Reasons behind the Quantitative Easing - Research Paper Example

?Reasons behind the quantitative easing The increase of basic food prices has severe impacts on the vast population worldwide. Shortages of grain dueto adverse weather, increasing meat consumption in China and India, conversion of corn to ethanol in the US are responsible for hiking the food price. Economic and finance ministers from the G20 nations are conducted a meeting in Argentina to discuss the increasing volatility among food and commodity prices. Food prices are no longer depended on the traditional economic motion of supply and demand in a market. Instead of that food prices now depend on global demand and supply. Dependence on global market leads to speculation which makes food price volatile. Volatility is a characteristic of the market but irresponsible monitory policies generate the market more volatile and drive prices up. Generally weather, speculation and a number of other faults would have been considered as responsible but here monetary policy and quantitative easing (QE) or printing new money are the main reasons. This policy can be done by the central bank only because everyone accepts this money as a payment. People use this money to buy government and corporate bonds, equity and houses. In addition central bank sometimes lowers the interest rate on new bonds and loans and this will make additional pressure on money market. It encourages greater spending. On the other hand bank can also improve their position and show their interest in money lending (Fry). Effects: There is also a negative impact. Firstly, the printing of new money raises the purchasing power of the consumer and the demand of products increase. For that people demand more money but the central bank fails to supply that amount of money. This leads to inflation in economy. Then to control the situation central bank decides to increase interest rate on both credit and deposit. For that central bank loss money on its purchase and suggest the government to impose higher tax rate on goods and services. Secondly, creating and spending money lowers the value of currency and it causes inflation or hyper inflation. This exploits the purchasing power due to instable price level. Last of all, QE demolishes the confidence of an economy. Thus we can say that QE is counterproductive for an economy and central bank cannot impose QE anyhow (The Financial Times Lexicon). According to some economist QE is not main responsible for rising of food prices. Poor people have to understand that they should maintain their food habits basis on supply of those goods in world market. If there is seen a shortage of that good people should adjust their food habit according to the situation. This can make a stable situation in the food market which directly affects the prices of foods (Lagi et al). Gradual increase of basic food prices has severe impacts on huge population across the world. There is a lack of confusion about the factors which are responsible for this situation. The main cause of price increase of food is investor speculation. In recent years it is clearly seen that the supply and demand are not consistent with the actual price dynamics. The exploitation of food prices in 2007-08 and 2010-11 were mainly happened due to the investor speculation (Lagi et al). Along with that the consumption of ethanol is another reason. The excessive consumption of ethanol in US gave a huge negative impact in the global market. It increased the price of ethanol sharply. More over these adverse results are not only seen in the commodity market but also seen in the asset market. It increased the expected returns from equities and bonds. Though some economists have claimed speculators cannot affect the food market directly. According to them food prices are set up through the market mechanism and deregulation of the price system. Price system is generally controlled by the practitioners of the market. Therefore, there is a huge chance of making disingenuous price system. They generally set the price level with respect to their profit maximization condition so that they can only receive the net profit. Ultimately the primary producers and consumers cannot get any benefit from this price system. Thus it is believed that the middle class people of the society would have been greatly affected during inflation. To make the situation under controlled the government should take some fast action. Overall QE can slow the energy prices because it is easier way to boost these prices. There will be seen a food riot worldwide according to modern economist. To mitigate this problem government should take some positive steps towards it but for that QE is not only the solution. Federal Reserve Bank first adopted QE policy to meet the money demand of the people in US. The impact of this policy has been suffered by the citizens of the nation and the world since then. In year 2011 Federal Reserve Bank implemented QE policy for two times. First policy was taken in September and the other one was taken in December. It gave a shock effect that spread over worldwide. The US government has been experienced from currency shocks and food price explosions. The global concern regarding this entire economy has to deal with this global crisis and should not give up patience until the entire economy gets back to its stable position. Along with that US government should control its money supply because international money market greatly depends on them (Purnell). Transition of demand from equities and bond to commodities improves the situation. Through this mechanism people will have no more money in their hand and it will directly affect the consumption of food and good. But this is not certain case. The demand of these commodities like gold, silver and technical commodities vary over time. Moreover Federal Reserve Bank is unable to control the USD (currency used by US government). Thus USD has mislaid its purchasing power. The adverse impact of QE policy has also been suffered by the developing countries. The currency value in these developing countries like India, Bangladesh, Pakistan, Sri Lanka have been exaggerated due to this price exploitation and inflation has been occurred during last periods. As a result food price has also increased and people have been bounded to consume less food and this will lead to the situation of large malnutrition, famine, starvation (Purnell). References Financial Times Lexicon, Quantitative Easing, July 13, 2013 from: http://lexicon.ft.com/Term?term=quantitative-easing Fry, Eric, Rising Food Price Through the scope of Quantitative Easing, Business Insider, 2011, July 13, 2013, from: http://www.businessinsider.com/rising-food-prices-through-the-scope-of-quantitative-easing-2011-2 Lagi, Marco, Bar-Yam, Yavni, Karla Z. Beterand, Yaneer Bar-Yam, The Food Crises: A Quantitative Model of food Prices Including Speculators and Ethanol Conversion, NECSI, 2013, July13, 2013, from: http://necsi.edu/research/social/foodprices.html Purnell, Jim, Quantitative Easing Causing Food Prices to SKYROCKET, The Elemental Economist, Washington post, 2011, July13, 2013 from: http://sgmmetals.com/KnowledgeCenter/LatestNews/tabid/75/entryid/18/Quantitative-Easing-Causing-Food-Prices-to-SKYROCKET.aspx Read More