Q’s

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Terms beginning with Q

Quantitative Easing

Quantitative Easing

A central bank’s attempt to stimulate an economy with easy money policies. Normally, a central bank buys and sells securities to either increase, or decrease, an economy’s money supply. Namely, if a central bank buys a security, such as a Treasury bond, money goes from the central bank vault, into the flow of money in the economy. If the central bank sells a security, such as a pool of mortgages, money goes from the economy, into the central bank vault. Quantitative easing is a way to increase the money supply faster, and at greater magnitude, once interest rates have already been driven down to zero, or very near. If the cost to borrow capital is decreased, the economy should be stimulated, or inflated.

Quantitative easing is sometimes described as “printing money.” In a digital world, the lion’s share of the a money supply is electronic; numbers dancing on computer screens. The central bank actually creates new money by increasing a digital sum (its credit) in its own bank account.

Due to a fractional reserve banking system, new money creation happens everyday at your local depository institution. Deposit multiplication occurs, and the money supply can theoretically grow to infinity. Judging how fast these multiplication occurs, is nothing more than a guessing game. And stimulating an economy through an increase in the money supply is nothing more than inflation.

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