Quantitative Easing's Effects on Brazil

Quantitative Easing.  Did your eyes just glaze over?  QE is a term that can make even the most educated person's eyes roll back in her/his head, but bear with me, it's actually not that difficult of a concept.  In the U.S., QE refers to the Federal Reserve purchasing back long-term U.S. treasury bonds it had sold to private investors.  By purchasing these bonds back, the Fed effectively drives down the interest rates for long-term bonds, incentivizing investors to look elsewhere for investments with higher rates of return.  The idea is to stimulate the economy by driving investors who normally would flock to purchasing Treasury bonds to instead invest in the private sector.  The result is an injection of cash into the economy, with the hope that this new money will be spread throughout the economy as the investors are pushed to better investments and the larger amount of money that banks hold in reserve allows for banks to increase lending.  Where does this money come from though?

Well, the short answer is that the Fed created it out of thin air.  When the Federal Reserve engages in QE, it's said that money is created "by the stroke of a pen." Since we are no longer basing our money on gold, the dollar is worth what the Fed says it is (and the currency market fluctuates accordingly, but more on that later).  If a central bank declares that its reserves are higher today than yesterday, then so be it. This might sound like suspiciously like "printing money" at first, and although the ideas are similar, QE is actually a different process, although the distinguishing line between them is rather thin.  The act of printing money refers to an actual increase in the money supply, while QE is more indirect.  Instead of literally printing money and giving it to consumers, QE creates potential money in the form of bank reserves (Jensen).  Like I said, the distinguishing line is rather thin.

Going back to the idea of the value of the dollar, as anyone who has taken an Econ class knows, the more money a government prints, the less that money is worth, and that's bad.  Econ textbooks like to cite the example of Germany after World War I, where inflation reached 41 percent per day and people reportedly had to cart their money around in wheelbarrows to make a modest purchase.  Inflation of this magnitude is, of course, bad.  But low inflation actually helps the economy and that's why the Fed uses inflationary measures like QE.  When people expect prices to increase, they purchase goods sooner rather than later to avoid paying more.  Thus, low inflation kind of greases the wheel of the economy.  Also, low inflation makes debt an attractive investment by lowering the absolute value of the loan over time.

The Fed also likes QE because it lowers the value of the dollar relative to foreign currencies.  This makes it cheaper for foreign countries to buy American goods, which boosts the export sector, and consequently, the nation's economy.  This brings us to Brazil, whose president is none too happy with U.S. monetary policy.  During her visit to Washington in April, she called QE a "monetary tsunami" and warned that "Brazil will continue to take whatever actions are required to offset the detrimental effects of QE policies." Of course, as the dollar depreciates, the Brazilian real increases in value, which creates a disincentive for the Brazilian economy, centered as it is around exports.  The numbers back this up.  When the first round of QE was implemented in January 2009, the exchange rate for reais stood at US$1 = R$2.33.  A few days after QE1 ended in March 2010, the dollar had slid to R$1.77.  Its value dropped even more after the N.Y. Fed president called for QE2 in October of that same year.  Is this really a bad thing though?

At face value, we can look at the depreciating dollar as disincentivizing exports around the world and harming export-led economies, but really, the result is much more nuanced.  Arguably, QE (among other monetary tools) has saved the U.S. economy from ruin.  A bankrupt U.S. economy would do much more harm to the economies of other nations than a depreciating dollar.  By saving the U.S. from the brink, the Fed staved off economic disaster at the cost of depreciation in the short-term.  In the grand scheme of things, even export-led economies such as Brazil will benefit from this policy.  In fact, if we look at statistics on Brazil's economy, it seems they haven't even suffered much in the short term.  From 2008 to 2010, their annual GDP growth averaged just over four percent (even including 2009, when they experienced a negative growth rate of 0.6 percent).  And, while their exports as a percentage of GDP decreased during those years, so too did their imports.  This decrease may have been simply a shift in their economy--the same three year period saw an increase in services as a percentage of their GDP by approximately the same amount as the decrease in exports.  Whether this indicates a more permanent change to a service-based economy remains to be seen, and definitely warrants further study.

Sources:Blackden, Richard. "Brazil President Dilma Rousseff Blasts Western QE as 'monetary Tsunami'" The Telegraph. 10 Apr. 2012. Web. 31 May 2012.
Goodwin, Neva R., Julie A. Nelson, and Jonathan Harris. Macroeconomics in Context. Armonk, NY: M.E. Sharpe, 2009. Print.
Hebron, Julian. "Quantitative Easing: Rate Recap & Timeline." The Basis Point. 23 June 2011. Web. 01 June 2012.
Jensen, Dr. Mark. Message to the author. 31 May 2012. E-mail.
Reuss, Alejandro. "Why Is the Government Buying Long-Term Bonds?" Dollars and Sense: Real World Economics. Web. 01 June 2012. 

"World DataBank." The World Bank Databank. World Bank. Web. 01 June 2012.