What is QE (Quantitative Easing)?

I’m just trying to explain it.Details therefore naturally fall by the wayside.

Quantitative easing (QE) in English is a rather unusual measure by central banks to promote inflation and the economy when interest rate cuts no longer work.

It should therefore be understood as an emergency measure that can be applied in an environment of too low inflation (or even deflation) at the same time as interest rates are already at 0.

Before I go on to explain what QE is, I would like to briefly explain the interplay between interest rates and inflation.Inflation is first of all price increase, so ugly expressed a creeping (but regulated!) Devaluation of money. The ECB sets a benchmark, but below 2% per year. This is the target because inflation is calculated as an average value via a test basket and this is seen as a safe buffer that is also acceptable to the consumer. At the same time, one wants to avoid deflation at all costs, because at least in theory, falling prices would curb investment and consumption – why buy today when I get more goods for my money tomorrow? Deflation is therefore a horror scenario for a central bank (and the economy/jobs).

Inflation is regulated by the central bank through the interest rate adjustment screw.With rising inflation (a sign of a well-run economy under normal circumstances), the key interest rate is raised to avoid overheating of the economy, with falling inflation, lowered so that banks can lend money more cheaply and thus the economy is reduced. to stimulate. In fact, the central bank has several adjustment screws, but the details go too far here. For this there are longer articles on the Internet and whole books. By the way, according to its statutes, the ECB is committed to monetary stability. I mention this separately, because in Germany inflation is often equated with hyperinflation and then, in the next step, is fables out of the expropriation of savers by the state (or even any elites). Even if QE isn’t always great for savers, you should stay calm on the carpet.

However, if the key interest rate is already at or near 0 and inflation is still too low below its target, this adjustment screw loses its effect, so something else has to be done.QE expands the money supply by using central bank money to buy securities, mostly long-term government bonds, from banks.

This purchase works at various points in the system.

On the one hand, it lowers the interest rates on these bonds, thereby encouraging the reallocation of money into companies, loans, and others, because they contribute more, even if they are not considered risk-free like government bonds.QE has therefore also contributed to the super-low loan interest rates and correspondingly to the real estate boom of recent years.

On the other hand, the central bank’s secure demand for bonds reduces countries’ costs for new sovereign debt.For example, they can set up their own stimulus programme and/or perhaps also reduce their debt burden by means of more favourable refinancing. In the case of the ECB’s QE in particular, the latter was also the necessary signalling effect that the ECB remains the lender of last resort for the countries, and thus bets on a break-up are pointless.

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