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GE2229

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by

Abby Liu

on 7 December 2012

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Transcript of GE2229

GROUP 10 QE 3 in US Outline Costs & Worries The impact of QE3 on US &HK property market Background Information
Goal & Mechanism
Costs & Worries
Implication on global market
-Reactions to inflation
-Impact on property market Implication on global market Goals and Mechanism Of QE3 Goals of QE3
Mechanism and benefits of QE3 US Economy
and QE Why US need QE? Hot money

Exchange rate

Policies Inflation

Dilemma

Investment uncertainty

Exit Strategy Motivate the investor to invest more
Stimulate the mortgage rate by buying 40billion MBS per month
A house bubble crisis is hidden 1. Inflation hurt economy inflation increasing cost of commodities
(eg. oil, petrolium) Goals:
-To stimulate the economic growth
-reduce the unemployment rate Mechanism and benefits of QE3: -keep interest rate as low as possible
to stimulate investment and consumption - Keep low interest rate for a few years(until mid-2015) to assure the investor's investment. -Fed buy 40billion MBS a month (480 a year), equals to 18% of the monetary base,

-So that by The Quantity Theory of Money

Increase MS --> increase P and Nominal GDP Mechanism and benefits of QE3: pressure profitability of business 2. Dilemma fight inflation low interest rate Economy Recovery Start to lend out money inflation Fed sell bonds to general public interest rate increases harm investment & consumption GDP unempoloyment rate low low 3. riskier investment low interest rate --> riskier investment --> increasing economic risks and uncertainty invest in property and commodities (eg. gold) --> economic bubble 4. Exit Strategy Investors believe recent economic development depends on QE economy can't improve independently
(addict to QE) QE policy is loosened lose confidence (panic) stock price falls When and how to stop and exit?
-tighten monetary policy Housing Bubble in 2006
Subprime Mortgage Crisis Tightened money supply
Dropping property price
Overvalued mortgages
Securities liquidity drop and risk rise
Collapsed credit market
Banks have not acdequate capital
Investor unable to borrow money for investment Quantitative Easing 1 (QE1) 24th November, 2008
Sponsoring Fannie Mae and Freddie Mac
Save economy from deflation
Improve employment rate

US Federal Reserve bought Mortgage-backed securities (MBS)
Encourage financial activities by decreasing long-term rate

Did save US financial sector and economy
US dollars depreciation, hot money flows to emerging countries Quantitative Easing 2 (QE2) 3rd November, 2010
US weak economy still cannot be recovered
Economy showed no significant growth
US government cannot increase expenditure

From October 2010 to second quarter of 2011, buying 600 billion of Treasury securities
Gradual, long-term policy

Prevent economy step into recession again
Hot money flows into emerging countries' market Mechanism and benefits of QE3: -As Ms increases, the value of USD depreciates --> Export price in terms of other currencies falls

-->Export volume increases - Total export values in terms of USD increases --> Net Export rises --> GDP rises QE3 Demand-pull inflation "too much money chasing too few goods" Depreciation of US dollars Response from Hong Kong Monetary Authority Japan’s reaction Emerging markets-China and Vietnam Trigger the currency devaluation for emerging markets The large increase in money supply will lower the domestic interest rates in US would result in :

1.the capital outflow***

2.creating the arbitrage of borrowing the money of US with lower interest rate and lending in a country with a relative high interest rate Reasons for depreciation of US dollars

Cause a depreciation of US dollars Capital outflow To protect the integrity of its currency board system

Buying up the US dollar with its printed Hong Kong dollar

Preventing the HK dollar from appreciating against the US dollar Response from Hong Kong Monetary Authority The Bank of Japan worried about the high value of Yen would damage its exports

Eased monetary policy by boosting its asset-buying program

To stimulate recovery of Japanese economy Japan’s reaction
The labour cost for some emerging countries like China and Vietnam are much cheaper than that in US

US firms mainly ran production in those countries with cheaper labour costs

It is possible that US firms will use the increased money from QE3 to invest in some emerging countries like China and Vietnam

Those countries would benefit from QE3 Emerging markets-China and Vietnam -With the release of QE3, the Fed attempt to depreciate US dollars to boost the exports

-Some argued that central banks in emerging markets have a headache on whether weaken their currencies to stimulate exports and growth Trigger the currency devaluation for emerging markets Interest rate at US are lower Investors will want to reduce their holding of domestic bonds of US Increase their holding of foreign bonds Domestic investors will try to sell domestic bonds Buy foreign currency(by selling US dollars) and buy foreign bonds Motivate the investor to invest more The interest rate become zero virtually
Lower interest rate , more incentive to invest more
Boost the property market Stimulate the mortgage rate Stimulate the mortgage rate by buying Mortgage-based securities 40 billion per month
Lower the mortgage rate can attract more people to buy the home
Home ownership rate increase
More company will construct more house due to the demand of the home ownership and the property market will boost Housing crisis The price level become increased since the first quarter of 2012
The price level seems to keep going
Recovered from the 2006 housing crisis
If the price level keep going...
A tendency to step up and go to the level on 2006(housing bubble crisis) Why US need QE?
Quantitative Easing1
Quantitative Easing2 Inflation in other countries Hot money weakness side of a US dollar
risk aversion among US investors
stable food and energy markets
currency movements increase
agreed official exchange rate Exchange rate Other countries currency (Strong)
VS
USD (Weak)

Import increase Export decrease

print money to adjust exchange rate against USD


M2 increase and inflation News:Hong Kong Takes Action to Weaken Its Dollar Policy Hong Kong and other emerging countries like Brazil, Russia, India and China Buy USD and sell own countries currencyLower exchange rate against USDHigher Inflation rate House Price step up and the crisis Easy to outflow the foriegn currency to the HK property market
The price level is higher than the level at 1997
The housing bubble What the HK government can do? Increase the stamp duty
Increase 15%
Special stamp duty
Warning the further move -Increase MS --> Interest rate fall --> C and I rise -->
Aggregate Demand rise --> GDP increase The Hong Kong Monetary Authority sold 4.67 billion Hong Kong dollars in the foreign-exchange market
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