2013 is coming to an end. As usual, it is always a year of mixed news, good and bad. The biggest year end finanical news is no doubt the announcement of the tapering of quantitative easing (QE) of the US.
Although the biggest fear for the whole year is that the Fed might opt for an abrupt weaning to prevent speculation and prolonged agony, fortunately and unfortunately the Fed’s QE retreat adopts a step-by-step strategy. The first step is reducing purchase scale. Specifically, the current monthly purchase scale will be reduced from $85 billion to $50-60 billion, and then drop to $30 billion, and to zero. In the mid-term, the Fed will gradually raise the interest rate. In the long term, the Fed will sell all bonds bought under the QE.
The implementation of QE has been a controversial measure all along. The emerging economies mostly felt the US has unfairly taken advantage of them. However, its exit is not less contentious than its beginning. The problem is that the money QE printed is out there and the financial structures propped up by the money are all in operation right now. Therefore, the retreat will have major impacts on the global economy and on the Chinese business communities for sure.
In general, there is impact in at least three areas according to some analyses: trade, finance and national debt and credit. In the trade aspect, the US is the biggest economy in the world. The retreat of QE signals the recovery of the US economy, which will increase its demand for goods from other countries. In November 2013, exports from China to the U.S. increased 17.7 percent year on year. Besides, the exit of QE could make the U.S. dollar stronger and in turn further increase its import. The second impact is on the finance. International capital has flowed into the emerging markets in pursuit of higher returns on stocks and real estate. The hot money is pulling out as the QE tapering, which will cause fluctuation in the capital markets of emerging economies. The third major impact is on the national debts and credits. A lot of countries buy U.S. treasury securities to park their foreign exchange reserves. The Fed’s QE policy is “printing money” to buy U.S. treasury securities. The stablization of the US treasury securities and the appreciation of US dollar will benefit the creditors of the US, which include China and Taiwan for sure.
In any event, judging from the reaction of the international markets, the gradual tapering strategy is welcome worldwide. The implementation of QE was not greeted warmly around the globe in that it was viewed as the US asked the world to share their failures and debts. But right now, since the world has been forced to take the medicine with the US, people are also worried about whether they would be withdrawn from the medicine too fast, which can cause severe withdrawal syndromes.
QE should bow out for sure. One could argue that it should not have been put in place to start with because it saves the speculators more than it does the ordinary people. A crash might have been turned into a soft landing. A gradual tapering will also decrease the withdrawal syndrome, but it also means that its side effects will linger longer. The consequences of QE, such as widened income gaps, will be here to stay for many years to come and might lead to more irreparable harm down the road.