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http://www.businessinsider.com/blackboard/quantitative-easing

The term quantitative easing (QE) describes a form of monetary policy used by central banks to increase the supply of money in an economy when the bank interest rate, discount rate and/or interbank interest rate are either at, or close to, zero. A central bank does this by first crediting its own account with money it has created ex nihilo ("out of nothing").[1] It then purchases financial assets, including government bonds and corporate bonds, from banks and other financial institutions in a process referred to as open market operations. The purchases, by way of account deposits, give banks the excess reserves required for them to create new money by the process of deposit multiplication from increased lending in the fractional reserve banking system. The increase in the money supply thus stimulates the economy. Risks include the policy being more effective than intended, spurring hyperinflation, or the risk of not being effective enough, if banks opt simply to pocket the additional cash in order to increase their capital reserves in a climate of increasing defaults in their present loan portfolio.[1]

"Quantitative" refers to the fact that a specific quantity of money

is being created; "easing" refers to reducing the pressure on banks.[2] However, another explanation is that the name comes from the

Japanese-language expression for "stimulatory monetary policy", which

uses the term "easing".[3] Quantitative easing is sometimes colloquially described as "printing money" although in reality the money is simply created by electronically

adding a number to an account. Examples of economies where this policy

has been used include Japan during the early 2000s, and the United States and United Kingdom during the global financial crisis of 2008–2009.

Concept

Ordinarily, the central bank uses its control of interest rates, or sometimes reserve requirements,[citation needed] to indirectly influence the supply of money.[1] In some situations, such as very low inflation or deflation, setting a low interest rate is not enough to maintain an adequate money supply, and so quantitative easing is employed to further boost the amount of money in the financial system.[1] This is often considered a "last resort" to increase the money supply.[4][5] The first step is for the bank to create more money ex nihilo ("out of nothing") by crediting its own account. It can then use these funds to buy investments like government bonds from financial firms such as banks, insurance companies and pension funds,[1] in a process known as "monetising the debt".

For example, in introducing its QE programme, the Bank of England bought gilts from financial institutions, along with a smaller amount of high-quality debt issued by private companies.[6] The banks, insurance companies and pension funds can then use the money they have received for lending or even buying back more bonds from the bank. The central bank can also lend the new money to private banks or buy assets from banks in exchange for currency.[citation needed] These have the effect of depressing interest yields on government bonds and similar investments, making it cheaper for business to raise

capital.[7] Another positive side effect of this is that investors will swap to

other investments, such as shares, boosting the price of these and

increasing wealth in the economy.[6] QE can also help in reducing interbank overnight interest rates, and

thereby encourage banks to loan money to higher interest-paying bodies.

More specifically, in terms of the lending undertaken by commercial banks, they use a practice called fractional-reserve banking whereby they abide by a reserve requirement, which regulates them to keep a percentage of deposits in "reserve",[citation needed] which can only be used to settle transactions between them and the central bank.[7] The remainder, called "excess reserves", can (but does not have to be) be used as a basis for lending. When, under QE, a central bank buys from an institution, the institution's bank account is credited directly and their bank gains reserves.[6] The increase in deposits from the quantitative easing process causes an excess in reserves and private banks can then, if they wish, create

even more new money out of "thin air" by increasing debt (lending)

through a process known as deposit multiplication and thus increase the country's money supply. The reserve requirement

limits the amount of new money. For example a 10% reserve requirement

means that for every $10,000 created by quantitative easing the total

new money created is potentially $100,000. The US Federal Reserve's now out-of-print booklet Modern Money Mechanics explains the process.

