Global Quantitative Easing - Hyperion and Tree Article Series

[specuvestor]

Hi HyperionTree... so there's actually 2 of you using the same ID? Are you new graduates?

1) Main thing I want to highlight here is that becuase the anchor is USD, QE at USD is much more significant than competitive devaluation in other competitor countries because like you said, all of them depreciating against USD is not going to help much. But if the anchor USD is depreciating againist majors like post GFC, it becomes much more complex if competitive devalustion happens.

2) Inflation generally follows when economy does well. There is also differentiation of core inflation and non-core which are external supply related. There should be difference in policy response to these 2 type of inflation. So when core inflation increases when economy does well but nominal interest rate stays the same, the real interest rate actually goes DOWN. That is why during boomtown, central banks try to increase nominal interest rates to normalise or increase real rates. I cannot recall any instance when deflation occur when economy is growing well in line with potential output

3) From a neo-monetarist point of view, inflation is always a monetary phenomenon. However the real world with global trades is becoming more complex than that as deflation/ inflation can also be imported, depending on the structure of the economy.

I think you are right that the key is structural reform... QE only helps to smoothen the pain... but if the pain-killers been adminsitered so long that the patient no longer realise there is a sickness, it becomes a problem in itself. I am supporter of monetary easing/ QE for the simple reason of avoiding systemic risk that are not moral hazards. There is a big difference if u ask someone to pay in 1 year vs if you spread over 10 years. It's the same issue when you charge NPL to banks over 1 year vs over 10 years the same amount which will have differing impact on the CAR.

Your premise seems to be Austrian without government intervention hence you are trying to observe the outcome of a passive/ non-existent central bank environment. But in the current world system, the central banks are actually changing the dynamics by changing the nominal rates and hence the real rates so the real rates is not a passive outcome at all.

4) There are a lot of controlled currency system besdies SGD from currency board, to hard peg like ERM to EUR, to soft peg like Middle Eastern countries to USD, to managed float like Singapore, and capital control like NTD, KRW and INR. In Singapore's context, our SGD is not backed by USD. There is no obligation for MAS to give you USD if you hand in SGD. This is unlike HK currency Board System. SGD is strong and AAA by the implied strength of our foreign reserve. MAS don't allow the internationalisation of SGD hence technically it can determine the FX rate of SGD if it wants to (not without collateral damage of course), and longer than SNB for sure because the CHF is internationalise, which shows us the stark difference of the 2 regimes.

So different regime has different dynamics. You can't use the same textbook for all. We are fortunate in Asia to see different type of regimes because most developed countries don't even understand these terms.

Negative real interest rate is in general trying to pump up the economy by transfering risk to the lender and wealth to the borrower. However negative real rates in Singapore is more a function of USD QE and yes it is also why asset prices rose in general globally with cheap money.

Cheers