Editor’s Note: This article also appeared on www.zaobao.com (11/13/2010).

Quantitative easing is a monetary policy by which the central bank increases the money supply through open market operations. It can be considered as creating a specified amount of money "out of nothing" and has also been simply described as printing money indirectly. The operation is that the central bank, for the purpose of injecting new liquidity in the banking system, buys securities through open market operations so that the funds in the clearing accounts opened by the individual banks in the central bank increase. The "quantitative" in "quantitative easing" refers to a specified amount of money that will be created and "easing" means to reduce the bank's financial pressure.

On September 15, 2008, Lehman Brothers declared bankruptcy, thus sending the world into a global financial crisis. On September 25 of that year, the US Government speedily launched a "quantitative easing" program to inject 700 billion US dollars of capital into the market to facilitate the purchase of sub-prime products by financial institutions. The key role was to stabilize the banking system. It was the shortage of funds in some parts of the banking system which caused the chain broken and which resulted in a domino effect throughout the financial system. Later, after Obama came to power, he re-launched more than eight hundred billion US dollars of funds to help all kinds of financial enterprises. This was the first round of the quantitative easing (QE1).

Since the 2008 financial crisis affected the economic development of the entire world, countries around the world did not react so strongly toward the QE1. They all considered it as a normal relief measure. However, two years after the financial crisis was over and while the world economy was slowly recovering, the Federal Reserve introduced a second round of quantitative easing (QE2) program of 600 billion US dollars. This has raised questions and objections by a large number of countries.

First of all we have to analyze why Ben Bernanke risked losing the credibility of the dollar to launch the QE2. First, the US Government has had a deficit year after year; the accumulated huge deficit needs to be reduced or to break even. The US dollar is the world's currency in circulation; its issuance cost is low. As long as it is not likely to cause a riot, printing more dollars to buy goods from the world is the most cost-effective approach. Besides, such behavior can also be a disguised devaluation of the dollar, thereby reducing the amount of debt assumed by the United States. Second, the market interest in buying US Treasuries is too weak, while the United States must rely on debt finance in order to maintain its fiscal policy. If no one wants to buy the newly issued bonds, or the prices of the old debts fall because no one wants to redeem or purchase them, then the new debts will not be able to get sold. In order to maintain the issuance of the treasury bonds, that is to say in order to maintain a normal US finance, the Fed had to select the second round of the quantitative easing program. In this desperate situation, there can be no delay of the acquisition and distribution program of the bonds. But the market's capacity and purchasing power have significantly decreased, so the Fed had to print its own money to buy bonds issued by the Ministry of Finance.

Prior to this, the over one trillion US dollars output by the QE1 program were initially circulated to maintain the normal flow and operation of the financial system. Because these funds and notes were not the actual dollar bills circulated in the market, they did not lead to inflation in the United States. After the financial condition stabilized, in order not to influence the US price (inflation), the US departments of financial management began to divert the funds of the QE1 into other countries. As the time lag of the financial effect is six to nine months, these funds that went into the stock and property markets of other countries have just now begun to show effects.

One of the most important phenomena is the massive inflow of dollars (it happens in various ways including through investment, trade, funds, insurance, letters of credit, and so on; it is hard to detect them).  Those countries that absorb large amounts of dollars must issue their national currencies to absorb these dollars. This would lead to inflation due to the influx of dollars. And if the central banks that receive the influx of dollars do not manage these extra dollars, the market phenomenon of dollar oversupply may also appear, resulting in the appreciation of their national currencies. The appreciation of a domestic currency would affect the country's export trade and also increase its imports, which will then reverse the import and export trade situation. Therefore, the central banks of different countries cannot avoid using a large number of their national currencies to redeem the dollar IOU. In other words, the irresponsible behavior of the United States has led to inflation in these countries, and it is all imported inflation. Because the United States has exported a lot of currency to other countries in exchange for a huge amount of goods sent back home, and because the United States Government has controlled the flow of its paper money inside the country, there has been the strange phenomenon of inflation in other countries but deflation inside the United States.

In fact, the effect of the QE2 has not arrived yet. The Fed was only worried about the issuance and repurchase of treasury bonds and acted pre-emptively as a preparation to reassure people. It was designed to ensure the smooth issuance and repurchase of the government bonds. Originally the Fed's implementation of the scheme was simulated by social psychologists on a supercomputer. It had no big problems, because a proper amount of inflation, after all, is less worrisome than unlimited issuance. But the Fed did not take into account that the output of the first round of notes exported all over the world is generating inflation and those speculative funds are trying to hype, through the opportunity of QE2, various types of futures and cause commodity prices to rise. These two unexpected factors have led many countries to call into questioning the Fed's quantitative easing program.

Before the complete implementation of the QE2, the Fed announced again the third round of quantitative easing (QE3). This is because they knew that the QE2 had not yet had an effect and most countries would not offer much opposition against the US and the Fed. Therefore, the Fed promoted such a concept early to avoid adverse policy effects afterwards, similar to "fighting fire with fire".

The United States normally each year can have a few hundreds of billions of dollars of seigniorage charges to gain, because 70% of the world economic growth needs to be expressed in the value of the dollar. The world annual output value is about fifty or sixty trillion dollars. A growth of 2% a year, as a lower limit, will allow the United States to collect hundreds of billions of dollars of seigniorage charges. But a few hundreds of billions of seigniorage may not fill the greedy coffers of the United States, due to its militarism, military bases, excessive spending and the growing deficit. It would also like to use the dollar status as the main settlement money to expand profits. This would certainly encroach on the national interests of other countries by causing inflation or lifting the values of their currencies. All of this can damage the national interests of other countries. Therefore, although the QE2 policy of the United States has not been fully implemented, the whole world is raising doubts. The quantitative easing program will make the world question the status of the dollar and eventually damage directly the use of US dollar as the international settlement currency. However, the Fed has to face the arduous task of issuing, redeeming treasury bonds and maintaining the normal order. How to make a choice? Indeed, it is a dilemma.