A state must be in control of its own currency and monetary policy if it is to be able to unilaterally employ quantitative easing. Countries in the eurozone (for example) cannot unilaterally use this policy tool, but must rely on the European Central Bank to implement it.[citation needed] There may also be other policy considerations. For example, under Article 123 of the Treaty on the Functioning of the European Union[7] and later Maastricht Treaty, EU member states are not allowed to finance their public deficits

(debts) by simply printing the money required to fill the hole, as

happened in Weimar Germany and more recently in Zimbabwe.[1] Banks using QE, such as the Bank of England, have argued that they are increasing the supply of money not to fund government debt but to

prevent deflation, and will choose the financial products they buy

accordingly, for example, by buying government bonds not straight from

the government, but in secondary markets.[1][7]

History

Quantitative easing was used unsuccessfully[8] by the Bank of Japan (BOJ) to fight domestic deflation in the early 2000s.[9] During the global financial crisis of 2008, policies announced by the US Federal Reserve under Ben Bernanke to counter the effects of the crisis are a form of quantitative easing. Its balance sheet expanded dramatically by adding new assets and new

liabilities without "sterilizing" these by corresponding subtractions.

In the same period the United Kingdom used quantitative easing as an

additional arm of its monetary policy in order to alleviate its

financial crisis.[10][11][12]

The European Central Bank (ECB) has used 12-month long-term refinancing operations (a form of

quantitative easing without referring to it as such) through a process

of expanding the assets that banks can use as collateral that can be

posted to the ECB in return for Euros. This process has led to bonds

being "structured for the ECB"[13]. By comparison the other central banks were very restrictive in terms of the collateral they accept: the US Federal Reserve used to accept primarily treasuries (in the first half of 2009 it

bought almost any relatively safe dollar-denominated securities); the Bank of England applied a large haircut.

In Japan's case, the BOJ had been maintaining short-term interest rates at close to their minimum attainable zero values since 1999. With quantitative easing, it flooded commercial banks with excess liquidity to promote private lending, leaving them with large stocks of excess reserves, and therefore little risk of a liquidity shortage.[14] The BOJ accomplished this by buying more government bonds than would be required to set the interest rate to zero. It also bought asset-backed securities and equities, and extended the terms of its commercial paper purchasing operation.[15]

How

1. The national bank declares an extremely low rate of interest, for example 0.5%.

2. The national bank credits its own bank account with money created from 'thin air' through lending interests.

3. The newly created money is then used for buying government bonds

from financial firms such as banks, insurance companies and pension

funds.

Risks

Quantitative easing is seen as a risky strategy that could trigger higher inflation than desired or even hyperinflation if it is improperly used and too much money is created.

Some economists[who?] argue that there is less risk of such an outcome when a central bank

employs quantitative easing strictly to ease credit markets (e.g. by

buying commercial paper), whereas hyperinflation is more likely to be triggered when money is

created for the purpose of buying up government debts (i.e. treasury

securities) which in turn can create a political temptation for

governments and legislatures to habitually spend more than their

revenues without either raising taxes or risking default on financial

obligations.

Quantitative easing runs the risk of going too far. An increase in

money supply to a system has an inflationary effect by diluting the

value of a unit of currency. People who have saved money will find it is devalued by inflation; this combined with the associated low interest rates will put people who rely on their savings in difficulty. If

devaluation of a currency is seen externally to the country it can

affect the international credit rating of the country which in turn can lower the likelihood of foreign investment. Like old-fashioned money

printing, Zimbabwe suffered an extreme case of a process that has the

same risks as quantitative easing, printing money, making its currency

virtually worthless.[1]

Origin

The original Japanese expression for "quantitative easing" (量的金融緩和, ryōteki kin'yū kanwa), was used for the first time by a Central Bank in the Bank of Japan’s publications. The Bank of Japan has claimed that the central bank adopted a policy with this name on 19 March 2001.[16] However, the Bank of Japan's official monetary policy announcement of

this date does not make any use of this expression (or any phrase using "quantitative") in either the Japanese original statement or its English translation.[17] Indeed, the Bank of Japan had for years, and in an article published in February 2001 had claimed that "quantitative easing … is not effective" and rejected its use for monetary policy.[18] Speeches by the Bank of Japan leadership in 2001 gradually, and ex post, hardened the subsequent official Bank of Japan stance that the policy adopted by the Bank of Japan on March 19, 2001 was in fact quantitative easing. This became the established official view, especially after

Toshihiko Fukui was appointed governor in February 2003. The use by the Bank of Japan is not the origin of the term "quantitative easing" or its Japanese original (ryoteki kinyu kanwa). This expression had been used since the mid-1990s by critics of the Bank of Japan and its monetary policy.

