I’m still basically convinced that no one really understands the impact of Quantitative Easing. Obviously, I think I have a pretty good grasp on how the policy works, and my predictions about its impacts at various points have been pretty accurate, but there are still great unknowns here. This has become increasingly clear, as we’ve seen various pundits shift their views over the years from that of “money printing” to “asset swap” to “diminishing returns.” Even Ben Bernanke has changed his rhetoric about how the program works. Just 10 years ago, even he called it “money printing.” Now he’s completely changed his tune.
Anyhow, this all came to mind while reading this post at Also Sprach on the different reactions to QE in four different countries. It’s generally believed that QE is “money printing,” and therefore currency negative, but that’s not at all how countries have responded. Not only has it not caused raging inflation anywhere, but it also hasn’t caused dramatic currency declines. As I said years ago, this remains the greatest monetary non-event. Here’s more via Also Sprach:
We could not have put this better than David Bloom and his team at HSBC:
Before the Fed and the Bank of England initially embarked on the quantitative easing programmes, the perception in the market was that QE would be unambiguously currency negative. This was based on the simple transmission mechanism that the more of a currency printed, the more the currency should depreciate. The market also believed that it would also create inflation, thereby undermining the currency’s value i.e., keeping with the Quantity Theory of Money (MV=PT). These perceptions have changed.
QE is no longer viewed in such simple terms, and there is considerable debate in the market as to what QE means for a currency. With the U.S., Japan, eurozone and U.K. all embarking on expansionary monetary programmes, we discuss with the demise of carry what we believe the impact of QE is for their respective currencies. These ideas are held by the market now but could change on a dime, or perhaps trillions upon trillions of dimes.
So what are theses ideas currently held by the market now:
U.S.: QE = USD negative: Resultant “risk on” mood takes us to higher yielding, more risky currencies. “Risk off” and the USD’s safe haven status kicks in.
Eurozone: QE = EUR positive: Non-conventional easing as lowering the probability of EUR default and disintegration, thereby boosting the EUR.
Japan: QE = mild JPY positive: JGB purchases have little JPY effect, but equity market boost encourages foreign capital inflows.
U.K. QE = GBP neutral: Little currency impact as unconventional monetary easing seen as an appropriate mirror to the ongoing tightening in fiscal policy.