10. Excel For Finance Tips - What is Quantitative Easing ?

Nick's picture

What is Quantitative Easing ?


Simply put:

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:


Download Spreadsheet to look at how Quantitative easing works in Excel

Training Video on Quantitative Easing:

Quantitative-easing.xls19.5 KB


The bit you missed out in your explanation of the confidence trick of QE, is that the semi-neo-Keynesianist economists who put up the idea to governments sold it on the basis of Keynesianism! Thus they are supposed to use QE on the downward cycle of the macro economy, but then to withdraw the amount of QE from the money supply when the macro economy turns upwards again afterwards.

Of course governments never actually do the last bit, since they would have to raise the additional money to do so from extra taxation (very politically unpopular when it comes to getting re-elected). So they miss out the repayment bit and by then hope that no one notices that inflation has risen significantly as a result!

In addition the "finance by inflation instead of overt taxation" tool-kit also needs the additional confidence trick of false inflation numbers, as well as other delusional devices like QE. Tricks like hedonics and many others are used so as to fool the people into believing that inflation is much lower than it really is. This is the main reason the gold standard for backing fiat currencies was abolished. This then gave licence to governments to debauch their currencies rather than increasing taxation to pay for their fiscal profligacy.

Nick's picture

Quantative Easing

very, very good points.

I simplified it a bit.. the other thing that shld be mentioned in a complete article is the velocity of money. My analysis assumes that the velocity is constant, and it might not be at all.

Savers who diligently made the right logical decision not to buy houses are the real losers from all this mess.

It's the perfect crime: You steal (without them knowing it) from risk averse people who have money, and give to idiots who blew themselves up, but now think they're really clever.

However, by the sheer fact that you're a saver, it means that you have money, so if the government takes it from you, no-one is really going to feel that sorry for you.

I just paid £8 for 2 beers in an uninteresting pub...  Here comes that inflation.