The earliest written record of the phrase and concept of "quantitative easing" has been attributed to the economist Dr Richard Werner, Professor of International Banking at the School of Management, University of Southampton (UK). At the time working as chief economist of Jardine Fleming

Securities (Asia) Ltd in Tokyo, and noted for his 1991 warning of the

coming collapse of the Japanese banking system and economy (reference:

Richard A. Werner, 1991, The Great Yen Illusion: Japanese foreign

investment and the role of land related credit creation, Oxford

Institute of Economics and Statistics Discussion Paper Series no. 129), he coined the expression in an article published on September 2, 1995 in the Nihon Keizai Shinbun (Nikkei).[19]

According to its author, he used this phrase in order to propose a

new form of monetary stimulation policy by the central bank that relied neither on interest rate reductions (which Werner claimed in his Nikkei article would be ineffective) nor on the conventional monetarist policy prescription of expanding the money supply (e.g. through "printing money", expanding high powered money, expanding bank reserves or boosting deposit aggregates such as M2+CD—all of which Werner also claimed would be ineffective). Instead, Werner

argued, it was necessary and sufficient for an economic recovery to

boost ‘credit creation’, through a number of measures. He estimated in

this article that the incipient bad debt problem of the Japanese system (i.e. including future bad debts)

amounted to about ¥100 trillion, or 20% of annual Japanese GDP, and that this had increased banks’ risk aversion. The subsequent slowdown in

bank credit extension was the major problem, because commercial banks

are the main producers of the money supply, through the process of

credit creation. He thus recommended as a solution policies such as

direct purchases of non-performing assets from the banks by the central bank, direct lending to companies and the government by the central

bank, purchases of commercial paper (CP) and other debt, as well as

equity instruments from companies by the central bank, as well as

stopping the issuance of government bonds to fund the public sector borrowing requirement and instead having the government borrow directly from banks through a standard loan contract. All of these, Werner claimed, would stimulate credit creation and hence boost the economy. Many of these policies have recently been adopted by the US Federal Reserve under Chairman Bernanke, who was familiar with the debate on Japanese monetary policy, under the expression of "credit easing".

However, while Werner used and explained the concept of credit

creation in his article, he chose not to use it in the article’s title, as too few readers would be familiar with it and alternative expressions were associated with flawed or failed policy prescriptions. Werner preferred to coin a new phrase. In his subsequent writings, including his bestselling book on the Bank of Japan (Princes of the Yen, M. E. Sharpe, and his 2005 book New Paradigm in Macroeconomics: Solving the Riddle of Japanese Macroeconomic Performance, Palgrave Macmillan), Werner argues that the Bank of Japan’s usage of

his expression ‘quantitative easing’ may be misunderstood. While

suggesting it was adopting the policy suggested by a leading critic, the Bank of Japan implemented the standard monetarist expansion of bank

reserves and high powered money, which Werner had predicted would fail. It is not obvious why the Bank of Japan chose to use Mr Werner’s

expression, and not the already existing and widely used expressions

‘expansion of high powered money’, ‘expansion of bank reserves’ or,

simply, ‘money supply expansion’, which more accurately describe its

adopted policy at the time.

