Money Systems: Quantitative Easing 1 & 2 (QE1 & QE2)

“Quantitative easing” is an approach by central banks aimed at escalating the money, which is in distribution as manifest in the financial system. It is tenable when there is a deflation in the economy leading to reduced circulation. The central banks create an environment where there is increased spending as opposed to savings. This is tenable through reduction of interest charges thus raising the pace of lending and activities in the economy. The government achieves this by purchasing property from banks and the private sector. Interestingly, this fails to involve production of the new currency, which is used in the purchase. However, the dealings are tenable by electronic means whereby physical cash is not utilized. Central banks procure financial property from minor banks and personal businesses. This is by employing the principal acquired electronically.

The administration may purchase bonds with the intention of lessening the interest charges. This boosts the ratio of funds in allotment. Nevertheless, if the rates are almost nil or nil, the normal directives may not bring down the rates further. This means that they are unlikely to accomplish the eventual intent of increasing the cash flow. This conveys into focus the vital functions arising from ‘quantitative easing.’ The aim is to promulgate economic activity and other facets of the economy through raising the coffers in the banks. Additionally, the improved reduction in the rates at which people repay loans borrowed from the banks and other fiscal entities will be manifest.

Qe1 is the initial approach used by the main banks when the crisis arising from deflation is looming or has already set in. This is evident in the purchases made from the banks and the private segments to reduce the interest capacities. When the central bank is successful in handling the crisis, the economy is likely to spring back to normalcy. Conversely, in other circumstances it may not culminate in corrective mechanisms. This may be the result of wrong fiscal decisions initiated in the economy.

Qe2 is the subsequent phase of ‘quantitative easing’ (eq1) done by the main banks as a measure to counter deflation when the initial step does not yield corrective measures to the economy. This was a common term in the year 2010, in many world economies, as they countered financial hardships. This targets increasing credit opportunities in the economy thus giving rise to more lending chances. Some scholars in this field have insinuated that such a level of quantitative easing is erroneous.

Qe2 is the final option to kindle the economy; thus, there are minimal opportunities for the third round or any other subsequent trials. Such a strategy focusing on correcting deflation came in handy in Japan though, it was not instrumental. Evidently, dangers are associated with such a mechanism of correction. First, there may be a surplus flow of cash in the economy to surpass the capacity of commodities and services in the economy. This directs to pointless inflation. Secondly, this approach may be unsuccessful if the banks do not lend money to small-scale traders. This indicates diminishing demands for loans. This money is available to the banks and does not flow to the economy to correct the deficit. In universal economies, the effect of quantitative easing is not the same as individual countries. This action culminates in reductions in one nation thus leading to decreasing assets in other economies.

It is worth denoting that this method is not the same as printing money and channeling it to the economy. Countries that have employed such a strategy as evident in Zimbabwe have had their economies assuming an escalated intensity of inflation. It is remarkable noting that Qe was utilized by “USA and Britain” to yield success.