There’s been a lot of talk about quantitative easing today, following the news that the Bank of England (BoE) will be using it in an attempt to help the economy (along with interest rate cuts).
Many news reports have called it printing money, but this is slightly misleading, as it gives the impression that the BoE will be stood on street corners handing out fivers to pedestrians. Sadly, its not really that simple and this isn’t quite how it works. So how does quantitative easing work?
Well, the BoE will buy up assets such as government and corporate bonds, which should mean that the financial institutions that sell themÂ (in basic terms, our banks)Â will have “new” money available to them, and the hope is that this money finds its way into the wider economy through increased lending and investment, amongst other things. Whilst new money is not literally being printed, some would argue that the effects are the same.
There are a few lessons we’ll hopefully have learned from history where “printing money” has led to big problems. But the are supposedly restrictions in place to prevent this happening here, thanks in part to the Maastricht treaty, and the short-term nature of the policy.
Here are a few more resources if you’re interested in finding out more on this complex yet fascinating (if you’re into this sort of thing) subject:
- Quantitative Easing (Wikipedia)
- Q&A: Quatitative Easing (BBC)
- Quantitative Easing: The Story So Far (BBC, Video)
photo credit: Andy Beez