FAQs on Quantitative Easing

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While the economy is going from bad to worse there always seems to be new buzz words that have not been mentioned for many years. We had parity, which has become used all over the finance world as GBP/EUR was getting close to 1 for 1, even sport commentators were using it.

The current buzz word, which probably won't make it into sports is quantitative easing, here are a few questions and answers;

How does Quantitative Easing work?
The Bank of England increases the amount of cash in the economy. But while it sounds good that the Bank of England is adding more cash into the economy, the more there is the less it is worth.

How much are they putting into the economy?
Initially they will be adding £75billion over the three months, but this could potentially rise to £150billion if the first attempt doesn't work.

What are the pros?
The Bank can buy gilts, which are very secure, or invest in shares. Buying gilts is, in effect, lending the government money.

What are the cons?
It decreases the value of money, you need more to buy something.

Why do it?
It can lower interest rates, which encourages spending.

Can't we just cut rates?
Interest rates cannot fall below zero per cent. Despite months of cuts, banks are still not lending.

Is money actually printed?
Most money in circulation never actually gets printed. When you buy large items, numbers just get transferred between accounts.

Won't the Bank just buy more bad debt?
No. It will buy government gilts and private IOUs in companies with the best credit ratings.

Who else has done this?
Zimbabwe has been doing it for years, to disastrous effect, to pay government bills. Germany did the same thing in the 1920s. Japan did it in 2005 and it helped end their 15 year recession. The US started in November.

Will Europe follow suit?
Unlikely. Countries with the Euro will probably not all agree on it.

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FAQs on Quantitative Easing

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