Comparison with other instruments

Qualitative easing

Willem Buiter has proposed a terminology to distinguish quantitative easing, or an expansion of a central bank's balance sheet, from what he terms qualitative easing, or the process of a central bank adding riskier assets onto its balance sheet:

Quantitative easing is an increase in the size of the balance sheet of the central bank through an increase it is [sic] monetary liabilities (base money), holding constant the composition of its assets. Asset composition can be defined as the proportional shares of the different financial

instruments held by the central bank in the total value of its assets.

An almost equivalent definition would be that quantitative easing is an increase in the size of the balance sheet of the central bank through an increase in its monetary liabilities that holds constant the (average) liquidity and riskiness of its asset portfolio.

Qualitative easing is a shift in the composition of the assets of the central bank towards less liquid and riskier assets, holding constant the size of the balance sheet (and the official policy rate and the rest of the list of usual suspects). The less liquid and more risky assets can be private securities as well as sovereign or sovereign-guaranteed instruments. All forms of risk, including credit risk (default risk) are included.[20]

Credit easing

In introducing the Federal Reserve's response to the 2008-9 financial crisis, Fed Chairman Ben Bernanke was keen to distance the new programme, which he termed "credit easing" from Japanese-style quantitative easing.In his speech, he announced:

“ Our approach—which could be described as "credit easing"—resembles quantitative easing in one

respect: It involves an expansion of the central bank's balance sheet.

However, in a pure QE regime, the focus of policy is the quantity of

bank reserves, which are liabilities of the central bank; the

composition of loans and securities on the asset side of the central

bank's balance sheet is incidental. Indeed, although the Bank of Japan's policy approach during the QE period was quite multifaceted, the

overall stance of its policy was gauged primarily in terms of its target for bank reserves. In contrast, the Federal Reserve's credit easing

approach focuses on the mix of loans and securities that it holds and on how this composition of assets affects credit conditions for households and businesses.[21]

Edited by Panda

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A state must be in control of its own currency and monetary policy if it is to be able to unilaterally employ quantitative easing. Countries in the eurozone (for example) cannot unilaterally use this policy tool, but must rely on the European Central Bank to implement it.[citation needed] There may also be other policy considerations. For example, under Article 123 of the Treaty on the Functioning of the European Union[7] and later Maastricht Treaty, EU member states are not allowed to finance their public deficits

(debts) by simply printing the money required to fill the hole, as

happened in Weimar Germany and more recently in Zimbabwe.[1] Banks using QE, such as the Bank of England, have argued that they are increasing the supply of money not to fund government debt but to

prevent deflation, and will choose the financial products they buy

accordingly, for example, by buying government bonds not straight from

the government, but in secondary markets.[1][7]

Yeah right, they really stuck to those rules didn't they.

No mention either that the Fed by their Dollar printing antics have played a large part in the mayhem currently unfolding in the Middle East.

Pr!cks the lot of them.

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In days gone by like the last 300 years since the creation of the bank of Engand.. to hit the 2% inflation target it has always been enough to lower the central bank base rate. The lowest over those 300 years was 1.75%.

This time nations went to 0% and still were in deflation. So they had to go below 0% which isn't possible in fractional reserve banking. So it requires printing.

Its a world away from Zimbabwe which was already running excessive inflation and then printing.

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In days gone by like the last 300 years since the creation of the bank of Engand.. to hit the 2% inflation target it has always been enough to lower the central bank base rate. The lowest over those 300 years was 1.75%.

This time nations went to 0% and still were in deflation. So they had to go below 0% which isn't possible in fractional reserve banking. So it requires printing.

Its a world away from Zimbabwe which was already running excessive inflation and then printing.

Banks using QE, such as the Bank of England, have argued that they are increasing the supply of money not to fund government debt but to

prevent deflation, and will choose the financial products they buy

accordingly, for example, by buying government bonds not straight from

the government, but in secondary markets.[1][7]

Thems the rules, they ought to be enforced.

UK deflation has been beaten in the medium term .... time to sell that £200 bn back to the market .... although highly unlikely.

