way. The country reported fiscal deficit of around 5 percent in 2015, and projects it to be 3.6 percent for the present year. The 10 year borrowing costs today are around 1.15 percent. Had the rates still been 7.5 percent, as in July 2012, the scenario is worth easy imagination.
Most European Union member nations have debt/GDP ratio in-between 90 to 100 percent. 1 percent additional cost of borrowing adds same percentage to the overall debt over a span of one year.
However, claiming that mere adoption of zero-rate-policy assisted these countries in managing recovery from the economic disorderliness would be mostly untrue. Unless, structural reforms are undertaken more practically, not even quantitative easing can help.
Nevertheless, zero-rate-policy appears to be working right now!