What are Quantitative Easing and Quantitative Tightening?


I’ve been hearing these terms but don’t really understand what they mean, when and why are they used by the government and how exactly they affect prices and general standard of living.

In: 45

The value of a dollar today is set primarily by inflation rates and interest rates. Basically with high interest rates and/or inflation rates money is worth less today than it would be tomorrow. If you think of “quantitative” as “access to money”, then easing means it becomes easier to get loans and tightening means it’s harder.

When interest rates are high, people and businesses want to save money because they get a good return, when they’re low you want to spend money because you can borrow from someone else very cheaply. “Easing” is when the government (who controls all currency) drops interest rates so that borrowing money is really cheap, usually done to stimulate spending (aka the economy). Tightening is the opposite and is used to fight inflation by encouraging people to save money.

Some of why inflation is high today is due to 1) a 10 years period of having easy access to money combined with 2) rampant speculation in markets that led to corporations and individuals taking their cheap money then “investing” it vs spending it. That increases the on-paper supply of money which drives up prices of those actually selling goods. Remember, just because Tesla at one point was worth more than Microsoft on paper, doesn’t mean that Tesla today produces more value in goods and services than them.

Quantative easing:

The govt sell bonds. You can imagine them like a savings account at the bank of england. Someone gives pounds to the UK govt on the agreement that after a set period of time the govt will give the money back plus interest.

I say “someone” – its sometimes a person. Most often its pension funds, insurance companies, banks etc.

With quantatitive easing, the govt buys back the bonds early in order to change savings into liquid assets. Basically the govt (BoE) transfer money from a savings account to a current account.

The joke on all of us is the bit where the govt tell us they bailed out the banks by giving them back their own assets.

Basically QE is a con.

Pretty simple. In QE the Fed buys bonds (and mortgage backed securities) from the market. This increased demand for bonds increases the price of bonds thereby decreasing their yields. This makes bonds less attractive to investors so they put money in stocks increasing stock prices. Increased stock prices cause people to be more likely to spend money. QT is just the exact opposite.

The usual way of controlling the money supply by the central bank is through interest rates. Sometimes that is not a good idea, so one of the way they do it is quantitative easing. This injects new money directly into the economy by having the central bank buy bonds and other assets with newly created money. This prevents deflation.

The Fed controls interest rates and inflation normally though open market operations. This is just buying and selling of short-term Treasuries. When the Fed buys Treasuries, it’s injecting new money into the system into the banks that sold those Treasuries. Those banks now have more money to lend to others, reducing interest rates with an intent to increase inflation. When the Fed sells Treasuries, it absorbs money from the banks it sold Treasuries to and takes it out of circulation. The banks have less money to lend, interest rates goes up, with the intent to reduce inflation.

Quantitative easing is a more expanded version of the Fed’s open market operations. However, instead of only buying short-term Treasuries to influence interest rates and increase the money supply, the Fed buys long-term Treasuries, mortgage-backed securities, corporate bonds, and sometimes (in the case of Japan) equities.