A Primer on Quantitative Easing (QE) and Its Inherent Limits

The rise of Quantitative Easing (QE) and other so-called Unconventional Monetary Policies has been one of the most important changes to the world in the last decade. Trust me — it’s right up there with the election of Donald Trump and Brexit.

But you could be forgiven for having never even heard of it. And If you have heard of it, odds are that you don’t understand the reasons for it or the mechanism by which it works.

QE is a tool central banks have used to lower long-term interest rates. Because of the massive amount of debt nations took on to bail out their economies after the 2008 financial crisis, lower long-term interest rates were desperately needed to allow this debt to be serviced.

These artificially low long-term interest rates come at a steep cost. They create zombie companies, which slow the growth of the economy — and which many economists blame for Japan’s Lost Decade(s). However, they have allowed the world to avoid a sovereign debt crisis since 2008 (although Italy’s new plan for a parallel currency risks just that).

But the risk from QE isn’t zombie companies — it’s that it is an inherently limited policy. Even if the world was prepared to accept the downsides of permanently low interest rates, eventually central banks will simply be unable to continue the policy. And what happens then?

To understand why central banks cannot continue QE indefinitely — and the incredible risk ending QE…