Quantitative Easing

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Money circulates around the world, in different currencies and different amounts. Every currency has its own degree of competitiveness, which is measured by the exchange rate. If your country’s currency depreciates, then its value goes down, which makes it cheaper for other currencies to exchange into your currency. On the other hand, if the currency appreciates, then other countries can buy less of it with every unit of their currency.  

The currency rate is determined by the market. As trade and direct currency exchange take place, currency rate either depreciates or appreciates in relation to other countries’ currencies. However, at times, it could also be controlled by the government. According to the principles of economics, in order to encourage spending, there has to be more money circulating in the market. Also, banks have to offer low interest rates in order to encourage loaning and further spending. Therefore, when money does not circulate enough in one’s country, the government sometimes implements fiscal policies to increase the circulation. This process is called “quantitative easing”.

 In addition to more circulation of money domestically, as trade plays a large role in lots of countries these days, currency depreciation is done through quantitative easing. What this means is that, as lowering the currency value of a country makes it more attractive for the other countries to trade with that country, the government lowers the currency value to encourage more trade. Through this, the country can benefit financially from selling more of its products abroad.

Quantitative easing is done through purchasing securities. The banks purchase securities from the government and the market in order to increase the money supply. At the government-level, it may sell its bonds to other countries’ governments. Consequently, as the money circulation increases, the interest rates go down and the currency value further goes down. Moreover, as the overall liquidity of the country increases, people can borrow money with lower interest rate.

In addition to all the lucrative sides of quantitative easing, there is also the negative side. Looking at it from the domestic perspective, as there is more money in the market, quantitative easing may, and usually does, lead to higher inflation. The overall economy increases, but the price of goods and services in the country increase as well.

This is a strategy used by some countries throughout the world, the biggest examples being China and USA. It has also been reported recently that Japan is going through the same process. Countries strategically implement such policy while making sure that not every country is doing it at the same time. It is very difficult to strictly say whether quantitative easing beneficial or harmful, it does bring both benefits and side effects.

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