What is quantitative easing?

By Deputy Editor Tim Bennett Nov 02, 2010

Tim Bennett

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The Federal Reserve is planning to engage in more ‘quantitative easing’. But what is quantitative easing? Is it really just money printing? And why have central banks decided they need to do more of it? Tim Bennett answers all these questions and looks at what the consequences of more QE could be, for both investors and the wider economy.

• Watch all of Tim's video tutorials here

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  • 1. yikyak

    (03 November 2010, 11:50AM)  Complain about this comment

    excellent educationally - should be sent to all schools!

  • 2. peter09

    (03 November 2010, 12:02PM)  Complain about this comment

    well that made QE2 very clear, and in very clear dialogue

  • 3. Daniel Rodger

    (03 November 2010, 01:04PM)  Complain about this comment

    very helpful, thanks

  • 4. NONEWS

    (03 November 2010, 03:20PM)  Complain about this comment

    Did he mention the real purpose of QE2,
    which is to devaluation of USD?

    Nice guy though, just out the grammar school.

  • 5. Tim

    (03 November 2010, 03:36PM)  Complain about this comment

    To NONEWS. Yes I did indeed mention the potential US dollar impact at the end. For info I actually went to a state school. And at 43 I am sadly not "just out of it"!

  • 6. NONEWS

    (03 November 2010, 04:48PM)  Complain about this comment

    To Tim.
    Was ment to be a compliment!
    I'm a great fan of you.

    I have no inner knowledge of English class-divisions!


    The US can make to world's money what is chooses, to own benefit,
    and to force others to pay!

    The price of food is going to rocket!

    It should be more talk about bringing millions of poor people to hunger ,
    with inflation created by Fed via money printing.

    USA is the manipulator of the world's reserve-currence .

  • 7. Alyson

    (03 November 2010, 05:00PM)  Complain about this comment

    Very helpful. So is property in this an asset like gold? But if they are loans in paper money only, the loan is less to pay off-if you have a job that is.

  • 8. Phillip

    (04 November 2010, 02:28AM)  Complain about this comment

    A very good video on QE that is straight forward to understand. However, he does not cover the fact that when money is created by the Federal Reserve which it may purchase Government Securities with, that money is also debt. The reason for this explanation is this money is an IOU that the Government must pay back to the Federal Reserve by collecting the Federal Income taxes that the people must pay.

  • 9. Don

    (04 November 2010, 02:22PM)  Complain about this comment

    Very helpful. But who do the government/banks actually buy the bonds from?

  • 10. Tim

    (04 November 2010, 02:46PM)  Complain about this comment

    Don. The answer in the US is the "primary dealers" - a list of institutions that includes Goldman Sachs, Cantor Fitzgerald etc. Here's a full list
    http://www.newyorkfed.org/markets/pridealers_current.html

    Hope that helps.

  • 11. Ricky

    (04 November 2010, 04:04PM)  Complain about this comment

    "And boy did they try that..."

    Tim, you are a star! Please keep the video tutorials coming, extremely interesting and simple to understand, you are doing a great service to us all...

  • 12. Jo

    (05 November 2010, 12:27AM)  Complain about this comment

    Thank you for the explanation...very clear. I agree with Ricky..keep the videos coming.

  • 13. Tai

    (05 November 2010, 04:23PM)  Complain about this comment

    excellent explanation from a very intelligent man with the ability to simplify the core issues .Have sent url of this video to several studying economics .well done Tim your work is much appreciated.

  • 14. Steve

    (05 November 2010, 07:29PM)  Complain about this comment

    Why not just nationise all the banks now, it's going to happen anyway, this is the only way out of the downward spiral we're in. We criticised the banks for taking the risk with US mortgages, is the Fed not taking the same risk with the economy?

  • 15. onlyafool

    (05 November 2010, 09:07PM)  Complain about this comment

    Nice little lesson on economics but very disappointed with Tim for thinking that banks actually lend money.

  • 16. onlyafool

    (05 November 2010, 09:11PM)  Complain about this comment

    Philip your a man who knows what he's talking about.

