To QE or not to QE?
LONDON, September 17, 2012 /PRNewswire/ –
So there’s not enough money in the economy, unemployment is far too high, interest
rates are at near 0%, everyone is dejected and conventional measures have run out of ammo,
“time for another round of Quantitative Easing”, some may say. But what exactly is
Quantitative Easing (QE) and why should we care?
Investopedia defines Quantitative Easing as “a government monetary policy occasionally
used to increase the money supply by buying government securities or other securities from
the market”, or in plain English, a policy designed to directly inject more money into the
economy. No-one (that we know of) wants to stay in recession, and although controversial,
Quantitative Easing is a policy designed to haul economies out of sticky situations when
all other attempts fail.
So how does Quantitative Easing work? The central bank generates a substantial amount
of money and pumps it into the economy through purchasing assets from financial
institutions. This gives financial institutions more money, which are in turn, more
willing to lend money. Increased lending to businesses and consumers will encourage people
to go out and spend more on goods and services, and businesses to expand and hire
necessary staff. This in theory pumps more money into the economy and helps stimulate
In the US there had already been two rounds of Quantitative Easing, and yesterday
everyone was on Fed watch with ears tuned to the voice of Federal Reserve Chairman Ben
Bernanke to see if he would announce a third (QE3). “What’s this got to do to with us?”
you might think, but with the world’s largest economy, any announcement of QE3 in the US
would likely have a huge impact on financial markets and economies across the globe.
The trillion dollar question is does Quantitative Easing work? Most people would
cautiously answer “yes” (although we have no idea how bad the situation would be without
it). Results from QE1 and QE2, where the Fed pumped over $1.5 trillion dollars into the US
economy to support the housing market, saw the 30 year mortgage rate drop to 5% a year
later, and now sitting at just above record lows.
With an economy that is still showing some signs of life, an inflation rate that is
hardly catastrophic and the announcement coming so close to the Presidential elections in
November, there are reservations across the Atlantic on whether the US really needs QE3
and if now is the right moment.
Quantitative Easing is a highly controversial and risky policy, as would be the case
with pumping such a large amount of money in the economy. Many see it as a short-term fix
to plug a leaky economy, an economy that will leak again as soon as the plug is removed.
Like one and two before it, QE3 has its critics and the impact not just in the US but the
global economy as a whole will be played out over the coming weeks, months and years. Can
QE cure the crisis? That is the question.
Log in to your Capital Spreads account to follow and trade on the impact the Fed is
having on the financial markets , or set up a free demo account to follow and trade
without any risk to your capital.
Spread betting [http://www.capitalspreads.com ] and CFD trading carry a high level of
risk to your capital and you can lose more than your initial deposit. These trading
products may not be suitable for all investors so seek independent advice.
Capital Spreads is a trading name of London Capital Group Ltd (LCG) which is
authorised and regulated by the Financial Services Authority.
SOURCE Capital Spreads