Overview of Quantitative Easing

When manipulating interest rates does not propel the economy forward far enough, the Fed does not remain dormant; instead, the Fed proceeds with its favorite game named Quantitative Easing (QE), a game it has become increasingly ardent to play.

According to Investopedia, Quantitative Easing refers to an “unconventional monetary policy in which a central bank purchases longer-term securities from the open market” as a means to expand the money supply, and thus stimulate economic growth. The execution of QE is induced upon the Fed’s inability to further lower interests when interest rates are already near zero. This is when the Fed engages in purchasing government bonds, as well as a myriad of other securities, ultimately increasing the money supply and the liquidity in the system.

Quantitative Easing may successfully stimulate countries’ economies if conducted properly, but in the case of the United States, despite the Fed injecting liquidity- and thus cash- into the economy, it is only the borrowers that may successfully carry out the Fed’s intention. In other words, people and investors are the ones that need to seek loans in order for the money to begin circulating- and increase the velocity of money in the economy.

Moreover, QE may backfire through the over-devaluation of the country’s currency; however, this may be counterbalanced by possible attractive import opportunities for foreign importers, ultimately allowing the domestic country’s manufacturers to bring in revenue inbounds.

Though it may sound as an initiative the United States may solitarily create, Quantitative Easing’s roots stem from Japan since 2001: Japan’s deflation crisis, known as “Japan’s Lost Decade,” included a period of stagnation, with Japan’s economy developing only 1.14% from 1991 to 2003. Essentially, the plight that hit Japan came from the Bank of Japan’s mistake following the burst of an inflationary bubble in its economy, adhering to limiting the money supply, while simultaneously raising interest rates, and suddenly reversing its actions. Because assets’ prices were falling due to contractionary monetary policy, deflation prevailed, offering no…