BEHIND THE NUMBERS
September 2012 will go down in history as a month of global liquidity euphoria. It began with the European Central Bank announcing an Outright Monetary Transaction (OMT) programme on Sept 6. In plain English, this involves buying sovereign bonds in the secondary market of countries that need help. This was followed on Sept 13 by the US Federal Reserve's highly anticipated third round of quantitative easing (QE3, or printing money to buy bonds). Finally, on Sept 19, the Bank of Japan unexpectedly beefed up its asset purchase programme.
Of the three, QE3 stood out from the pack. OMTs were needed to bring down the borrowing costs of struggling European governments, while the additional Japanese asset purchases were meant merely to fend off further yen appreciation. QE3, on the other hand, was meant for something bigger: reviving the whole US economy and bringing down its stubbornly high unemployment rate. But how can an injection of liquidity deliver such a powerful result?
Let's first get something straight. Despite all the hype about QE3, when compared with its two QE predecessors, the size per month is smaller, with purchases of $40 billion of agency mortgage-backed securities. In comparison, QE1 cost $101.5 billion per month for 17 months, bringing the total to $1.725 trillion, while QE2 was $75 billion a month with a total of $600 billion. True, QE3 purchases could go on indefinitely, or until the Fed is happy that unemployment is falling, which could result in a record total sum. But when it comes to liquidity, the pace of the fund injections is what really matters.
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