  • 17. MonacoJim

    (05 November 2010, 09:55PM)  Complain about this comment

    What is this? the age of the Whiteboard? (Just kidding, well done overview) Don't forget governments don't have any money, only what they take from the working public. Check out another white board jockey for the real story:
    http://www.youtube.com/watch?v=3uWCOvnOtTI&feature=player_embedded

  • 18. Poldark

    (05 November 2010, 10:32PM)  Complain about this comment

    Excellent video, one thing missing from the equation is the G20.
    The extra £600 billion QE was done with consultation of the G20 who agreed to support the trading index of the dollar at 77.
    So, although the dollar fell Wednesday it has already bounced back as the central banks of the G20 bought US dollars.
    My theory is we are moving to a World Exchange Rate Mechanism where each country of the G20 keeps within a bandwidth of the US dollar just like the European Exchange Rate Mechanism. Can you see where this is headed?

  • 19. John Edwards

    (06 November 2010, 12:38AM)  Complain about this comment

    I've been trying to watch this for two days - no joy! Must be heavy demand!

  • 20. FC

    (06 November 2010, 11:20AM)  Complain about this comment

    Excellent explanation Tim. I expect the vast majority of people do not understand QE2 at all. There was hardly a mention of it in the UK news following the FOMC on Wednesday. Missing from your video were the savers who are being forced to take punts on e.g. commodities to preserve the value of their hard-earned savings... where the inevitable consequence is asset bubbles, instability a lottery economy.

  • 21. FC

    (06 November 2010, 11:26AM)  Complain about this comment

    How about a vid on the necessary role of deflation in the economic cycle? Or just an explanation of all the kinds of inflation...

  • 22. charlie

    (06 November 2010, 04:58PM)  Complain about this comment

    China and the middle east have the largest currency reserves. The Fed (and G20) wants to hold up the value of the dollar BUT it needs to sell goods into these cash rich markets. Can the fed have its cake and eat it? Please can you put together a whiteboard session on this very topical issue?

  • 23. Lefty Goldblatt

    (06 November 2010, 05:56PM)  Complain about this comment

    2 questions:

    (1) you need to include the credit-card money machine in your digrams. interest rates are 20% and higher and folks are treading water. the bank rate does not matter at all. they cannot re-finance.

    (2) why do the chinese not provide banking services to US consumers? they have enough dollars to buy a US bank and offer accessable interest rates.

  • 24. George

    (07 November 2010, 03:56PM)  Complain about this comment

    well, most of the dollars are not in America, as the US dollar is the main reserve currency of the world. .... so for each dollar US prints almost every person in the world looses some of his hard work and savings to pump up the American economy a bit, so they work less, consume more and get fat. that is why the gold is so high although it is almost useless. people don t trust the US dollar and desperate for an alternative.

  • 25. SSP

    (07 November 2010, 07:26PM)  Complain about this comment

    Very Good. Explained in simple terms. Thanks very much.

  • 26. Simon

    (07 November 2010, 10:34PM)  Complain about this comment

    great. Nice and clear explanation.

    I would be interested in a little more around the idea that the world economy is great big Ponzi scheme.

    Also how does the buying of government bonds affect the taxpayer and his indebtedness? Am I right in thinking the taxpayer has to pay back (via taxes) interest to the central bank that it just created out of nowhere in the first place?

  • 27. David

    (08 November 2010, 10:17AM)  Complain about this comment

    I find the tutorials very helpful. Could you do one on bonds?

  • 28. James

    (09 November 2010, 12:16PM)  Complain about this comment

    Excellent. Why don't our politicians watch videos like this? They might learn something and actually realise that we cannot just keep spending and infalting our way out of trouble

  • 29. Tim

    (09 November 2010, 02:43PM)  Complain about this comment

    David - yes I can! An introduction to bonds is the next one I have lined up. So watch this space.

  • 30. Donal

    (11 November 2010, 06:22PM)  Complain about this comment

    Tim - you have a talent for conveying complex concepts clearly. Well done and please keep the vid's coming.

  • 31. Jim

    (12 November 2010, 09:51PM)  Complain about this comment

    Very interesting, indeed.

    Usual questions however.

    How is the amount of money in the system measured. Or to put it another way how does the central bank know when enough money is in the system or not enough.

    In the UK, we have these monetary measurement numbers, I think they are called M0, M1 and so on. Do they have relevance to the amount of money in circulation?

    Also that some money is lost to the system by some people not trusting there money to banks and possibly criminals who have to hide cash for obvious reasons. Not forgetting wear and tear on the notes, understand UK notes are made of some form of cotton, so these would disappear from the system or taken out of circulation if the bank has them.

