Monday, 19 September 2011

What does Quantitative Easing actually mean?

You've by now most likely heard the term "Quantitative Easing" about, oooooh I dunno... maybe a million times? On the tele and in the papers, it's everywhere these days!

The first few times you heard it maybe you thought to yourself "OK, but what the hell does it actually mean?", and then after a while, since nobody in a position of authority that you feel like you ought to take them seriously seems to want to tell you what it really means ... you probably just started thinking "what-ev-er!" and switching off. I don't blame you, and you likely don't need me to tell you you're very much not alone!

To cut to the chase, it really is as simple as the name might suggest. It means they are creating new 'money'. They are "easing" the "quantity" of money in the financial system. Making money easier to get hold of, so that the economy isn't thrust into a depression like the 1930's, or perhaps more accurately in today's world, a prolonged recession like the last twenty years plus (and still counting) in Japan.

Back in the day, when money meant bank notes and coins in people's wallets, shoeboxes under the bed, and those massive whiskey bottles full of coins that your grandad used to have beside the sofa in the lounge, it would have been literally translated as "printing money". The Central Bankers would have been up all night and through the weekend just trying to print as much money as they thought they could get away with. But today most money isn't cash, it's electronic information within the banking system. Electronic digits on a computer hard disk somewhere. They no longer have to employ people into the dark hours and through the weekend, and especially on bank holidays, feeding paper and ink into the printing presses. No, printing actual, physical bank notes is so last century! Nowadays they simply type the number of new Pounds (or Dollars, Euros, etc) that they want to create, into the Central Bank's computer, and presto! There is more money to go around. It's done before you've even got the kettle boiled for your tea break. In the immortal words of Tommy Cooper: Just like that!

Wonderful isn't it, this modern world of ours? So civilised. At the stroke of a keyboard, the Bank of England (and other Central Banks around the world) can create more of that lovely stuff you need to buy things every day and spend most of your time working to earn, or more importantly to pay back the loan of the money you previously borrowed to, say, buy your house perhaps. Or your car. Or that nice holiday you had last year. Or that natty pair of jeans and designer shoes that you put on the credit card and will, y'know, get around to paying off sometime soon. Yeah, soon... OK, maybe never then eh?

You have to work for money, but the people who create the money you must work for, type numbers into their computer. It's a tough job, but someone's got to do it, right? The really hard part is stopping themselves from going mad at it and creating so much of this money that people start to realise ... Hey! This money is no good! What am I doing with all this money in my bank account and my personal pension? Why haven't I got a lot of stuff, real-world and tangible things, instead of this mirage? Why am I working so hard to pay back these loans and mortgages and whatnot that I've accumulated over the years, when someone else can just make it up out of nowhere!? I reckon you'd have a pretty good point.

Rich people don't have money in the bank. They have debts, and they have stuff. They understand that money is no good. So they borrow it expecting that it will be easier to pay back later. Stuff will have become more expensive, just because there is a lot more money chasing after it by then, so if necessary they'll just sell their stuff to payback the debts. Simples. But they'll have the stuff at today's prices in the meantime... and they'll probably wind up keeping it.

This was how houses became so unaffordable! Many people took on money debts to bet on house prices rising forever and making the debts easier and easier to repay, which did kinda look almost like it might the case... until it clearly wasn't any more and people started not just losing money, but finding they couldn't even pay off the mortgage loans after selling the houses. Oh dear! But that's a whole different story and, thankfully, I'm not about to take you there in this post, because I like to keep focused. Call me old fashioned.

Anyway, moving swiftly on. You're probably about now thinking something like "OK, so QE = printing money, I get it and you can stop labouring the point now... but why are we only recently hearing this term bandied about?". That's a great question! I'm glad you asked. But you'll need to read yet another article to find out the other half of the Quantitative Easing story. Sorry about that! Why not stop and relax with a song before you click that link and continue with this voyage of discovery?

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