What is quantitative easing?
In short, quantitative easing is when the central bank (the only bank which can do this) introduces new money into its economy to aid in a crisis. To expand, the central bank increases the credit in their account (creates new money) and uses it to buy long term assets, equities, invest in corporate bonds, government bonds, treasuries, housing and so on. The act of distributing the new money across the nation’s banks in this way eases the restrictions on the monetary supply.
During bad economic times such as recession redundancy rates rise leading to people cutting back on expenses and saving every penny. Although the lack of funds can lead to the public borrowing more, interest rates prevent many from doing so. In turning to quantitative easing, interest rates will be lowered (even to as low as 0%) for specified periods of time, resulting in a knock-on effect of spending. Benefits of the quantitative easing can include an increase in available loans, jobs and available disposable income (creating demand for goods and services). The hope is with cheaper borrowing and prices at their lowest (prices are likely to elevate at a later date) spending will increase rapidly thus flowing money back into the economy (in turn bringing the money a full circle back into the banks).
Despite the desired benefits, quantitative easing is always the last resort; as with any solution there are generally risks. The central bank could end up in a worse off position if investments do not create the required turn around (which may drive them to further quantitative easing ending in hyperinflation). Another problem that may arise is ‘scepticism’: a nation may feel their money is safer if left in their own hands and find new ways to survive on the bare minimum – causing quantitative easing to be moot.
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