Advantages of Quantitative Easing
February 12, 2025
Real Estate Investment Trusts (REITs) have become the buzzword when it comes to investing in real estate. They have provided above average returns in countries like the United States where they were first implemented. This has led to the growing popularity of the Real Estate Investment Trusts (REITs) and today more countries in the world […]
All over the world, governments are held accountable for the unemployment rates prevalent in their country. It is as if, the government’s main duty is not to govern but rather to provide employment to every willing person in the country. Therefore, whenever unemployment rears its ugly head, governments find themselves under increasing pressure to change […]
What is the McKinsey Model of Internal Democracy and How it Works and its Advantages The famous business consulting firm, McKinsey follows a model of internal democracy that is unique and can be said to be pioneering. This is because the CEO or the Chief Executive Officer and other senior leaders are directly elected by […]
What is Capital Account Convertibility ? Capital Account Convertibility means that the currency of a country can be converted into foreign exchange without any controls or restrictions. In other words, Indians can convert their Rupees into Dollars or Euros and Vice Versa without any restrictions placed on them. The reason why it is called capital […]
Sovereign debt is regularly in the news even though we may not realize it. Several poor countries keep defaulting on their debt. This occurs more frequently with countries in Latin America and Africa. People have a limited understanding of how sovereign debt works. This is because sovereign debt is a bit counter-intuitive. It is true […]
The Fed and the United States government have chosen the Quantitative Easing (QE) policy as the best policy to overcome the 2008 crisis. This means that there were other policies in consideration. These policies were alternatives to Quantitative Easing (QE) policy and were capable of providing a similar effect. However, the average person is not even aware of most of these policies.
In this article, we have therefore decided to discuss some of these policies and their advantages and disadvantages relative to Quantitative Easing (QE). Some of the alternative policies are as follows:
One of the alternatives to Quantitative Easing (QE) suggested by many critics is the “helicopter drop” policy. This policy is a fictional policy that was made popular by Milton Friedman.
The policy is based on the assumption that a helicopter flies across various neighborhoods in the city and drops money to the people. Simply put this means that the government creates more money and distributes it to the people. This policy would also have a similar effect as Quantitative Easing (QE). This is because as and when people get their hands on the newly created money, they would start to spend it. As a result, the demands for goods and services will increase and the economy as a whole will be stimulated.
Critics argue that this policy is much better than Quantitative Easing (QE) and that the government should simply give away money to the people. This is because the helicopter drop would create a somewhat equitable distribution of money in the economy and everyone receiving the money would be better or worse off to a similar extent.
However, in the case of Quantitative Easing (QE), the banks are the ones that receive the money first. As a result, they get maximum advantage out of the money which is then lent out to the people much later and by the time the average person gets their hand on the money, inflation has already caught up!
Many economists believe that tax rebates would be a much better alternative to Quantitative Easing (QE). This is because Quantitative Easing (QE) emphasizes on creating more borrowing in the economy. The borrowing maybe for a productive purpose, such as setting up an industry. Alternatively it could be for consumption driven purpose.
Quantitative Easing (QE) does not distinguish between these two types of lending. Hence, the policy of Quantitative Easing (QE) is faulty to these economists.
Tax rebates on the other hand can be used to control, exactly who gets the additional money. For instance, the United States government could cut tax on productive purposes. This would leave more money in the hands of the entrepreneurs who would then want to invest this money to grow their business and stimulate the economy in the process.
The personal income taxes can be dropped at a lower rate to fuel consumption of these additional goods. Tax rebates, therefore have the power of directing the newly created money to its appropriate destination.
The Quantitative Easing (QE) policy is aimed at stimulating borrowing and lending in the economy. The central bank provides the banks with excess reserves based on which they can create more loans in the open market.
Theoretically, therefore a lowered interest rate would work in the same way as a Quantitative Easing (QE) policy would. However, in reality, lower interest rates do not work as well. This is because lower interest rates and other lax lending standards attract borrowers that the banks do not want to lend money to. The borrowers that banks are in fact interested in lending money to are often disinterested in these interest rate gimmicks.
Another popular measure commonly used by Central Banks and governments worldwide in lieu of austerity is deficit spending.
Under this policy, the government is advised to undertake long term infrastructure projects in the economy. Since the government does not have the money to finance these projects, they are advised to create this money or use debt financing. In either case, the money supply of the local economy increases and the overall effect is like that of Quantitative Easing (QE).
This policy has been widely used by many governments across the world. This is because it gives governments the power to redirect the resources strategically as and when required.
Deficit spending, however creates the problem of huge interest burdens if the policy is not implemented carefully. Deficit spending programs gone awry have been the cause of many bailouts around the world.
One of the most painful alternatives to Quantitative Easing (QE) is austerity. Quantitative Easing (QE) and all the other policies listed above are aimed at providing temporary relief to the economy and the people.
Long term relief can only be achieved by undoing the wrongs of the past. As a result, austerity is the ideal solution. Sooner or later, any economy that is using Quantitative Easing (QE) will have to use austerity as well. However, most economies want to avoid that day till as long as possible.
It must be noted that austerity is the only real solution, one that solves the problem from its root cause. It is unlike other quick fix band-aids that are usually used by the Central Banks and governments as populist measures.
Many critics believe that Quantitative Easing (QE) was not the best choice for any of the developed nations to come out of the crisis. However, all the nations have made a unanimous choice. The results of this choice will be visible over the next few years.
Your email address will not be published. Required fields are marked *