What Is Quantitative Easing and Does It Work?
The British government is currently embarking on a programme of quantitative easing. In 2009, they announced that they would inject £75bn into the economy, increasing this to £200bn later in the year. In October 2011, a further £75bn was used for quantitative easing and in February 2012, another £50bn. So what is quantitative easing and how does it work?
The Bank of England electronically creates money out of thin air and credits their balance (the modern method of printing money). This money is then used to purchase government bonds, also known as gilts, from various financial institutions. With improved asset sheets, these institutions are supposed to invest in the economy through lending to small and medium sized businesses, and areas to create much needed jobs. Quantitative easing is in effect, an indirect method for investing in certain areas of the economy, with the aims of job creation and economic growth.
 This method tends to be used after lowering interest rates to stimulate private investment and general spending. However, when interest rates are at their lowest and the economy continues to struggle, governments can decide to publicly invest. Quantitative easing is a form of public investment into the economy. It is also intended to improve economic confidence leading to increased private investment, although this doesn't appear to be the case in Britain.
The main problem with this method is the lack of accountability for the money as soon as it enters financial institutions. They have no responsibility to lend this money to small and medium businesses and may choose to either sit on the money or use it for alternative and more profitable ventures. Therefore, the government investment may never end up in the desired areas for job creation and infrastructure programmes. This raises serious questions as to whether quantitative easing really works.
Another issue is that of inflation, ‘printing' more money leads to a depreciation of the currency and the rate of inflation is likely to increase. The depreciation would help if there was strong demand from foreign countries but as everyone is suffering from the global recession, this has little effect on economic growth.
It is evident that with struggling economies suffering from little private investment, governments need to take action through public investment. However, if they don't ensure that it reaches the necessary areas to create much needed jobs, it will not have the desired effect of economic growth. As with any investment, great care must be taken to guarantee that it is used in the correct manner.
The Bank of England electronically creates money out of thin air and credits their balance (the modern method of printing money). This money is then used to purchase government bonds, also known as gilts, from various financial institutions. With improved asset sheets, these institutions are supposed to invest in the economy through lending to small and medium sized businesses, and areas to create much needed jobs. Quantitative easing is in effect, an indirect method for investing in certain areas of the economy, with the aims of job creation and economic growth.
 This method tends to be used after lowering interest rates to stimulate private investment and general spending. However, when interest rates are at their lowest and the economy continues to struggle, governments can decide to publicly invest. Quantitative easing is a form of public investment into the economy. It is also intended to improve economic confidence leading to increased private investment, although this doesn't appear to be the case in Britain.
The main problem with this method is the lack of accountability for the money as soon as it enters financial institutions. They have no responsibility to lend this money to small and medium businesses and may choose to either sit on the money or use it for alternative and more profitable ventures. Therefore, the government investment may never end up in the desired areas for job creation and infrastructure programmes. This raises serious questions as to whether quantitative easing really works.
Another issue is that of inflation, ‘printing' more money leads to a depreciation of the currency and the rate of inflation is likely to increase. The depreciation would help if there was strong demand from foreign countries but as everyone is suffering from the global recession, this has little effect on economic growth.
It is evident that with struggling economies suffering from little private investment, governments need to take action through public investment. However, if they don't ensure that it reaches the necessary areas to create much needed jobs, it will not have the desired effect of economic growth. As with any investment, great care must be taken to guarantee that it is used in the correct manner.