  • 32. Paul

    (13 November 2010, 01:24PM)  Complain about this comment

    Tim
    In the video clip below Mr. Bernanke clearly states that QE does not create new money. Who is right ?
    http://www.c-span.org/Watch/Media/2010/11/05/HP/A/40361/Fed+Chair+Bernanke+QA+with+Jacksonville+University+Students+on+Monetary+Policy.aspx

  • 33. Tim

    (14 November 2010, 04:32PM)  Complain about this comment

    Paul. No new printed money is created as the government simply increases the size of the iou it has at the fed. However the effect is to create more funding and liquidity for the primary dealers (investment banks and the like)

  • 34. fnm500

    (10 December 2010, 12:09PM)  Complain about this comment

    Sorry for asking some genuinely stupid/basic questions:

    1. Why does "printing" more dollars, devalue the dollar? Why the assumption that if you increase the supply of a product, the demand for it won't keep up?

    2. Why does increasing the money supply with QE2 increase inflation in the US? Most of the money being created is spent on defense items or good being imported from China. In the case of defense, the public never get to spend that extra money created, it merely goes into buying more missiles. In the case of buying imported goods, its the Chinese who get these extra dollars.

    Great video by the way!

  • 35. rikki

    (10 December 2010, 12:35PM)  Complain about this comment

    Tim-very good but what I think you missed is that perhaps the FRB wants to generate inflation as it is one way of defaulting on the country's huge loans-so it is not an unintended consequence. It also creates more problems for the Chinese et al who actually already have an inflation problem and could force them to revalue their currency-another intended consequence by the FRB

  • 36. Flogged Horse

    (10 December 2010, 12:39PM)  Complain about this comment

    Excellent Explanation! A+

    When everyone else was borrowing, I was saving!
    Now it feels like my carefully stored nuts are dangling exposed to the cold draft whilst being chewed on by inflation!

    As I see it we have two choices
    Option 1 - "Death by a thousand cuts!" - (bank loans, low base rate, QE1, QE2, QE3......prop, prop, etc,etc)
    Option 2 - "Let the system die of natural causes"

    Either way, once at rock bottom the only way is up!
    Ok - Its a world problem so Option 1 is going to win every time! no body wants to be out of the warmth! But just how big will the hole be at the bottom?

    You heard it here first! We will need "World War 3" to clime out! - Darn again whos got the biggest armies? China and the USA!

  • 37. Simon

    (12 January 2011, 07:32PM)  Complain about this comment

    Hello Tim,

    First, thankyou for producing these tutorials.

    I am shocked at the idea of commercial banks accepting cheap money from the Fed or BoE to invest in government bonds.

    Could you suggest any search words so I can explore this further?

    Simon.

  • 38. Robert

    (07 October 2011, 03:54AM)  Complain about this comment

    Very enjoyable and informative video.

    Don't you think QE is more of a gamble than a calculated risk? The government has essentially spent half of public sector expenditure on QE, without any real evidence it will encourage borrowing, and so spending. Surely the £200 billion last year should have been a barometer for increasing the supply of money, which resulted in contracting manufacturing and engineering outputs, rising unemployment, rising prices, and a haemorrhaging stock-market, coupled to volatile currencies.

    Doesn't this go against a governernt that becries austerity?

  • 39. david

    (11 February 2012, 02:41PM)  Complain about this comment

    bonds are government debt right ?
    why does the BOE quantitatively ease us completely out of all debts.
    if it can print money to buy back bonds , is it a giant step for the bank to buy back all bonds.
    If the borrowing is in Swiss francs , Dollars why does it not " quantitatively purchase the required currency to repay the debt.
    the Americans have been doing it for years, why not sterling.
    the effect would be to strengthen the economy by reducing the need to raise taxation. this in turn should make the pound stronger ?
    this all sounds to simple. it is possible, would it make sense ?

  • 40. Chris

    (03 March 2012, 03:05PM)  Complain about this comment

    Tim, as I understand it the idea is that at some point the central banks will sell the bonds they have bought through QE and destroy the money again, so that is why QE is described as an IOU? Or will they wait for the bonds to expire and collect the interest payments and the final payment on the bond and then destroy the money? And what happens if economies are struggling in 10 years time and central banks choose to reinvest the QE money rather than destroy it?
    Ben Bernanke may say new money hasn't been created because at some point it will be destroyed, but the fact is new money has been created/ printed right? And how binding is the agreement it will be destroyed at a later date?
    Thanks to yourself and Moneyweek for running the tutorials it is very helpful to have a source available to help make sense of these things.

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