Hi everyone, this is matt from mad strats. I figured it could be helpful to provide information on quantitative easing since it's been a popular topic in the news lately. What is it? Does it even work? Why should you and i even care quantitative, easing abbreviated qe - is a rare action taken by the federal reserve where it purchases long-term securities from the market in order to increase the money supply and encourage lending and investment buying these securities, such as treasuries and bonds, adds New money to the economy, but also expands the fed's balance sheet. So what does this even mean? I know that explanation can be confusing, so let's take a deeper look and hopefully we can gain a better understanding to execute quantitative easing.

The fed increases the supply of money in our economy by buying various forms of securities. Increasing the supply of money is similar to increasing the supply of any other asset. It lowers the cost as supply increases, the value decreases. A lower cost of money means interest rates are lower and banks can therefore lend money with more friendly terms.

This is all done in an effort to stimulate the economy. Alright, if increasing the supply of money fixes our economic problems, why is it a big deal? What's the hesitation, the short answer is that quantitative easing has various drawbacks. If the fed increases the money supply, it can cause inflation. In a worst case scenario, quantitative easing may cause inflation without stimulating the economy, a period in which the economic growth is halted is referred to as stagflation quantitative easing does not guarantee economic growth because it doesn't force banks to lend borrowers to seek loans or investors to Invest, it simply makes the environment more favorable to do so.

The end result is not guaranteed if the increased money supply does not work its way through the banks and into the economy, quantitative easing may simply facilitate deficit spending. Another potentially negative consequence is the devaluation of the us dollar, as in the dollar, becomes less valuable relative to other currencies for manufacturers. This may help stimulate growth, because exported goods would be cheaper in the global market. On the other hand, the relative price of imports would be more expensive, which could increase the cost of production because of these drawbacks, quantitative easing is used as a last resort.

Typically, strategies such as lowering the interest rate are utilized to assist the economy before quantitative easing at the time of making this video in march of 2020, the fed interest rate is already zero, so quantitative easing is one of the few tools they have left now that We know the risk and reward of quantitative easing. Let's discuss its effectiveness during the qe programs conducted in response to the 2008 financial crisis, the fed increased the money supply by 4 trillion dollars through the purchasing of bonds, mortgages and other assets. This means that the asset side of the fed's balance sheet grew significantly in response. The liability side grew by the same amount, mainly in the form of u.s bank reserves, which is a term for how much cash banks keep on hand.

As you can see in this chart, banks held on to much of that money as excess reserves. At its peak u.s banks held 2.7 trillion dollars in excess reserves, which was an unexpected outcome for the fed's 2008 qe efforts. Most economists believe that the fed's quantitative easing program helped rescue both the u.s and world economies following the financial crisis. However, the magnitude of its role in the economic recovery is still debated and most likely will be impossible to quantify.

Other central banks throughout the world have attempted to deploy quantitative easing to fight recession and deflation with similarly cloudy results. Recently, another round of qe programs have started in the u.s as a result of the economic decline prompted by a global pandemic. Only time will tell if the impact of this strategy is as intended. Do you think this round of quantitative easing will facilitate a quick rebound in our economy? Let me know your thoughts in the comments below.

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