Quantitative easing (QE for short) is an unconventional monetary policy. After implementing zero interest rate or near zero interest rate policy, the central bank increases the supply of base money by purchasing medium and long-term bonds such as national debt, and injects a large amount of liquidity into the market to encourage spending and lending, which is equivalent to indirectly printing more banknotes. The government bonds involved in quantitative easing policy are not only huge in amount, but also long in cycle. Generally speaking, the monetary authorities will take this extreme approach only when conventional tools such as interest rates are no longer effective.

its operation is that a country's monetary management institution (usually the central bank) purchases treasury bonds, mortgage bonds, and other securities from financial institutions such as commercial banks through open market operations, so as to increase the funds of commercial banks in the settlement accounts opened by the central bank, inject new liquidity into the external banking system (become monetary assets of external banks), and improve the money supply in the real economy environment.

The central bank uses money created out of thin air to buy state bonds in the open market, lend money to deposit-taking institutions, and purchase assets from banks. All these will lead to the decline in the yield of government bonds and the interbank lending rate, so that banks can sit on a large number of assets that can only earn very low interest. The central bank hopes that banks will be more willing to provide loans to earn returns, so as to alleviate the financial pressure in the market.

when banks have loosened or assets purchased will depreciate with inflation (such as treasury bonds), quantitative easing will devalue the monetary tendency.

because quantitative easing may increase the risk of currency depreciation, the government usually introduces quantitative easing measures when experiencing deflation. Continued quantitative easing will increase the risk of hyperinflation.

under the partial reserve system, banks keep a certain proportion of deposit reserve, and the rest of the funds can be used for loans. With the deposits increased in the process of quantitative easing, banks can borrow and create more money supply, that is, deposit multiplication. For example, suppose that the liquidity of money is 1 transactions on average, and for every $1, created by quantitative easing, the final money supply can be $1,.

quantitative easing provides sufficient liquidity to the local interbank market, greatly reducing the borrowing cost, and ultimately it is expected that all borrowers will benefit to support the overall economic operation. Generally speaking, quantitative easing can support the overall economy and "help to alleviate or curb the impact of economic downturn."

Although it is described as "printing money on the machine", quantitative easing is usually just to adjust computer accounts. To implement quantitative easing, a country must have control over its currency; Therefore, individual countries in the euro zone cannot unilaterally introduce quantitative easing policies.

When reducing interest rates to increase the money supply is ineffective, the central bank may introduce quantitative easing measures; It usually appears when the interest rate is close to zero.

United States

In response to the global financial crisis that began in 27, Federal Reserve Chairman Ben Bernanke responded with quantitative easing, which ended in October 214 after three times of implementation.

after the financial tsunami in 28, the United States launched three rounds of quantitative easing, which greatly increased the monetary base.

Zero interest rate policy: Since August 27, the Federal Reserve has cut interest rates for 1 times in a row, and the overnight lending rate has dropped from 5.25% to % to .25%. The federal funds rate has been maintained at .25% since December 16th, 28.

Replenishing liquidity: During the financial crisis in 27 and the bankruptcy of Lehman Brothers in 28, the Federal Reserve rescued the market as a lender of last resort. Buy some non-performing assets of some companies and launch a series of credit instruments to prevent excessive liquidity shortage in domestic and foreign financial markets and financial institutions. At this stage, the Fed will expand the target of supplementing liquidity (actually injecting money) from traditional commercial banks to non-bank financial institutions.

Actively release liquidity: From 28 to 29, the Federal Reserve decided to purchase 3 billion US dollars of long-term treasury bonds and a large number of mortgage-backed securities issued by Fannie Mae and Freddie Mac. At this stage, the Federal Reserve began to directly intervene in the market and directly contribute to support troubled companies; Directly act as an intermediary and directly release liquidity for the market.

guide the market to lower long-term interest rates: in 29, financial institutions in the United States gradually stabilized, and the Federal Reserve gradually purchased long-term US Treasury bonds through open market operations. Through this operation, we try to guide the market to lower the long-term interest rate and reduce the interest burden of debtors. At this stage, the Federal Reserve gradually returned to the background from the stage, and provided funds for the social economy through quantitative easing.

Britain

Britain also uses quantitative easing as a financial policy to reduce the impact of the financial crisis.

Japan

Japan was the first country to adopt quantitative easing monetary policy. In 21, the Bank of Japan made such an amazing move. They adopted a new monetary policy tool, a further expansionary monetary policy based on zero interest rate, to deal with deflation, and no country had tried this policy before. Its practice is to inject a large amount of excess funds into the banking system, so that both long-term and short-term interest rates are at a low level, thus stimulating economic growth and fighting deflation.

Abenomics, which was implemented at the end of 212, is also a quantitative easing policy in essence.

Eurozone

On January 22, 215, the European Central Bank also announced that the European version of quantitative easing policy would be implemented in the Eurozone from March 215 to September 216.

on December 4, 215, the European central bank announced that it would extend QE until March 217, cut the main interest rate from negative .2% to negative .3% again, and extend the period of quantitative easing for at least half a year, keeping the monthly bond purchase unchanged at 6 billion euros, and the total scale will be expanded to 1.5 trillion euros.

Impact

This unconventional policy measure, which is almost universal in the world at present, is conducive to curbing the deterioration of deflation expectations to some extent, but it has no obvious effect on reducing market interest rates and promoting the recovery of credit markets, and may bring certain risks to the later global economic development.

in the first case, if the quantitative easing policy can take effect successfully, increase the credit supply, avoid deflation and restore healthy economic growth, then stocks will generally outperform bonds.

in the second case, if the quantitative easing policy is carried out excessively, which leads to excessive money supply and the recurrence of inflation, then real assets such as gold, commodities and real estate may perform better.

in the third case, if the quantitative easing policy fails to produce results and the economy falls into deflation, then traditional government bonds and other fixed-income instruments will be more attractive.

quantitative easing is likely to bring about hyperinflation. The central bank injects a lot of liquidity into the economy, which will not lead to a substantial increase in the money supply. However, once the economy recovers, the money multiplier may rise quickly, and the liquidity that has been injected into the economic system will soar under the action of the money multiplier, and excess liquidity will constitute a big problem in the short term.

The quantitative easing policy not only reduces the borrowing costs of banks, but also reduces the borrowing costs of enterprises and individuals. Now the world is cool and hot, and governments all over the world are implementing ultra-low interest rates, with the original intention of hoping for a rapid economic recovery. But as a result, the quantitative easing money that should have entered the real economy has flowed into the stock market in some countries, such as the United States, and the stock market has skyrocketed when the economic fundamentals are not good at all.

The quantitative easing monetary policy is a double-edged sword. The implementation of quantitative easing monetary policy will inject a lot of funds into the market, which will help alleviate the shortage of funds in the market and help restore economic growth; However, in the long run, the hidden danger of inflation may cause stagflation when economic growth is stagnant. In addition, quantitative easing monetary policy will also lead to a sharp depreciation of the domestic currency, which will stimulate domestic exports and worsen the economic forms of related trading bodies, leading to trade frictions and so on. For the United States, the global economic hegemon, the impact of implementing this radical quantitative easing monetary policy on its own country and the global economy should not be underestimated.