Quantitative Easing

Remember those long games of Monopoly with the family? Remember how much richer you thought you were when you hit the "GO" square that lets you "collect $100 salary as you pass"? Remember how this square kept the game going another couple of hours? QE, short for quantitative easing, is perhaps doing what this square is doing for our economy.

What is quantitative easing?
When the economy isn't on the bright side, central banks try to encourage the public to borrow money from banks or spend from their existing savings. To achieve the former, interest rates are to be decreased. But what interest rates can't drop any lower? Then banks have to directly inject money into the economy. This, in simplified terms, is quantitative easing. The central banks do so by purchasing assets, for example government bonds, with virtual money, new electronically created money. So what good does it do? This means that those businesses which sold those assets can use that sum of virtual money, setting off a positive domino effect.

What are the effects?
The government sells the bonds in the form of reverse auctions - auctioning prices are driven down instead of up. With the extra money in the banks' bank accounts, they are more willing to lend. The second effect is that the supply of bonds on the market since much is bought by the banks already. What do we know about supply and demand? Now that there are less bonds available for purchase on the market, desire for these bonds increases.


The reason I brought this up is because the US is currently talking about QE3, the third installment as suggested by the number of quantitative easing. The US will be ever more eager to push through this plan should unemployment rate not decrease. Keep your ears open for more about this proposal later this year.

Greece Debt Crisis

I'm not going to lie - the election is this weekend and it's only till today that I took the initiative to try and understand what is going on with the Greece Debt Crisis.

What went wrong?
When Greece joined the European Union in 1981, it benefited from an economic boom when wealthy European and North Americans considered it as a popular tourist destination. Unfortunately, this turned sour when tourists began to feel that the Greeks were overcharging them. While the tourist industry is going downhill, switching to the euro currency did not help in 2001. After the switch, the government sector could not sustain the rapid increase in wages, let alone dish out generous benefits to those retiring. Official retirement age in Greece is 58. Despite all these, the big blow to the Greek economy is mass tax evasion. When the government doesn't get its money from taxation, who does it turn to? European banks. In estimation, Athens is 54 billion euros ($74 billion) in debt  and much of this debt is due in fast approaching months.

What is the world's eyes on right now? Deal or no deal?

Greece takes the deal
Up until the current crisis, the EU and IMF have already provided 110 billion euros of bailout loans in 2010 and another 130 billion euros earlier this year. Private creditors have written off more than half of Athens' debt and decreased the rate of the rest of the loans. Another offer is in place should Greece decides to accept it. European banks are willing to take on about half of whatever is owed. The potential deal-breaker is that Greece must agree to austerity. This includes cut-backs on government spending, which of course decreases pay for public employees, and agreement to stagger repayment of debt. This means that the country will fall into a spiraling debt. It is believed that unemployment will be driven up while shrinking the economy and lowering living standard.

Greece defaults 
To default and drop the euro to return to the drachma (ancient Greek currency), Greek export will benefit from becoming cheap. I could not, however, think of any other reasons to default. Greek banks, which are creditors to the government, will go bankrupt in no time. It takes at least four months to introduce a new currency. While the drachma is trying to settle, inflation will reach sky high.

To conclude, it appears that the outcome of the election on June 17 will hit the rest of the world at a steeper angle than it would at Greece itself. If the election favors the pro-austerity parties, the EU and IMF will put the international economy back in spin for yet another day. If the anti-austerity parties win, Greece will freeze all loan payments. All faith is then lost on the European market. As for Greece, it has already hit rock bottom, unless there is another layer of calamity to it.