By Henry Buzar, Former Chair of Quezon PDRRMO Anaysis July 24, 2020 It will be very difficult and complicated to explain economic terms...
Anaysis
July 24, 2020
It will be very difficult and complicated to explain economic terms in Pilipino, so I will unriddle the complexities by simple economic layman English translation.
All Central Banks imposed “bank reserves” as a means to control money supply. The money supply is composed of coins and bills in circulation, in short the amount of money in circulation. When the money supply goes up, say a national election is of the offing and candidates withdrew their money stashed abroad and converting them into peso, the economy is then flooded with money thus increasing the money supply. The effect of increase in money supply is inflation or increase in prices of commodities and services. On the other hand, when money supply retreats, it results to deflation or decrease in prices of commodities and services. When there is excess money supply, in economic parlance, the government thru monetary policy siphon off the excess liquidity (extra money supply) by raising the bank reserve, increasing interest rate and other open market operations.
Now, with a pandemic or a recession that could be posed by a particular financial crisis, there is a contraction in economic output and activities reducing the level of employment to the low side or what is termed as “downturn.” Prices of commodities go up as we experienced today with the purchasing power of the peso fully depleted due to lack of consumer goods and supply chains affected. We know in Economics that when there is shortage of products, the price goes up. Why is there shortage? Because people can’t come to factories to produce goods because of fear of the coronavirus. Many people became unemployed and no cash to spend. The government intervenes through fiscal policy by providing cash incentives like social amelioration fund, tax rebates, extending loans, farm aides, etc.
The problem now is how to recover from this contraction leading into recession. As BSP Governor reiterated: “The Philippines has enough funds for its war chest against the coronavirus.” We have Gross International Reserves (IGR) of $93.32B, “Marami tayong pera,” he assured us in response to PRRD’s admonition that he will be selling government assets to be able to buy Covid vaccine once it is available. In response, Sec. Dominguez said that the government borrowing policy is conservative as an additional precaution for a long protractive war with COVID.
The US government however, made use of “quantitative easing” as its war chest. Quantitative easing (QE) is when a CB buys long-term securities from its member banks. In return, it issues credit to the banks' reserves.
Where do central banks get the funds to purchase the banks' securities? They simply create them out of thin air.
In the United States, only the Federal Reserve has this unique power. That's why some people say the Federal Reserve is printing money.
QE increases the money supply It lowers long-term interest rates, makes it easier for banks to lend, and spurs economic growth. QE is an expansion of the Fed's open market operations. The Fed uses QE after it's lowered the fed fund rate to zero. This rate is the basis for all other short-term rates. In the United States, the QE purchases are done by the trading desk at the New York Federal Reserve Bank.
Other countries do the same, just printing money and issues credit to the banks. While QE increases money supply, its utility during a pandemic and or a recession is essential. They reduced the reserve ratio to zero to encourage banks to lend out all of their funds during the COVID-19 pandemic. The bank reserve is then reimposes during the economic recovery period.
Maybe, some of you will ask, what is a bank reserve? A bank reserve is a monetary tool of the Monetary Authority like the CB wherein a portion of a bank’s deposit is held in trust in CB say 10%. When inflation sets in, the bank reserve is increased to siphon off excess liquidity and when there is deflation the reserve is decreased to perk-up investors and consumers to release some of the cash in the economic stream.
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