Quantitative Easing Expands To Emerging Market Nations

It turns out money printing isn’t just for rich nations any more.

Emerging market countries like Chile, Costa Rica, Croatia, Hungary, Indonesia, Poland, Romania, the Philippines, South Africa and Turkey are taking a page from the developed nation’s monetary policy playbook this year.

In an effort to combat the economic slowdown foisted onto the world by Covid-19, emerging market central banks are playing copycat to the United States by buying bonds of various kinds in a new asset purchase programs, also known as quantitative easing.

What is quantitative easing (QE)?

Quantitative easing, often called money printing, describes an unconventional monetary policy dreamed up by advanced nation central bankers a decade ago – to combat the 2008 global financial crisis.

In November 2008, the U.S. Federal Reserve began quantitative easing – extremely controversial at the time – in an attempt to keep the American economy afloat during the credit crisis meltdown.

Essentially, the Fed expanded its balance sheet (by creating new money) and then began buying bonds with that new money.

The Fed expanded its balance sheet from $870 billion in August 2007 to an all-time record high of $7.21 trillion today. That’s a lot of new money created over the past decade. Several trillion of that occurred in just the past few months as the Fed pledged to do whatever it takes to support the economy during the Covid crisis.

In our largely electronic banking system, the Fed simply adds money to its digital balance sheet and then uses that “money” to buy bonds. This, of course, dramatically increases our nation’s money supply.

Other rich nations like the UK and Japan also instituted these money printing policies back in 2008.

Fast forward to today

Not everyone thinks it is a good idea for emerging markets to join the money printing party.

“I don’t think it is either advisable or necessary for emerging markets to go into QE right now,” said Divvuri Subbarao, governor of the Reserve Bank of India from 2008-2013 told Reuters on May 6. “It is not necessary. They have enough conventional instruments available and they can still cut rates now,” he added. “And also, central banks are taking on a credit risk, and I don’t think emerging market central banks are in a position to take on such a credit risk.”

Our neighbor to the north

The Bank of Canada is also falling back on the ‘quantitative easing’ policy in an attempt to ease recessionary conditions inspired by Covid-19.  In April, the Bank of Canada began buying $5 billion of Canadian government bonds each week. Similar to the U.S. Fed stance (whatever it takes), the bank of Canada pledged to continue to do this until the economy recovered.

What’s the big deal?

The 2008 global credit crisis was the first time that central banks got involved in “credit creation” or  money printing.

The big concerns by many mainstream economists?

Hyperinflation and people needing wheelbarrows full of money to buy a loaf of bread.

What about gold?

Countries around the world are adding on more government debt and massively expanding their paper money supplies. This is a startling combination of questionable monetary and fiscal policies that leads many economists today to warn that our nation could be close to “monetizing our debt.” That would simply mean that when Congress spends more money, the Federal Reserve prints more money to buy the bonds to fund the deficit spending.

In the midst of this monetary policy shenanigans, the United States remains the world’s largest holder of gold, officially that is.

There are many mainstream policy watchers that believe that China’s official gold holdings are vastly under-reported and that China could indeed hold more gold than the U.S.

For now, all we have are official numbers.

June 2020

Tonnes

  1. United States 5
  2. Germany 6
  3. IMF 0
  4. Italy 8
  5. France 0
  6. Russian Federation 7
  7. China PR Mainland 3
  8. Switzerland 0
  9. Japan 2
  10. India 0

Source:  World Gold Council

Central banks are buying gold in 2020

In the midst of the Covid-inspired money printing frenzy, central banks are buying gold, real money. In the first quarter of 2020, Turkey, Russia, India, UAE, Kazakhstan and Uzbekistan all bought gold.

It’s no surprise that the central banks that can are buying gold.

Why not trade paper money that is becoming increasingly devalued for gold, a tangible asset that can’t be desecrated by a central bank printing press.

In 2020, it’s becoming increasing clear that central bankers around the world have grown bolder since the 2008 global financial crisis.

Quantitative easing is becoming an accepted practice and money printing is spreading to emerging markets as Covid wreaks havoc on the global economy.

But, in the end, will we simply be awash in paper money that has increasingly less and less actual value?

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