Printing Money: What is Quantitative Easing?
“Printing money is merely taxation in another form” ― Peter Schiff
5 min read
Printing Money: What is Quantitative Easing?
“Printing money is merely taxation in another form” ― Peter Schiff
5 min read
Quantitative Easing, a tool in the arsenal of central banks, has become increasingly prominent in monetary policy. This approach involves the deliberate and substantial purchase of financial assets, most commonly government bonds, by the central bank. The ultimate goal is to influence (increase) the money supply, interest rates, and overall economic activity.
Today, we are looking at the dynamics of Quantitative Easing and finding out why it may be useful, why it may be bad, and what it’s all about! Read on to find out more.
Defining Quantitative Easing
Unlike traditional monetary policies that involve adjusting short-term interest rates, Quantitative Easing focuses on expanding the money supply and influencing long-term interest rates. The central bank achieves this by purchasing financial assets, as mentioned above these are primarily government bonds, from the market. The objective here is to inject a significant amount of money into the financial system, encouraging lending, investment, and overall economic growth.
At its core, the actual process of Quantitative Easing involves the central bank creating new money electronically. This newly created money is then used to buy financial assets and in doing so, provides the institution from which the assets were bought with with additional liquidity.
In its simplest form, Quantitative Easing is the process of printing money (but, legally!) to increase the supply of money in an economy.
The Positive Side
Below we provide some of the positives to Quantitative Easing and how it attempts to benefit an economy:
Stimulating Economic Growth: At its core, Quantitative Easing operates as an engine for economic growth. By injecting a substantial amount of money into the financial system, central banks aim to boost spending and investment. As this newly created money circulates through the economy, businesses find themselves with enhanced liquidity, which, in turn, fuels expansion, job creation, and a general uptick in economic activity.
Lowering Interest Rates: One of the primary mechanisms through which Quantitative Easing exerts its influence is by manipulating interest rates. As the central bank engages in large-scale bond purchases, it effectively increases demand for these securities, driving up their prices. Conversely, when bond prices rise, yields fall. This phenomenon leads to a lowering of interest rates across the spectrum. The strategic intent here is to incentivise borrowing, both for businesses seeking capital for expansion and individuals considering major purchases like homes or automobiles.
Fighting Deflation: In the face of deflationary pressures, Quantitative Easing serves as an antidote. Deflation, characterised by a sustained decrease in general price levels, can be detrimental to economic health as it encourages consumers to delay spending in anticipation of lower prices in the future. By flooding the market with additional money, Quantitative Easing stimulates demand, helping prevent the onset of a deflationary spiral.
The Negative Side
Naturally, there are also some downsides, too! A few of these are as follows:
Wealth Inequality: Whilst Quantitative Easing aims to bolster economic activity, its benefits are not always distributed equitably. One of the major criticisms is its potential to exacerbate wealth inequality. As the central bank’s asset purchases drive up the prices of financial assets, those who hold significant investments in stocks and bonds reap substantial gains. On the other hand, those without significant financial holdings might not experience a proportional improvement in their economic circumstances.
Market Distortions: The sheer magnitude of funds injected into financial markets during the Quantitative Easing process can create distortions. Asset prices, including those of stocks and real estate, may experience substantial inflation. This, in turn, can lead to speculative bubbles and misallocation of resources as investors chase returns in an environment where traditional valuation metrics may become disconnected from economic fundamentals.
Interest Rate Risks: As central banks persistently engage in Quantitative Easing, they face challenges when attempting to normalise interest rates. A prolonged period of low interest rates can create a sense of dependency, making it difficult to implement rate hikes without unsettling financial markets and the broader economy. Striking the delicate balance between stimulating growth and avoiding excessive risk-taking becomes a crucial task for monetary authorities.
Should Quantitative Easing Be Used? If So, When?
The use of quantitative easing is a complex decision that depends on various economic factors, and its appropriateness is often subject to debate among policymakers and economists to this day.
Quantitative Easing is typically considered when traditional monetary policy tools, such as adjusting interest rates, prove insufficient in addressing economic challenges, especially during periods of economic downturns.
So, when should it be used? Here are a few key considerations as to when and if Quantitative Easing should be employed:
Economic Downturns and Deflationary Pressures
For example, when an economy is facing a severe recession, high unemployment, and deflationary pressures (falling prices).
How does Quantitative Easing help? It can stimulate economic activity by injecting liquidity into the financial system, lowering interest rates, and encouraging borrowing and spending.
Ineffective Conventional Monetary Tools:
For example, when central banks have already lowered interest rates close to zero, and further rate cuts are deemed ineffective.
How does Quantitative Easing help? It becomes an alternative tool to influence long-term interest rates and provide additional monetary stimulus.
- Balancing Risks and Benefits:
- For example, when policymakers carefully assess the potential risks and benefits of Quantitative Easing, it can then be implemented, or not.
- How does Quantitative Easing help? In this example, it is more a case of weighing up whether it is suitable to implement. Quantitative Easing has potential side effects as we have discussed, and so only after policymakers have weighed these risks against the potential benefits for economic recovery should it be implemented.
Making Your Investments Print Money
Printing money is not often legal when implemented by a member of the public, so we advise against it! However, what you can control is what you are investing in, and this in turn influences the returns you can achieve. For example, if you invest over 5-years and your funds grow by 500%, it is as if you have printed money!
Whilst we will not guarantee you a 500% return over 5-years, we can guarantee that your investments will be well looked after if you get in touch with Patterson Mills and book your initial, no-cost and no-obligation meeting. Financial success and a worry-free future starts with Patterson Mills.
Send us an e-mail to contactus@pattersonmills.ch or call us direct at +41 21 801 36 84 and we shall be pleased to assist you.
Please note that all information within this article has been prepared for informational purposes only. This article does not constitute financial, legal or tax advice. Always ensure you speak to a regulated Financial Adviser before making any financial decisions.
