Well, yes its time to cut the austerity. Central Banks all over the world are envisaging means to break the shackles of low or stagnant demand and what better tool to use when the usual monetary policy measures fail? The answer lies in Quantitative Easing. This basically is a program wherein the Central Banks delve in asset purchases in order to inject liquidity in to the banking system hoping that it would lower borrowing costs and spur demand in the long run.
So the fever originated with Eurozone around 2 weeks back when the ECB announced that it would actually be good to start seeing some money moving around the economy(‘s). Here began asset purchases that actually started off on a good note, seeing a drop in borrowing costs and indices rising across the world. Signalling, maybe? But a short run move like this is bound to impact in the long run. Cause no one can really point out when the inflationary phase begins to kick in. Which is a concern as the ECB didn’t really put an end date to this. Essentially to counter this they have created a deposit scheme wherein banks would be able some interest too. Although this looks like a foolproof plan, but heaven’s forbid if a default falls through we know one good economy which would not be so happy – Germany.
Now what started off in Eurozone, gave a slight nudge to the american counterparts to wake up and smell the coffee. In light of low demand and flattening consumer sentiment, the FED decided to roll in (much awaited) QE3. I believe this was being rattled for in the pipeline quite some time. Yes, there may have been a Chinese, “Eureka! Here comes the Sun” moment when this was announced (Although there is strife speculation China may opt for monetary easing too by lowering reserve ratios). So more liquidity in the american economy does sound good and it actually lead to rising indices again. However it doesn’t really seem to be hitting the housing market as of yet. With banks playing clever in keeping borrowing costs still high, to soak in any sudden surges in demand this ensures that there is no lowering of the housing prices as well. A vicious cycle, you see. Not for long though, as banks will soon begin to lower interest rates. So happy days would be here again, albeit in a little while. Again just like the Eurozone, the FED has not kept any end date to this program. Which means, this is pretty much in place until we see a good build up of the economic prospects. Say inflation and unemployment.I wonder if there would be any more policy upheavals. But this should fix some problems, in the short run.
Closer home, today Japan already reeling under a heavy national debt chose to go ahead with nearly double the asset purchases. Objective being the same, to infuse economic mobility in an otherwise deadbeat economy. Growing uncertainties in the economic environment ended up pressurizing the Yen which moved higher to 79/Dollar. This is bound to hurt the export driven economy. However losses should stabilize soon.
Given the bleak setup with respect to global economic confidence its hard to say which economy (rather part of the world) would see a rebound soon. But these moves are surely going to help build back some of the demand and see some parameters correct themselves. However will these be sustainable changes? Only time would tell.