Impact of Quantitative Easing Tapering on Various Stakeholders

The Quantitative Easing (QE) policy has impacted the lives of pretty much everybody on this planet. The reverse policy of Quantitative Easing (QE) tapering is also expected to have a similar wide range effect on the lives of millions of people. Some of them may be positively affected by the Quantitative Easing (QE) tapering policy whereas others may be negatively affected by the same. In this article, we have listed down the major stakeholders who are expected to be affected by Quantitative Easing (QE) tapering and have provided a brief gist of the impact that they are likely to face.

United States Government

The United States government will be one of the most impacted parties in case the Fed decides to taper its Quantitative Easing (QE) program. This is because the government is perpetually in debt and of late has found out that the demand for its bonds is weakening because of its poor economic fundamentals. Therefore, for the past few years the Quantitative Easing (QE) program has quite literally sustained the spending binge that the US government is on. Therefore, if the Quantitative Easing (QE) program is tapered by the Fed, the government may find itself short of lenders. As a result, they may have to pay a higher yield on their debt or may have to cut down the scale of their debt issue.

United States Taxpayers

The next most affected stakeholder would be the United States taxpayers. The United States taxpayer has been funding this multibillion dollar Quantitative Easing (QE) program ever since it started. When the government creates new money to buy these bonds, it is taking away a certain portion of the value of the existing money. The new money derives its value from the loss of value of the old money. Hence, the taxpayers and pretty much anyone holding a dollar bill is at a loss when Quantitative Easing (QE) programs are announced. Therefore when the Quantitative Easing (QE) program is tapered, the United States taxpayers will heave a sigh of relief as the plundering of their wealth through official means will come to an end.

United States Investors

The United States investors will face a number of outcomes if the Quantitative Easing (QE) program is tapered. The effects of these outcomes remain largely uncertain and any guess is considered to be nothing except speculation. However, experts have considered a wide variety of possibilities and some of the most probable ones include:

  • Higher cost of funding since the markets will turn bearish. Once the supply of excess money by the Fed is stopped, the base interest rates will rise. This rise in interest rates will find its way to the required rate of return on all investments, thereby simply raising the cost of capital across investment opportunities.

  • A large number of United States corporations make a significant chunk of their profits through their overseas subsidiaries. A lot of these subsidiaries rely on a strong dollar for demand to be created. Hence, Quantitative Easing (QE) tapering could lead to a possibility of lower earnings from foreign subsidiaries.

  • Lastly, the Quantitative Easing (QE) tapering is expected to create a flight of United States capital which is currently invested in foreign markets. Geopolitical considerations following the Quantitative Easing (QE) tapering will make this flight of capital an imperative. Hence, once the Quantitative Easing (QE) tapering program is launched, investors will have to liquidate their assets at whatever prices possible and move the money back to America. This sudden sale is expected to hurt the United States investor interests.

Asset Markets

All the asset markets in the world will be widely impacted by the Quantitative Easing (QE) tapering program. We have discussed the individual impacts on most of the markets in the form of individual articles in this module. However, to summarize, one can say that the asset markets of the world will see some serious “never seen before” volatility as a result of the Quantitative Easing (QE) program.

This is because fiat money is the monetary base in which the prices of everything else are calculated. Therefore, if the value of the “monetary base” changes, then the value of everything from real estate to gold also changes. There will be some serious redistribution of wealth in the markets when Quantitative Easing (QE) tapering takes place.

Foreign Investors

Foreign investors are likely to be on the winning side if the Quantitative Easing (QE) tapering takes place. This is because they exchange their local currency to dollars and invest in the United States markets. One of the biggest impacts of the Quantitative Easing (QE) tapering program will be an increase in the value of the dollar. Therefore, foreign investors who have invested their money in the United States markets stand to benefit from this massive Foreign Exchange gain. A part of this gain may be offset because of the lost business as a result of economic mayhem around the world. However, the significant movement in the Forex markets is expected to more than offset the same.

Emerging Markets

The economies of the emerging markets have been booming of late. This boom has largely been constructed on the basis of rising exports to the United States markets which is created by the Quantitative Easing (QE) policy. A reverse policy of Quantitative Easing (QE) tapering would therefore cause a sudden period of recession in these markets because of a sudden slowdown in aggregate demand.

Therefore, some people stand to gain from the Quantitative Easing (QE) tapering policy whereas others stand to lose. However, almost everyone stands to be affected.

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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to and the content page url.