In the UK, interest rates of the Bank of England have reached a record low of 0.5% and they have also announced that they will be increasing the base money by £75 billion. This policy is described by many as “quantitative easing”. But since central banks are generally increasing the base money most of the time, what distinguishes “quantitative easing” from what they do the rest of the time? Is it just a question of degree?
The difference lies only in the name. Obviously when interest rates are zero, they can’t say they’re cutting the interest rate, so they just use a different name for it.
See this BBC article: http://news.bbc.co.uk/1/hi/business/7925620.stm
No, of course the central bank has never tried expanding the money supply before…
Are they having a laugh? Buying assets with what exactly? Bannanas? No, newly printed banknotes.
I think they transfer electronically. They do not print money.
What’s the difference?
They save paper.
You do not print computer entries. They are also not legal tender.
Well the nominal interest rate and the real interest rates are very different.
So to lower the effective interest rate, they need to “quantatively ease” (what a euphemism!).
What do you mean ? Electronic money and electronic payments are fully ‘legal’ scams/tender, just like paper bills.
However, they undertake the quantative easing we are screwed (heard of several different methods thus far). We need higher rates to squeeze out the excess and waste as quickly as possible or this is going to go on for a very long time…
Quantitative easing is when the central bank buys securities other than government bonds, like corporate bonds and asset backed securities, in order to inflate the credit and capital markets. It is used when the interest rate on government bonds no longer effects credit markets in the desired way.
An interest rate of a bond is of course the inverse of the bond price. When the government buys bonds, it pushes up their prices and hence lowers their interest rates. So it is a direct way to lower interest rates on privately issued bonds. If a bond promising to pay 100 in one year is currently selling at 90, its interest rate is 11%. Here comes the government and bids 95 for it, halving its interest rate. If you have money to invest, you’ll have to compete with the government’s bid. Or, as the government hopes, just spend your money on consumption instead!
Also, since the government does pay with newly created money, it is effectively exchanging bonds for cash. It is as if it magically turns debt into money.
The point of buying government bonds isn’t to increase consumption. It’s to flood the credit markets with more credit. By increasing the bond price, financial institutions like banks and mutual funds can now sell their bonds for higher profits and reinvest those profits. If this were not true, then we would not have a boom-bust cycle.
From the Bank of England’s own website:
I like the way they describe the way they will pay for the purchase of these assets: by the issuance of central bank reserves. This language hides the fact that they are producing the money out of thin air, implies that it is from a pool of savings that they have accumulated in the past.