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Quantitative easing
In recent decades, central banks have tried quantitative easing to infuse the economy with cash while maintaining a low risk of severe inflation. The quantitative easing approach is where a central bank increases cash flow by purchasing another entity's bonds.
Anyone can buy bonds from corporations or governments. When you buy a bond, you're really loaning money to the company or government, who will pay it back later with interest.
- When a person buys a bond, they're using money already in circulation.
- When a central bank buys a bond, it creates cash.
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Buying bonds from the government
During the 2008/9 financial crisis and 2020, the United States' central bank bought unlimited bonds from the U.S. government called treasury bonds, loaning the U.S. government money. The government used the money to fund relief efforts.
This isn't the same as printing money. Because of the ...
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The government can't just increase the money supply
Most countries have a central bank that manages the money supply. It is independent of the government to prevent political interference.
The government can implement different types of economic policy, like decreasing taxes, but can't increase the money supply.
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Concerns over central banks buying government debt
When the Federal Reserve pledged to buy unlimited government debt, this means the government could just issue more bonds which the central bank would buy. The government could then use the money from the new bonds to pay off the old bonds, meaning the government never pays back its debt.
So...
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Inflation
When there is more money in circulation, the manufacturers of goods like food, clothing, and cars could respond to demand simply by raising prices. This means you could no longer buy as much with the same amount of money. It is known as inflation.
Inflation of about 2% a year is considered ...
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The central bank
The central bank determines how much money is in circulation at a time.
They can authorise the printing of unlimited money to help an economy in crisis, but that's a short-term solution. It doesn't necessarily help with economic growth in the long term and can actually hurt the economy.
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Fractional Reserve & Money Supply
Banks loan money they don't have. Most hold a limited reserve to serve the few who decide to make redraws. When the majority decides to liquidate their bank accounts we have what is called a bank run.
In order to protect the banks, central banks were created to provide a gu...
Money & Morality
Long-term economic thinking is conducive to moral behavior. Low inflation helps us think long-term, allowing us to worry about the uncertain present while maintaining sanity over the future.
ex: Think of a wine maker selling wine at $20/bottle. When a Central Bank doub...
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