Interview: Side effects of Fed's unlimited quantitative easing should not be undervalued -- economist
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E-mail Xinhua, May 17, 2020
SINGAPORE, May 17 (Xinhua) -- The U.S. bailout could be a jackpot for a short term, but it has underlying side effects and could pose future debt and market risks to other countries, a leading economics expert has recently said.
The U.S. Federal Reserve announced in late March that it was racing to rescue the U.S. economy amid COVID-19 pandemic through an unlimited quantitative easing program, taking the Fed's monetary policy tools to the extreme as some observe.
Gu Qingyang, associate professor of the Lee Kuan Yew School of Public Policy of the National University of Singapore, warned the possible side effects brought by the unlimited easing policy in an interview with Xinhua on Thursday.
As quantitative easing lowers long-term interest rates, a low-cost financing environment can encourage blind optimism and excessive speculative behaviour, which will lead to rapid expansion of debt and add to the market risks, he said.
In addition, quantitative easing can lead to excessive issue of cash and push up asset bubbles, especially in the stock market where prices are inflated.
Globally, Gu said, quantitative easing is likely to generate more debt and market risks in other countries, especially for emerging economies.
If the United States attempts to withdraw easing policies in the future, emerging markets might experience currency devaluation and a fall in the stock market, given the current influx of large amounts of capital to emerging market countries, he explained.
Moreover, although the unlimited quantitative easing may lead to a quick economic recovery in the short term, it ignores the urgency of long-term and deep-seated structural problems in the U.S. economy, the expert said.
Gu suggested that the United States should address the long-term structural problems of its economy, ranging from an aging population, inadequate welfare policies, worsening income inequality, low productivity, insufficient investment in the real economy, excessive development of the virtual economy to long-term fiscal and foreign trade deficits and so on.
After a prolonged growth after the wake of the 2008 financial crisis, he said, the U.S. economy has begun to show signs of recession since the start of this year.
In the face of a large budget deficit, stock market bubble, investment void in the real economy, and the impact of plummeting oil prices, from last year, many research institutes had already warned that the next financial crisis would occur in 2020, he added.
The COVID-19 pandemic, with a great impact in just a short period of time, could be the last straw that overwhelmed the U.S. economy, Gu said.
Gu believes that the introduction of massive fiscal and monetary stimulus packages would have been feasible in an usual crisis, but the problem is that COVID-19 pandemic is not a typical economic tragedy.
With cities under lockdown and economic activities have largely stopped, stimulus policies have done little to ease the current economic woes, which could explain why the U.S. economy has continued to deteriorate in the past weeks since stimulus policies were introduced, the scholar noted.
The main challenge for the United States should be to curb the spread of the virus, rather than focus on stimulating the economy, he said, and effectively containing the virus' spread is the best way to save the market.
Providing relief to affected families and businesses to weather the crisis is not only to help the people, Gu said, but can prepare for future recovery.
It is a strategy that the world rather than the United States only, should adopt, he added, as the economy stimulating policy will not have a significant effect until the epidemic is kept under control.
Noting that the United States is eager to reopen the economy even in a highly volatile situation, he said this move may cause a relapse of the epidemic and hinder future economic recovery.
The scholar also highlighted the significance of international cooperation amid the crisis.
During the 2008 financial crisis, he said, the Fed quickly introduced the bailout policies of quantitative easing, and the U.S. government worked closely with other countries including developing countries and major economies around the world to coordinate its monetary policy and fiscal policy.
But now, there is no drive, determination and leadership of the U.S. political elite to pursue long-term solutions, said Gu. Enditem
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