What you describe isn't workable ... the West can't simply print its' way out of trouble without bringing the rest of the world down with it,

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What do you think Injin......................?

I hoped this thread would ignite some thought?

I think it's very simple.

1) The general public isn't aware of the whole "broad money" thing and banking requires them not to know

2) The CB and the commercial banks have an arrangement whereby when the commercial banks ****** up, the CB prints it up and makes it good.

3) QE is simply the taking in of commercial bank "assets" at nominal par with money pritning.

4) All of this is done so the man in the street never finds out he's a victim of fraud. That's the aim, the prupose and design. Everything else is secondary. Without the conflation of legal tender with bank credit, there is no system.

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I think it's very simple.

1) The general public isn't aware of the whole "broad money" thing and banking requires them not to know

2) The CB and the commercial banks have an arrangement whereby when the commercial banks ****** up, the CB prints it up and makes it good.

3) QE is simply the taking in of commercial bank "assets" at nominal par with money pritning.

4) All of this is done so the man in the street never finds out he's a victim of fraud. That's the aim, the prupose and design. Everything else is secondary. Without the conflation of legal tender with bank credit, there is no system.

I do like that "Injin" term "CON"-FLATION, unique..................about sums up the whole charade................

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You don't need to think about QE too much. All it is, is theft.

You must protect your wealth. Just like protecting your property with bolt locks, fences, alarms etc.

The bad thing is, is that this theft is invisible. The worst kind of robber is one you can't even see. And it is all legal!

---

At least they tell us about quantitative easing.

If I was a mad dictator of my own country, I would get the printers to print up a load of money so I could spend it on flash cars, houses, loose women, holidays and give the rest to friends and family.

If they called QE, the "I-am-stealing-money-from-your-savings-account" program, it wouldn't go down too well would it?

Edited by Money Spinner

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I have selected three current threads on the board to illustrate where theft is happening right now. Don't think too much, QE is not complicated at all.

http://www.housepricecrash.co.uk/forum/index.php?showtopic=162828&view=findpost&p=2968976

http://www.housepricecrash.co.uk/forum/index.php?showtopic=162832&view=findpost&p=2968977

http://www.housepricecrash.co.uk/forum/index.php?showtopic=162833&view=findpost&p=2968981

Oh and look what they're spending the money on, flash cars, holidays and loose women (probably). They just need to spend the money on houses, it's all going on the wrong areas.

Anyway thats my 2p. I don't have PhD in economics. I know nothing.

Edited by Money Spinner

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You don't need to think about QE too much. All it is, is theft.

You must protect your wealth. Just like protecting your property with bolt locks, fences, alarms etc.

The bad thing is, is that this theft is invisible. The worst kind of robber is one you can't even see. And it is all legal!

---

At least they tell us about quantitative easing.

If I was a mad dictator of my own country, I would get the printers to print up a load of money so I could spend it on flash cars, houses, loose women, holidays and give the rest to friends and family.

If they called QE, the "I-am-stealing-money-from-your-savings-account" program, it wouldn't go down too well would it?

What if they allowed the alternative to play out.

i.e. All bank accounts were reset to zero (plus a few grand perhaps from govt. guarantees. but that's less certain also with such an outcome).

i.e. Which outcome is preferable:-

£100k in the bank with 2% negative yields for a few years or

£0k left in the bank with a 2% positive yield?

Btw, in that scenario there's no 'money' (debt) left to buy 'assets' anyway. Thus their price must plummet, as indeed started to happen in September '08 before deposits and asset prices were supported by the expansion of CB balance sheets. An 'Austrian' wet dream no doubt, but what does the day after look like?

Edited by Red Karma

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A clean sheet.

a clean sheet, rich bankers in the gutter, indeed just as few banks for safe keeping of deposits.

A lot less tat in the shops, and what there is, your £ will buy a lot of it.

Plenty of Public sector joining the bankers.

