Question 1 : What is the effect of QE and QE2 to the whole world ?
QE (Quantitative Easing) tends to lower the "value" of the dollar since it tends to induce
inflationary forces - more money chasing the same amount of goods. The hope is that the overall
"economic affect" of the process may induce an increase in the demand for (and availability of)
goods and services so that the inflationary impact will be minimized. The money supply is
directly related to aggregate demand via money velocity.
So the benefit of increasing the supply of money, like what happens during QE, is an
expansionary effect on AD which counters recession. Also, more money tends to flow into
equity financing instead of bonds, leading to an increase in stock prices which often has a
positive effect on consumer confidence (people see that the down is rising on the news, they go
out and buy more).
The devaluation of the dollar increases international demand for US goods because
foreign currency will buy more dollars, making them effectively cheaper for foreigners to buy.
Some people also argue that QE is inappropriate for addressing anything but liquidity problems
And for some reason most people hear the word inflation and drop a load in their pants because
of the 70s and whatnot, so if word starts going around that the increased ability of banks to lend
will cause hyperinflation, it could undermine business confidence.
Ideally, QE would work best in a relatively closed economy. The truth of the matter is, however,
that we live in a globalized world. A substantial proportion of the liquidity thus generated, instead of
powering domestic investment and consumption, end up leaking out of the US economy, flushing the rest
of the world already awash with US dollars with even more liquidity.
This is due largely to the glaring and still growing returns gap between the US and the emerging
economies, arising from the striking contrast of deep-seated structural malaise and cyclical weakness for
the former versus the strength of both the latter's real economy performance and anticipated appreciation
of their currencies. This has changed the correlation between monetary policy and aggregate output/price
levels. If the domestic impact of monetary policy moves in the US used to be modest but still positive, it
is today much more nebulous. Things do not look good on the twin counts of current economic activities,
with GDP growth and unemployment mitigation as major indices, and of future potentials using fixed
asset investment as a proxy.
To be effective, short-term counter-cyclical monetary tools such as QE have to be combined with
policy measures targeting the long-term structural problems in the US economy. Otherwise, it will simply
fall short in generating adequate investment opportunities that can yield attractive returns for the money
to stay in the system other than by way of creating bubbles. In fact, if investor inflationary expectation is
firmly established, there is little doubt in which one direction investment will flow. In that case, the US