10. Excel For Finance Tips - What is Quantitative Easing ?
What is Quantitative Easing ?
It's printing money !
It's a sneaky way of stealing money from cautious savers who carefully tucked money away for a rainy day, and giving it to reckless borrowers.
Lets see how this works in a simple world example.
- In this world, we have some money in the form of notes and coins, some apples, and no borrowing.
- We start off with 1000 in notes and coins, 100 apples.
- The price of apples is 10.
- I have 100 of these notes and coins... lets call that my "savings".
- I can afford to buy 10 apples.
- Now, the government then embarks on a policy of "Quantitative Easing", and prints an extra 100 notes and coins.
- The supply of apples remains fixed at 100, thus the price increases to 11. (1100 notes and coins / 100 apples )
- I can now only buy 9 apples, so clearly my savings have just been devalued.
"But the government have told us they're only doing "Quantitative Easing" in order to reach their inflation target" I hear you scream.
- Yup.. but without "Quantitative Easing" there might actually be DEFLATION which is an excellent thing for savers as it means the relative value of their cash is increasing.
Deflation is a big worry for borrowers as it means that paying off their debt gets increasingly difficult. Inflation on the other hand erodes the value of debt.
Here's how it looks in Excel:
Training Video on Quantitative Easing: