I just realized that many people do not clearly understand what QE is, especially when central banks continuously implement this policy. Today, I want to share some things I’ve learned about Quantitative Easing.

Basically, what is QE? Simply put, it is an unconventional monetary policy tool used by central banks when traditional measures are no longer effective. Instead of just adjusting interest rates, the central bank creates new money and buys financial assets, mainly government bonds. The goal is to increase the money supply, lower long-term interest rates, and encourage economic activity.

I will give a few real-world examples to make it easier to understand. In 2008, after the global financial crisis, the Fed started buying government bonds and mortgage-backed securities. They carried out three rounds of QE from 2008 to 2014 with a total value of about $3.7 trillion. Similarly, in 2015, the ECB also launched a asset purchase program (PSPP) to combat deflation risks, buying about 60 billion euros per month, then increasing to 80 billion euros in 2016. The program lasted until 2018 with a total value of approximately 2.6 trillion euros. During 2020-2021, the Fed bought at least $120 billion worth of bonds each month to support the economy’s recovery after COVID.

Why is QE important? When conventional monetary measures no longer work, especially when interest rates are near zero, QE becomes the last resort. It helps increase liquidity, reduce the risk of financial crises, and encourages lending and investment. I see that QE is really useful in emergency situations when the economy needs immediate rescue.

But not everything is perfect. QE has notable limitations. First is the risk of inflation. When too much money is created without a corresponding increase in demand, prices will rise, money will lose value, and consumers will be negatively affected. Second, QE can create financial bubbles. Due to low interest rates, investors seek higher-yielding, riskier investments, leading to bubbles in the markets. Third, QE often benefits financial institutions and the wealthy more than ordinary people, increasing income inequality.

History shows these limitations are real. Japan implemented QE from 2001 to 2006 but couldn’t stimulate spending because people were worried about the economic future. QE also caused the Yen to depreciate, increasing import costs. In the US, although QE from 2008 to 2014 helped the economy recover, it also caused inflation, asset bubbles, and increased inequality.

Now I want to talk about the impact of QE on markets. In the bond market, when the central bank buys government bonds, demand increases, prices go up, and interest rates fall. This spreads to other corporate bonds, encouraging borrowing and investment. In the stock market, abundant liquidity and low interest rates lead investors to shift toward stocks seeking higher returns, pushing prices up. In the foreign exchange market, increased money supply can cause the currency to depreciate, benefiting exports. In commodities markets, as QE stimulates economic growth, demand for oil, gold, and metals increases, raising commodity prices.

I realize that QE is not a perfect tool. It needs to be carefully managed and combined with other control measures to avoid unintended side effects. For investors, understanding what QE is and how it affects different markets is very important. Events related to quantitative easing policies often have a significant impact on our investment decisions. Therefore, I recommend everyone to monitor the monetary policies of central banks to gain deeper insights into the markets.