Quantitative easing, or QE, has been a key component in America’s financial strategy for the past half decade, since the financial crisis. It’s controversial, and it might be coming to Eurozone countries.
So for any readers getting paid in or holding on to euros at the moment, here are the highlights from the piece, which is available here.
At the most basic level, QE is designed to boost an economy by having a central bank print money to buy securities from banks. This flushes banks with more cash, and the theory goes that this would prompt banks to lend out more money.
Phrased as I just did, QE sounds like black magic: Central banks create money, buy assets from individual banks and get consumers to trade personal debt for cash. That’s what Ron Paul alluded to earlier this week on CNBC when he talked about “the abuse of government.”
Paul, a longtime critic of the Fed, would argue that QE significantly undercuts a currency’s value. If money can just be printed, where is the scarcity to buttress its worth?
But QE has its proponents, who have at least mixed results to support their claims.
If banks can stockpile assets with the cash from the sales of securities, this can raise stock prices and lower interest rates, which leads to investment. Small businesses can get loans. And the Fed, for its work, bolsters its balance sheet. The total value of the Fed’s assets has more than quadrupled since 2007, from less than 1 trillion USD to 4 trillion USD today.
Are these all good things, though? Many will argue no. The Economist, in fact, referred to QE as having created “a firehose of money to emerging economies that cannot manage the cash.”
Plus, once QE runs its course, the central bank will have to sell off these assets. What then? Will the reverse happen, causing interest rates to rise?
Even the threat of a Fed sell-off last year caused global markets to fluctuate wildly.
As such, many economists are arguing that the EU needs to consider alternative methods to spark its Eurozone economy.