Sunday, September 30, 2012

Unprecedented Quantitative Easing Policy

While Asian people have still been fighting against inflationary impacts from the previous two quantitative easing programs, the third round of quantitative easing policy (QE3) has already come.

The major goal of quantitative easing policy, by definition, is to increase the quantity of money supply to a level that is far exceeding what the market normally needs. It is intended to stimulate the U.S. economic recovery as conventional monetary policy is now not effective and is no longer feasible to further reduce interest rates (U.S. federal fund target rates are already close to zero).

It is well-known that QE1 (first round of quantitative easing policy) had printed an extraordinary amount of money worth USD$1700 billion since the 2008 financial crisis. On November 3, 2010, U.S. Federal Reserve continued with its QE2 (second round of quantitative easing policy) to print an additional amount of USD$600 billion to buy agency debts or agency MBS (Mortgage-Backed Securities) assets. At that time, Mr China team immediately issued an inflationary-risk warning on November 2010. Source: First Inflation Warning. According to the Federal Open Market Committee (FOMC) minutes reported later, an additional amount of USD 300 billion in government bonds had already been purchased by re-investing part of principals from QE1 holdings. As a result, total amount of QE2 package should be worth USD$900 billion dollars (USD$300 billion + USD$600 billion dollars).

It seems the U.S. Federal Reserve is now just addicted to printing money. On September 13, 2012, Ben Bernanke (current chairman of U.S. Federal Reserve) has just announced to launch a new round of quantitative easing policy (QE3) that will buy MBS-related (Mortgage-Backed Securities) assets worth USD$40 billion each month until U.S. unemployment condition becomes acceptable. U.S. Federal Reserve, at the same time, also announced to extend OT2 (Operation Twist that sells short-term government bonds as well as buys longer-term government bonds) until end-2012 and to keep interest rates at current exceptionally-low level at least until mid-2015. It is estimated that the above actions, together with re-investing principals from current Fed's maturing housing debt holdings, will increase its total purchase size of longer-term securities by approximately USD$85 billion per month until end-2012.

That said, by definition, U.S. Federal Reserve theoretically can buy unlimited amount of MBS-related assets (Mortgage-Backed Securities) unless unemployment rate can be greatly improved in the U.S. There is currently no timeline as of when this QE3 will come to an end.

This QE3 quantitative easing program is unprecedented and highly aggressive. It is perhaps the first time in modern history that monetary policy should be linked directly to employment market. There is also no maximum spending amount limit or any time limit. Global stock markets have already given very positive responses to this unprecedented shift in FOMC (Federal Open Market Committee) quantitative easing policy.

With other quantitative or credit easing programs already implemented by the Bank of Japan (BoJ) in Japan, Bank of England (BoE) in U.K. and European Central Bank (ECB) in Eurozone etc, the investment market is even speculating now if People's Bank of China (PBoC) will also introduce similar easing policy to stimulate the weaken Chinese economy.

<strong>Our 2nd Inflation Warning</strong>

No matter this QE3 quantitative easing policy will be effective or not, no doubt it is now already launched and the current exceptionally-low interest-rate environment will not be changed until mid-2015.

Due to the rising risks of asset bubble formation, we are afraid that now we have to issue our second inflation warning here in this website for China. That means we anticipate that inflationary expectation will arise and the actual inflation pressure will come back soon in China.

<strong>Mr China Anniversary</strong>

Today, September 30, is the birthday of this website. Let's celebrate together! Mr China is now 2 years young!

Another thing for celebration is that our website is now becoming more and more popular. Nevertheless, we will continue to stick with our original ideas of creating this site 2 years ago. Source: Our First Big Day.

The below is the summary list of our 10 Most-Popular Topics for the year:

1. 2011 GDP;
2. Google AdSense;
3. iBond;
4. China LGFV;
5. iBond;
6. Hui Xian;
7. 2011 Hang Seng Index;
8. 2012 GDP;
9. A50;
10. RMB Business War.

As we promised in our previous anniversary celebration (Source: First Anniversary Celebration), we would put more focus on topics about GDP, stock market analysis or bond analysis etc. We believe we have done what we promised successfully and statistical result in the timeline also indicates that our readers do love these topics.

Now with such a great result we must say we thank so much for all supports from our readers. We will certainly continue to do our best to deliver the valuable stock market or financial-related information on this site, just like this one about unprecedented quantitative easing policy that can change global market sentiment dramatically!


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