Quantitative Easing – why?

November 12, 2010 · Filed under Investment, Stagflation, The Economy

The Government buys its own bonds from banks with money that it creates. Bond prices go up, interest rates go down and banks keep buying bonds of which there is a good supply since Governments are so indebted. The money supply goes up, there is no impact on economic activity except via two mechanisms – interest rates being low reduces borrowing costs for those on variable rates and the exchange rate weakens boosting exports. The latter is the undeclared objective – it is called “beggar thy neighbour”. It doesn’t work. When will journalists stop pandering and call a spade a spade?

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