Can somebody please explain to me what quantitative easing is in simple terms?
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Lets say you are rich, and you notice that all your friends are very poor, and they are struggling with having enough money to pay for food and their basic needs.
You have a few options, you could:
– Give them money for free
– Lend them money
– Tell them to have a yard/garage sale, and buy up all the stuff that they don’t need.
Quantitative easing is the governments version of the last option. To infuse the economy with cash, the government buys up a large portion of investment items called securities (usually stocks and bonds). This allows the holders of these items to liquidate (sell off) their investments. Normally when a business, or person needs to generate money quickly, the last thing that they want to do is sell their assets. Consider how you would feel selling your car, for grocery money. You would be too motivated, and be forced to sell for too low, and lose a bunch of money on your car. But if you have to get the money, then you have to.
Having the government, buy your car for the market rate, right now. Gives you a good return, lets you get the money you need, and then when you are back on your feet, you can either buy your car back, or a new one. Secure in knowing that you didn’t lose much in the situation.
This in theory allows the economy to bounce back quickly after a recession.
Disclaimer: The government does not do Quantitative Easing on the level of individual people, it is often buying thousands of bonds from banks. I only compared to individual items as I think for ELI5 it makes it clearer what is going on.
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