OR

a policeman on every corner.

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What if they allowed the alternative to play out.

i.e. All bank accounts were reset to zero (plus a few grand perhaps from govt. guarantees. but that's less certain also with such an outcome).

i.e. Which outcome is preferable:-

£100k in the bank with 2% negative yields for a few years or

£0k left in the bank with a 2% positive yield?

Btw, in that scenario there's no 'money' (debt) left to buy 'assets' anyway. Thus their price must plummet, as indeed started to happen in September '08 before deposits and asset prices were supported by the expansion of CB balance sheets. An 'Austrian' wet dream no doubt, but what does the day after look like?

So what you are outlining here is, if no "printing" or asset purchases by the Fed, BoE et al had taken place, then anyone with over £35k in one institution within the UK; in October 2008, would have lost the remainder?

So they would have gotten the £35k's from where? There ain't no pot of honey? Just say old granny pat had £150k in the Nationwide in Oct 2008, would she had lost it all had they not "printed", a genuine question, was it really QE, negative interest rates for say 4 years or a complete reset to zero balance across all bank and building accounts in the UK. I ask because i an interested to hear anyones thoughts..............

If a complete reset to zero, nothing could be valued against FIAT, no gold, not houses, not coffee, not an hours labour, not a pension pot...........was it that bad?

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What if they allowed the alternative to play out.

i.e. All bank accounts were reset to zero (plus a few grand perhaps from govt. guarantees. but that's less certain also with such an outcome).

i.e. Which outcome is preferable:-

£100k in the bank with 2% negative yields for a few years or

£0k left in the bank with a 2% positive yield?

Btw, in that scenario there's no 'money' (debt) left to buy 'assets' anyway. Thus their price must plummet, as indeed started to happen in September '08 before deposits and asset prices were supported by the expansion of CB balance sheets. An 'Austrian' wet dream no doubt, but what does the day after look like?

A mortgage free, tax free population.

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Which makes the money worthless as without tax....

We'd have a money which was worth something in and of itself.

This "sky is falling" stuff is purely and simply the terror of the long term prisoner on being released.

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Banks using QE, such as the Bank of England, have argued that they are increasing the supply of money not to fund government debt but to

prevent deflation, and will choose the financial products they buy

accordingly, for example, by buying government bonds not straight from

the government, but in secondary markets.[1][7]

Thems the rules, they ought to be enforced.

UK deflation has been beaten in the medium term .... time to sell that £200 bn back to the market .... although highly unlikely.

What you describe isn't workable ... the West can't simply print its' way out of trouble without bringing the rest of the world down with it,

Yep now that in the UK inflation is running above target, time to stop QE and either sell some of the QE bought bonds back, or increase the base rate.

In the US they are still below target so still some more printing needed.

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So what you are outlining here is, if no "printing" or asset purchases by the Fed, BoE et al had taken place, then anyone with over £35k in one institution within the UK; in October 2008, would have lost the remainder?

So they would have gotten the £35k's from where? There ain't no pot of honey? Just say old granny pat had £150k in the Nationwide in Oct 2008, would she had lost it all had they not "printed", a genuine question, was it really QE, negative interest rates for say 4 years or a complete reset to zero balance across all bank and building accounts in the UK. I ask because i an interested to hear anyones thoughts..............

If a complete reset to zero, nothing could be valued against FIAT, no gold, not houses, not coffee, not an hours labour, not a pension pot...........was it that bad?

The depositors definately would have been wiped out at all the British financial institutions because they are legally the most junior creditors. After they were wiped out then it would go into the bondholders based on seniority of the bonds. The senior bond holders would have gotten something, because of the brand value and infrastructure the big banks have. The game would have gone on with the reset the system needed.

But I think a lot of people online delude themselves to think we could have had the banking crash and reset, and their family would have kept all their savings.

If the government wanted to cover the £35k it would have had to print up that amount.

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  • 284 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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