ST Forum Replies to "Printing money to push spending"

Dec 1, 2010

QE and the liquidity trap

I REFER to the articles and reports on quantitative easing (QE), including the piece by Professor Linda Lim ("Printing money to push spending"; Nov 23).

So far, most of these reports have failed to accurately explain what QE is and have served to perpetuate the wrong perception of QE as the actual printing of money.

What the Federal Reserve of the United States does by buying treasuries is to increase bank reserves, in the hope the banks will be able to lend more. But if the banks are not in a position to lend, or people and corporates are unwilling to borrow because they are already over-leveraged, or see no prospect of making a positive return on incurring more debt, then QE will not work.

This is a situation economists refer to as "liquidity trap", and was what caused the Great Depression.

Richard Lim

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Dec 4, 2010

QE is about printing more money

I REFER to Mr Richard Lim's letter on Wednesday ("QE and the liquidity trap") where he said that some reports have been inaccurate in describing quantitative easing (QE) as printing more money.

The fact remains that QE is indeed about printing more money. The money supply in the United States is created by the purchase of treasury bonds, which in effect is the US government and Federal Reserve creating money out of debt. That is how money today is created.

It is misleading to claim that money thus created is not tantamount to printing it, for what is the money resulting from QE if not for use and able to be withdrawn as printed notes eventually.

All money we use today is fiat currency, which is essentially debt currency or money that comes from a government owing a central bank money through bond purchases.

Previously, we had hard currency that was backed primarily by gold. Cash backed by precious metals is real money and is not debt currency. A careful look at what the US dollar is worth will reveal that it is measured against the value of gold.

One of the principal causes for the Great Depression was the start of a movement away from the gold standard in the US with the establishment of the Federal Reserve. The US Fed is a private organisation and not one under the control of the US government, and is thereby accountable to the people. Its governors are essentially bankers from the US banking industry.

One of the reasons China has a band within which its currency operates, much to the chagrin of the US, is because it gives it a stability that is reminiscent of hard currency. It must also be remembered that it was loose monetary policies that led to the speculation and manipulation that brought on the Asian financial crisis of the mid-1990s.

We should be wary of the US Fed's QE policies, which are in effect an attempt to pump near zero-interest rate money into an economy, which in turn is a sign that the actual value of the US dollar is suspect.

Sanjay Perera