Quantitative Easing

Remember those long games of Monopoly with the family? Remember how much richer you thought you were when you hit the "GO" square that lets you "collect $100 salary as you pass"? Remember how this square kept the game going another couple of hours? QE, short for quantitative easing, is perhaps doing what this square is doing for our economy.

What is quantitative easing?
When the economy isn't on the bright side, central banks try to encourage the public to borrow money from banks or spend from their existing savings. To achieve the former, interest rates are to be decreased. But what interest rates can't drop any lower? Then banks have to directly inject money into the economy. This, in simplified terms, is quantitative easing. The central banks do so by purchasing assets, for example government bonds, with virtual money, new electronically created money. So what good does it do? This means that those businesses which sold those assets can use that sum of virtual money, setting off a positive domino effect.

What are the effects?
The government sells the bonds in the form of reverse auctions - auctioning prices are driven down instead of up. With the extra money in the banks' bank accounts, they are more willing to lend. The second effect is that the supply of bonds on the market since much is bought by the banks already. What do we know about supply and demand? Now that there are less bonds available for purchase on the market, desire for these bonds increases.


The reason I brought this up is because the US is currently talking about QE3, the third installment as suggested by the number of quantitative easing. The US will be ever more eager to push through this plan should unemployment rate not decrease. Keep your ears open for more about this proposal later this year.