Quantitative easing

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Quantitative easing (QE) is money printing hidden behind a very poor disguise. It is a form of extraordinary monetary policy that has become popular in recent years due to the failure of conventional monetary policy to deliver the desired outcomes.

Central banks create money electronically and with it, they buy assets, primarily sovereign bonds (but also, in some scenarios also corporate bonds or even equities). The intention thereafter is that the institutional investors that have sold their sovereign bonds will reinvest in assets a little further up the risk spectrum. This forces the next seller to do the same and so on. Ultimately, the stated purpose of QE is to inflate the price of risk assets in the hope that, in so doing, the benefits of higher asset prices in the financial world will ‘trickle-down’ through the economy to provide a boost to activity in the real world.

There is ample evidence to suggest that this trickle-down simply hasn’t happened, however. The fruits of the policy have been consumed in the financial world but the wider economy has failed to benefit. This has led some policymakers and commentators to suggest another form of extraordinary policy as a natural successor to QE – helicopter money would attempt to bypass the financial system and put money directly in the hands of consumers.

 

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