THE SENIOR ANALYST
Another risk is that the increase in confidence
among consumers and businesses may lead to
excessive borrowing by them. A certain amount
of debt can help stimulate the economy but
excessive debt can create problems. In addition
to this, quantitative easing can also create
government deficit.
QE in the United States of America
The biggest investment bank in the US, Lehman
Brothers went bankrupt in Aug 2009 and on
Nov’09 the first round of Quantitative Easing QE1 as it is now called was announced by the US
Feds. After the Lehman crisis other major banks
were on the verge of following suit. This could
have been out of greed to earn more or a poor
decision or whatever may have prompted them,
all had huge mortgage backed securities in their
portfolio. After the housing bubble crisis and the
Lehman Bankruptcy, these securities were of no
value and in the balance sheet they were nothing
but a NPA (Non-Performing Asset) for banks. This
is when the Feds came in to rescue and an
agreement was reached between the banks and
the Feds. The agreement was that the Feds would
buy $100billion worth of mortgage backed
securities from the banks every month and ease
the burden on their balance sheet. The round
lasted for 17 months starting Nov’09 which is the
longest so far. In FY’09 the US economy
contracted by 2.8% compared to .8% previous
year. Unemployment touched an all-time high of
9.3% compared to 5.8% previous year. However,
in 17 months i.e. by Jan 2011, the data showed
some signs of relief. The GDP after two years of
contraction finally expanded by 2.5% and both
gold and gas increased in value by over 50%
indicating that investment had enabled demand
at least at the face value.
Jan 2014
Overview of US economy FY09-10
Economic Activity
FY09
FY10
Real GDP (YoY %)
-2.8
2.5
Unemployment (%)
9.3
9.6
CPI (YoY %)
-0.35
1.63
10-Year Note (%)
3.84
3.3
Budget(% of GDP)
-10.1
-9
Meanwhile about 10000 miles away in India it
was all happy go lucky. Many believed the
century belonged to India and China and why not,
in the last decade the economy grew at an
average of 7-8%. Per capita income had almost
doubled. Because of a tightly regulated financial
system (Banks, Stock Markets), India was able to
absorb the recession relatively better than most
of the globe. A more introspective analysis of the
Indian economy in the post-recession era would
confirm this. In FY09,the 27 nation European
Union contracted by .6% and the US economy
contracted by 2.8% while the Indian GDP grew by
6.6%(lowest in last five years) . Exchange rate was
46.53 which showed that rupee was very stable.
By Jan’11, there was relief for the Feds as pointed
out earlier that the demand had picked.
However, there was no sign of improvement in
the labor market. Unemployment rate shot up to
9.3 % in FY’09 from 5.8% in the previous year.
Despite QE-1, the GDP growth was back in track
to positive numbers but the labor market
remained in a limbo. Unemployment rate in FY10
was 9.6% and in FY11 was 8.9%. This prompted
the Feds to start another round of quantitative
easing in Sep 2012 which is still there and is
expected to be withdrawn by March 2014.
Impact on Indian Economy
Quantitative easing or the printing of money is
the easiest way to stimulate economic growth
that involves a lot of risk not only for the home
economy but for the world as a whole. In 2011,
before the first round of tapering, the 10 year
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