Quantitative Easing

The Fed, a.k.a. the Federal Reserve, is more about easing the money supply...rather than ripping the bandaid off. Quantitative easing is when a central bank, like the Fed, increases the money supply by buying government securities back from the market.

Quantitative Easing, or QE, is considered a kind of last resort in the U.S. You’ll likely only find the Fed pulling the QE wrench out of their monetary policy toolkit if interest rates are already at zero (or near zero). Once interest rates are down as far as they can go, there’s nothing else the Fed can do with interest rates to encourage investing and spending. They’ve made borrowing cheaper...and, yep. That’s about it. And they hope that will result in more people borrowing, which should stimulate the overall economy (employment, spending, all of it).

If the economy is still looking pretty recessionary after pushing interest rates down to zero, then the Fed will do QE. In other countries, QE is a tool the central banks use more often than in the U.S. Like in Japan.

We saw the Fed executing quantitative easing during the Great Recession of 2008. The subprime mortgage crisis took down the entire economy with it, leading to super-low interest rates and QE. Pulling out all the stops.

The reason we should “ease” the money rather than lump-sum it is because increasing the money supply decreases the value of each dollar. That means: inflation nation. Hyperinflation is one of the worst scenarios, where prices climb at an alarming rate, and people stop trusting fiat currency.

The other worst scenario: stagflation. That’s when the central bank has pulled out all the stops to get the economy going again, we’ve got inflation, and yet GDP is still going down. It’s all about...easing into it.