What Withdrawing QE4 Will Mean for Europe, Japan and the US

The Federal Reserve wants to wean the markets of the cash infusions that we have abbreviated to QE4 in the last spate of stimulus. So dreaded that we can’t even mention its name in full for some, you might add. The dreaded Q-thingy. QE4 has kept the US economy afloat for the past 6 months. Artificially, or not, it doesn’t matter. The problem lies in the carrot that has been goading the markets into rising and inflating. It has worked, but now the prospect of withdrawal seems dauntingly fearful for the market. Even the mere mention of a possibility of withdrawal from the sweeteners that have been given seems like a nightmare not only on Wall Street, but also in Europe and in Tokyo. The question that is raised is whether or not those markets are all in a position to be able to give it a go and take withdrawal that looks like might be on the books.

The Federal Reserve has been spending $85 billion a month buying into large chunks of US Treasury bonds and mortgage-backed securities. The result has been a steady increase in the market. It has also meant that mortgage rates have been kept lower too and that was good news for the real-estate market. Analysts expect that the Federal Reserve will bring quantitative easing down to $60 billion in September. It has also been suggested that the prime rate will be raised at more or less the same time.

Europe and Japan?

Japan and the EU

Japan and the EU

There is a big difference between what is taking place in Europe, in the US and in Japan however with the economic situation. Banks in the USA have seen their debts decrease and so have households over the past few months. The debt of the government has increased. In Europe, the banks are not doing as well and the debt of governments is still rising. If the US continues financing the economy in the way that they are doing at the present time, then the government is only going to increase its already mammoth debt. If the Federal Reserve stops financing or at least reduces that financing, then experts believe that the losses that may be incurred could be distributed amongst banks that would be able to take a small loss, rather than continuing with QE and ladling it on in hefty dollops to add to government debt.

If Europe were to do the same, then the banks would not be able to put up with the losses that would be incurred and it would spiral out of control at both the European Central Bank and central banks in EU-member states. The ECB must continue on the line that has been set up for the moment and maintain QE measures. Draghi explained only a few days ago that the sweeteners in Europe might continue for yet another year.

In Japan, is pumping $7 trillion Yen into government bonds each month. But, will Abenomics pay off and what will be the effects of the withdrawal of QE in the USA on the Japanese plan? If the USA restricts monetary supply by withdrawing quantitative easing, then the dollar may rise and the yen will inversely react. That will be good news for Japan. Analysts are predicting that the Euro will also fall in relation to the Dollar (to between $1.20 or $1.25 by the end of 2013 and to even $1.10 with the next year and a half).

Exports for both Japan and the EU will become cheaper and that will be good for their economies there. Yes the Dollar fell a few days ago, but that’s because no decisions have been taken. Dithering is the worst thing that can happen in the market. A decision, and a decisive one, has to be taken. But, in the US, the withdrawal of QE will take a severe toll in the US on real estate prices. That is already showing through in the rise in repossessions as the banks call in their bad mortgage loans.  Low interest rates have helped the real estate sector, but if they rise, as predicted, then that will become very expensive for people. The effect may be similar to the one that caused so many repossessions at the start of the financial crisis and the ensuing credit crunch. That risks coming down on the US like a ton of bricks.

Real Estate will suffer!

Real Estate will suffer!

Paradoxically, the fact that Bernanke may be withdrawing QE from the US economy might be the saving grace for Japan and Europe. That’s maybe another reason to decry the decisions of the Federal Reserve on one side of the Atlantic. But, from Europe’s perspective he might just save the day. He might be on the next helicopter to Europe’s capitals to throw the greenbacks out the window! Europe may be the next US patriots, staunchly defending Mr. Bernanke.


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