Quantitative Easing (QE): impact and implications

Quantitative easing is a little-known economic concept. However, the term has been around for a long time and is understood by those who work and are interested in the field of finance. Interestingly, this policy is often controversial, some see it as a solution, while others see QE as a nuisance.

Definition of Quantitative Easing (QE)

Quantitative easing or quantitative easing is an unconventional monetary policy that induces a central bank to increase the money supply by purchasing financial assets from private institutions or commercial banks, as well as long-term public securities in the open market. This policy has been implemented to facilitate obtaining loans or credits. Quantitative easing is also used when standard monetary policy is no longer effective.

By buying securities, the money supply increases. An increase in the money supply also increases the amount of other assets, thereby lowering interest rates and swelling the central bank's balance sheet. This policy makes it easier for banks to offer conditional loans to the public.

The effect of quantitative easing

So what is the effect of implementing QE?

If Bank acts as a central bank to increase the money supply, it could lead to inflation. In the worst case scenario, business knowledge leads to inflation through a policy of quantitative easing without economic growth, leading to stagflation. If the increased money supply does not flow through the banks, but into the economy, then QE will not work unless it is used to ease fiscal policy (deficit spending).

If QE fails, fiscal policy aimed at expanding the money supply can be implemented. If assets are issued in the form of long-term bonds held by the government to finance deficit spending, then indirect quantitative easing blurs the line between fiscal policy and monetary policy.

Another effect of the implementation of the policy of quantitative easing is the depreciation of the currency. For manufacturers, this can help boost growth as exported goods are valued less in the global market. But a weaker currency increases the value of imports. In addition, currency depreciation also increases production costs. As a result, prices sold to consumers increased.

The conclusion of quantitative easing

From the above explanations, it can be seen that the application of quantitative easing (QE) has two effects, namely gains and losses. Basically, the implementation of QE is good for the banks. The central bank hopes to raise money by selling bonds. This money can be used by the central bank to boost economic growth by keeping the reserve ratio in balance. The trick is to distribute that money as credit to the public. Quantitative easing has also led to an increase in the value of the supply of government bonds. When the value of a bond increases, interest rates automatically decrease. Since the price of long-term government bonds is often used as a benchmark for long-term investment rates, interbank rates will fall. This situation forces banks to release deposits. Banks will use these deposits to make loans to other parties at higher interest rates. For all its strengths, QE also has weaknesses. The implementation of this policy entails the risk of causing an increase in inflation rates. If the amount of new money in circulation continues to increase, the value of money will weaken. Therefore, when economic conditions improve, the money supply increases rapidly. This situation makes banks lend to the public more aggressively and the public is more willing to spend. Quantitative easing is usually a last resort in emergency situations, including deflation when necessary. Many countries around the world have also implemented quantitative easing policies, such as the United States, the European Union, and Japan.

So here's what you need to know about the meaning and impact of QE. With this interpretation, you can determine the right time to start a business or invest. However, be sure to weigh the risks.