Central Bank Quantitative Easing: How It Affects the Financial System

Over the past ten years, the world’s most important financial institutions have been repeating one name: QE, in other words, Quantitative Easing. This term has not only caused excitement among financial professionals but also openly among ordinary people. The question is, what is QE really, and why has it become such a critical economic tool?

What is Quantitative Easing and Why Did Central Banks Adopt It?

Quantitative easing, which is often referred to as QE, turned out to be the response to every emotional question central banks faced during an economic crisis. When interest rates are pushed down to zero and accessible monetary policy becomes more aggressive, QE is the last call.

Quantitative easing is the process of asset purchases by banks and financial institutions, aimed at injecting additional money into the fiscal system. These assets can include government bonds, corporate debt, or mortgage-backed securities. The introduction of QE represented a major turnaround from the previous approach where central banks mainly manipulated interest rates to influence the economy.

How Does Quantitative Easing Work: Step-by-Step

The process of QE is relatively simple, but its results are complex. When a central bank, such as the Federal Reserve or the European Central Bank, plans to implement QE, the first step is to purchase assets. Banks, which transfer these assets into the hands of the Federal Reserve or another central bank, receive new capital in exchange.

Now, with capital in the banks’ liquidity, the economy that previously relied on urgent large loans can maintain better conditions. The central bank’s actions allow banks to lower lending interest rates, which makes a significant difference for companies and individuals seeking loans. The ultimate goal of QE is to stimulate the economy, make borrowing easier, and reduce unemployment.

Risks and Transitions: Inflation, Asset Bubbles, and Other Challenges

However, like a true gold rain, QE has two sides. The first risk is inflation. After the central bank injects a large amount of money into the economy, prices tend to rise. This directly affects all sectors: the prices of certain goods and services increase for everyone.

The second risk relates to the operational class. Large-scale asset purchases can artificially inflate prices, whether in stocks or real estate. This can lead to “bubbles,” where, at some point, certain significant factors may cause the bubble to burst.

Additionally, excessive QE can lead to social inequality, especially during downturns—long after the initial stimulus—when real activity may not have recovered to previous levels.

Global Impact of Quantitative Easing: Assets, Crypto, and Currency

Another aspect of QE is its influence on financial markets. When central banks buy large amounts of assets, they flood markets with liquidity. This liquidity, in turn, pushes asset prices upward.

The stock market’s rise was not solely due to QE adding liquidity—companies that found cheap borrowing easier could invest more, boosting asset prices further.

QE can also lead to significant currency devaluation. When large amounts of money are created and held outside of domestic control, its value diminishes. This can be beneficial for exports, making local prices more competitive internationally, but it can also lead to higher inflation.

2020: COVID-19 Pandemic and the Dramatic Expansion of Quantitative Easing

2020 marked the third act of QE. When the COVID-19 pandemic caused a global crisis and businesses shut down, central banks responded with a wave of unprecedented measures.

The Federal Reserve announced “unlimited QE,” indicating its commitment to buy assets without limit to stabilize markets. This was a historic move against the resistance of central banks. Meanwhile, the European Central Bank and other global institutions also expanded their QE programs.

This expansion was a clear signal—an “all-in” move—aimed at supporting an economy that was barely functioning, with financial markets still in turmoil.

The Crypto Market and the QE Paradox

The impact of QE on cryptocurrencies, including Bitcoin, remains a hot topic among financial experts. Some believe that the devaluation of traditional currencies during QE makes Bitcoin and other alternatives more attractive to investors seeking store of value.

Others argue that Bitcoin and other cryptocurrencies operate independently of central bank policies, functioning in a libertarian manner, unaffected by QE measures.

Conclusion: The Future of QE

In summary, QE remains one of the most powerful and trend-setting tools central banks have during economic downturns. It is a retrospective approach to money supply, aimed at supporting private banks, and improving borrowing conditions for companies and individuals.

However, QE is not a limitless tool. When inflationary pressures or bubbles become evident, the economy needs stronger safeguards. As a result, central banks may find themselves facing increased resistance if they continue to extend QE indefinitely.