What is Quantitative Easing
Quantitative Easing is injecting money by a central bank, to the failing economy, to sail through the bad times any country faces. Central bank buys some financial assets and pumps in the required money at the time of economic depression. This is different from the normal buying of bonds as this buying takes place when interest rates are at the lowest, almost close to zero.
Quantitative easing is used to ease out difficult economic condition prevalent in the country. It involves buying long term government bonds to keep the money floating in the system. Falling inflation is required to be kept at a level to prevent economy from sinking in. This is achieved by systematic buying of government securities and bonds, referred to as quantitative easing.
Quantitative easing is applied by a central bank when it cannot lower the interest rate further. This situation occurs when inflation is extremely low. The goal of this process is to increase money supply since interest rate is at the lowest. This is often seen as final attempt to improve the condition of the economy.
This concept was attempted by Bank of Japan in 2001. Due to very low inflation rate being maintained for around a decade, Japan faced the problem of excess reserves and deflation. Attempt to maintain inflation failed miserably even after performing more than two rounds of quantitative easing at that time.
Quantitative easing involves increase in money supply in economy to boost inflation. If not perceived properly, this sensitive balance can yield altogether a different scene resulting into over inflation. Increase in money supply depreciates the value of currency against other currencies. This proves to be beneficial for exporters of the country but is a loss making situation for importers at the same time.
This activity is termed as ‘money printing’ by many analysts as money is created by buying of bonds and securities by the central bank. This term, however, is a misnomer as printing money is actually minting money to cover up the currency deficit in the country.
There are various processes similar to the quantitative easing. One of them is credit easing. This involves buying of private sector corporate bonds and mortgage-based properties unlike QE which involves buying of government bonds. Another process is qualitative easing that also aims at increasing balance sheet of the central bank but by composing assets of less liquid and risky kinds.
Whatever be the process, main issue is maintaining inflation which is a necessary evil for any economy to survive. Hence, a lot of expertise and detailed research is mandatory before taking the decision of quantitative easing. This technique proved its worth during depression caused by bankruptcy declared by Lehman Brothers in late 2000’s. This also helps in increasing marketing confidence.