In our recent study Perceptions and Understanding of Money – 2020, we surveyed Americans to measure how well they understand money mechanisms, including concepts such as quantitative easing (QE). We hope that the “Everything You Need to Know” series will help improve understanding of money topics and issues that may not be more relevant today.
What Is Quantitative Relief?
Quantitative relaxation is a policy whereby those who control money supply increase the amount of money in circulation. There are various incentives behind such policies (more on that later), and organizations like the Federal Reserve can use several specific tools to implement quantitative easing.
One lever the Fed can pull to engage in quantitative easing is purchasing guarantees. These include:
- Government bonds
- Corporate bonds
- Equity, which includes exchange-traded funds (ETFs) and could soon cover stocks, is back Forbes
- Assets such as mortgage backed securities
Essentially, buying a security makes one a creditor of the entity issuing the security. The Fed, or another body similar to a central bank in another nation, can give cash to financial institutions in return for such securities, and in doing so provide more liquidity to the market. In doing so, banks are expected to lend that cash and stimulate economic activity.
As well as providing cash directly to the open markets, an organization that operates quantitative easing can also reduce interest rates or lower contingency requirements. Lower interest rates can generally stimulate borrowing, as the cost of borrowing decreases. Reducing reserves requirements reduces the amount that banks have to keep on hand, which means they have more money to borrow.
Banks generally lend whenever they can, as this is their main way of earning money on customer deposits and loans they have received from the Federal Reserve. The Federal Reserve may even lend money directly to banks in the name of quantitative easing. In the QE school, such borrowing is the main catalyst for economic activity during slow periods or stagnation.
Who Controls Quantitative Relief?
In general, those who control a nation’s money supply may be the ones to implement quantitative easing. In the United States, this is the Federal Reserve. In some nations, it may be a central bank, which may be controlled by the ruling political party or may be a fairly independent entity as Bank of Japan, Deutsche Bundesbank, or Bank of England.
The Central European Bank manages the money supply for 19 member countries, and has now played a significant role in European monetary policy since the widespread adoption of the Euro. Each financial body must decide whether to legislate quantitatively based on the impact it is likely to have on those using currency.
What Is Quantitative Relief Intended For?
The stated intention of quantitative easing is to stimulate economic activity through increased access to borrowing, particularly at times when economic activity has slowed down or has shown warning signs of slowing. The rationale is that more money in the hands of the public – business owners, investors, consumers – will lead to growth and spending.
This may generally be the case. Those who have money to spend in worthwhile ways, or simply to burn, may tend to do so. And when this is the case, the goal of quantitative easing is achieved.
Criticism of Quantitative Relief
The main criticism of quantitative easing is that while it may stimulate investment, growth and spending in the short term, such policies have a very real long-term cost of inflation.
Fractional reserve banking allows banks to borrow money without withdrawing that money from their asset ledgers.
This is having a remarkable growth impact on a nation’s money supply from an accounting perspective. Because quantitative easing injects the money directly into the money supply a facilitates borrowing, it tends to have a significant growth impact.
Anytime you grow a money supply, inflation happens. Generally speaking, having more of something (including dollars) reduces the scarcity of that thing, as long as demand does not increase along with supply. As a result, every single unit of that thing will become less valuable. This is the core principle of inflation, and shows why increasing the currency supply reduces the value of each individual currency unit.
Because quantitative easing increases the money supply by its exact principle, the most valid criticism of QE is that it trades a short-term impetus for long-term currency devaluation – a trade that many argue is not worth the effort. After all, there is no guarantee that the stimulus will even work in the short term, while there is a guarantee that QE will nevertheless contribute to inflation.
The University of Pennsylvania Wharton School explains that specific policies related to QE in recent history have had ill effects as well as inflation. For example, the Fed’s stimulus policies following the 2008 financial crisis ultimately reduced direct business investment by banks, making the 2008 quantitative easing a failure.
Quantitative relaxation can be like injecting steroids into a normal course of inflation, with no guaranteed benefit to counteract this disadvantage.
The Case For Shortage Through Cryptocurrency
The buying power of the dollar has plummeted over the last century and more, and continued pumping of fiat money into supply (the main mechanism of quantitative easing) has accelerated this decline. The guarantee of scarcity once provided by the Gold Standard is a distant memory.
Those looking to return to truly rare value stores may consider cryptocurrency, and may have already invested similar to Bitcoin. Unlike the dollar or the Euro, cryptocurrency is stable, with the supply of Bitcoin set at 21 million. While there has been a debate about whether the supply of Bitcoin and other cryptos should eventually increase, the kind of exponential growth that has overtaken the value of the dollar is unlikely.
Scarcity is a central tenet of the value of cryptocurrency, a fact not lost on those who benefit from it.
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