The Process of Quantitative Easing and How a Currency Loses Its Worth
By: Steffen Berhardt | Posted: 19th January 2011
Quantitative easing is a monetary policy that is implemented by central banks to increase the market’s money supply overnight and to encourage commercial banks and other financial institutions to lend money to persons or corporations that are financially weak. Quantitative easing is centered on the goal of financial recovery by means of large quantities of cash reserves. Once the cash reserves are distributed and properly handled by the financially weak members of the economy, recession is expected to be gradually eliminated and deflation significantly delayed.
Central banks have their ways on how they can increase the monetary supply of the market in less than twenty-four hours. Zero percent interest rates are very attractive for those who are intending to save money to keep their financial stability and the purchase of bonds can easily earn the central bank the much needed cash reserves. This is how quantitative easing begins – through the creation of money. However, this creation can result to destruction if quantitative easing is not successfully implemented and the central bank generates too much money. One of the major results of its failure can be associated with the loss of value in the state or nation’s currency.
When the state or nation creates more and more money, the currency gradually loses its worth and inflation immediately increases. Exchange rates are also immediately affected. With this great risk at hand, quantitative easing becomes a very controversial instrument to help an economy in recession recover.
Quantitative easing is carried out by central banks by cutting short-term interests to zero percent and indicating the length of its validity and by purchasing long-term securities like Treasuries and corporate bonds. This monetary policy is easy to understand, but still, the advantages and disadvantages that people can derive by its implementation are yet to be experienced.
Quantitative easing is a financial tool used by central banks to lift the present economy suffering from recession or deflation.This article is free for republishing
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Tags: validity, twenty four hours, interest rates, quantities, financial institutions, monetary policy, money supply, cash reserves, central banks, commercial banks, inflation, financial stability, financial tool, exchange rates, treasuries