Quantitative Easing Explained

The UK Bank of England injected into the UK Economy a sum of £375 Billion. This process of injecting money is called Quantitative Easing. The Japanese did this in the 1990’s to rescue their banking sector, and the UK Federal Reserve has done the same, to help the US economy after the financial crisis. Only last week the Bank of England are talking about more Quantitative Easing, and also the US decided to do more by buying short term US Government Bonds to lower long term interest rates, by more Quantitative Easing.

But what really is Quantitative Easing ?

To put it simply the Central Bank (eg The Bank of England) creates money and uses it to buy assets such as government bnods and high quality debt from private companies, (like BT)

[http://www.btplc.com/Sharesandperformance/Fixedincome/index.htm]

BT’s bonds.

This created money feeds into the wider economy as high street banks that hold government bonds and corporate debt (high quality debt from private companies) sell the gilts and corporate bonds to The Bank of England, and get the newly created cash. The Bank of England for example, in March 2009, they decided to buy two types of asset – UK government bonds (known as gilts) and high-quality corporate bonds. Making the majority of purchases in gilts allows the Bank to increase the quantity of money in the economy rapidly. Targeted purchases of private sector assets has make it easier and cheaper for companies to raise finance by improving conditions in corporate credit markets.
[http://www.federalreserve.gov/boarddocs/speeches/2004/200401033/default.htm]
The above link from a speech in 2004 that makes interesting reading on monetary policy from the US Federal Reserve, and now quantitative easing.  So really it is not printing money as the media often say, but really it creating new credit

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