What is Quantitative Easing and
how does it affect markets?
How does QE work?
The term quantitative easing (QE) describes a form of monetary policy used by centralbanks to increase the supply of money in an economy when the central bank interesteither at, or close to, zero.
Fed supplies money to banks
Banks supplies specified bondinstruments
In QE US Fed would buy the designated bonds from the US banks in exchange for cashUS Dollars
Fed supplies money to banks
Banks supplies designated bond instruments
Banks lend the funds toconsumers and business
QE is intended to improve the flow of credit in the economy byflushing the banking system with funds
Side Effects of QE
Banks & FI lends money to hedge funds & clientswho in turn speculate on asset markets
QE can improve credit flow in the system. But thatcredit could be directed more towards speculativeassets and less to real economy
Effect of QE on various assets
The 8 major central banks of the world have nearly doubled their balancesheet through various quantitative easing programs… that is equivalent to aliquidity infusion of nearly 7/8 trillion USD over last 52 months!
Post QE1: Brent gained 125%, Gold gained41% & Silver gained 63%
Post QE2: Brent gained 84%, Gold gained65% & Silver gained 183%
Effect of QE on various assets
Why QE might not help real economy
Fed supplies money to banks
Banks supplies specified bondinstruments
Liquidity Trap
Fed supplies banks with cash but banksdo not lend to consumer or business, asbanks are risk averse +++ Banks aresaddled with bad loans
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