I just learned about a quite interesting topic in the world of finance – Quantitative Easing or QE. It sounds complicated, but it actually directly relates to our investment decisions.

What is quantitative easing? Simply put, it is a monetary policy tool used by central banks when conventional measures no longer work. Instead of just adjusting interest rates, they print money and use it to buy financial assets like government bonds. The goal is to increase the money supply in the economy, lower long-term interest rates, and encourage people to borrow money for investment or consumption.

Here are some specific examples. In 2008, after the global financial crisis, the US Federal Reserve started buying government bonds and mortgage-backed securities. They carried out three rounds of QE until 2014, with a total value of up to $3.7 trillion. The European Central Bank (ECB) also did something similar from 2015, purchasing about 60 billion euros worth of bonds each month, then increasing to 80 billion euros in 2016. During 2020-2021, the Fed continued its bond-buying program with at least $120 billion per month to support recovery after COVID-19.

But what exactly is QE that causes such a big impact on financial markets? When the central bank buys government bonds, demand increases, bond prices go up, and yields decrease. This spreads across the fixed income market, making borrowing cheaper. In the stock market, low interest rates lead investors to seek higher returns by shifting to stocks. Stock prices rise, and the market develops. Even commodity prices like oil and gold tend to increase because of rising demand.

Additionally, QE affects exchange rates. When the money supply increases, the currency tends to depreciate against other currencies. A weaker currency can help exporting countries because their goods become cheaper on the international market.

However, what are the limitations of QE? The biggest risk is inflation. When the money supply grows too quickly relative to actual demand, prices will rise. Consumers face higher costs for goods, and businesses have higher production expenses. Moreover, QE can create financial bubbles. Low interest rates make investors accept higher risks to seek returns, leading to excessive speculation.

There’s also a social issue I find quite important. QE mainly benefits the wealthy who own financial assets. When bond, stock, and real estate prices rise, those holding these assets profit. But low-income people, who do not own assets, suffer from inflation without benefiting. The wealth gap widens.

History shows these limitations. Japan implemented QE from 2001 to 2006 but still couldn’t stimulate spending because people were worried about the economic future. The US applied QE from 2008 to 2014 and faced inflation, asset bubbles, with profits mainly concentrated among financial institutions.

So, what is QE that makes it an effective tool but also one that needs careful management? It is an unconventional monetary policy, used only when interest rates are near zero and conventional measures are ineffective. It must be combined with fiscal policies and other control measures to avoid unintended side effects.

For investors, understanding what QE is very important because policy decisions will directly impact market prices, exchange rates, and interest rates. When hearing that the Fed or ECB is about to implement QE, we need to be aware of the potential changes in our investment portfolios.