Quantitative Easing

The Economist  Oct 2  Comment 
THE power of central banks over the economy is so great that the debate over the effectiveness of recent policy changes will rumble on for many years. This is all to the good, in a democratic society. But it is important to get the facts right. As...
The Economist  Sep 28  Comment 
WHAT has quantitative easing (QE) done for us? Regular readers may be aware that your blogger is not the greatest fan of QE. But it should be criticised for the right reasons, not the wrong ones. It was not, as John McDonnell, the finance...
The Economist  Sep 24  Comment 
THE Guardian carried an interesting article on Tuesday, written by Zoe Williams, about Richard Murphy, the architect of much of the economic policy of Labour's new leader, Jeremy Corbyn. In it, Mr Murphy responds to the critics of his most...
MarketWatch  Sep 23  Comment 
The euro traded higher against the dollar Wednesday after European Central Bank President Mario Draghi told members of the European Parliament that the central bank stands ready to expand its program of quantitative easing.
Financial Times  Sep 22  Comment 
All of us who work in finance owe a debt to quantitative easing, writes Paul Marshall
Financial Times  Sep 21  Comment 
Burbank expects Federal Reserve to be forced into fourth round of quantitative easing
Yahoo  Sep 16  Comment 
The era of extraordinary monetary policy and central bank dominance of macroeconomic policy may be at a critical juncture - and not just at this week's Fed meeting in Washington. The U.S. Federal Reserve decides on Thursday whether to end its...
Forbes  Sep 16  Comment 
Data released this morning showed that HICP annual Eurozone inflation came in at 0.1% in August compared to expectations of 0.2%, with core inflation stable at 0.9%. This comes off the back of a downgrade in ECB staff forecasts for inflation at...
Reuters  Sep 15  Comment 
The European Central Bank's quantitative easing programme might be broadened or extended, ECB Governing Council member Ewald Nowotny was reported as saying in a newspaper interview published on Tuesday.


Quantitative easing is a monetary policy tool in which a central bank—like the Federal Reserve—floods the market with cash in an attempt to stimulate an economy in recession and to stave off deflation. The idea is that if the central bank floods enough cash into the market, it will set off the following chain of events:

  1. Banks and other financial institutions will build up larger and larger cash reserves
  2. Banks will finally decide to loosen their lending standards to utilize their excess cash
  3. Individuals and companies will start getting the loans they are seeking
  4. The economy will begin to recover as people and companies begin to spend again.Understanding Quantitative Easing

Quantitative easing involves flooding the market with cash. The question is...how does a central bank—like the Federal Reserve—flood the market with cash?

Quantitative easing requires the central bank to take the following three steps:

  1. Cut the short-term interest rate to zero percent
  2. Announce how long it will leave the short-term interest rate at zero percent
  3. Begin buying long-term securities—like Treasuries, corporate bonds and asset-backed securities

Why Would the Federal Reserve Resort to Quantitative Easing?

It seems that during good economic times, all we hear about is how concerned the Federal Reserve is with inflation. We can't let the economy grow too fast....We can't let the monetary base get too big....We can't just print money—the Fed says.

But during bad economic times, all of that seems to change. And during really bad economic times, we even start to hear about quantitative easing. But what does quantitative easing do for the economy?Benefits of Quantitative Easing

Quantitative easing can help consumers, exporters and financial institutions find their way out of a recession and offers some of the following benefits.

  1. Quantitative easing can lower longer-term interest rates by pushing down yields at the far end of the yield curve.
  2. Quantitative easing can lower deflationary expectations by promising to keep interest rates low for an extended period of time.
  3. Quantitative easing can stimulate exports by increasing the monetary base.

Connecting Quantitative Easing to Government Spending (fiscal budgetary security tools)

Although monetary and fiscal models are normally viewed separately, QE as a monetary tool is so similar to deficit spending that the two lend themselves to a common view based on their immediate purpose: each is concerned with national and global security--to prevent chaos in trade and tragedy among nationals working in their own country.

QE and DS create necessary demand to protect people and nations from economic crises that may bring casualties in very large number and very short order. Both can create demand without limit -- except for the purchasing power of money after they become effective.

Each can be partially controlled by ending them. When either has done more harm than good their common remedy is taxation to prevent hoarding and policing to prevent tax evasion.

Accordingly, QE and DS require intense monitoring while in progress -- preferably by extremely sophisticated data analysts with tools akin to those of a national security agency with the highest priority on effectiveness not their cost.


Video: Understanding Quantitative Easing. Learning Markets. Retrieved on 2009-01-24.

Speech: Chairman Ben S. Bernanke. The Federal Reserve Board (1/13/2009). Retrieved on 2009-01-24.

Quantitative Monetary Easing and Risk in Financial Asset Markets. The Federal Reserve Board (9/282004). Retrieved on 2009-01-24. Bold text

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