My understanding of quantitative easing (QE) is that it provides a further way of reducing interest rates (at longer maturities) when base rates are at or close to zero. There’s no room for further base rate cuts, so to get rates down further, the central bank buys longer-dated bonds, with money it creates for the purpose, at a goodly price, pushing down the yield.
Technically, this is printing money, but we are assured that it won’t lead to inflation because when the job is done, they’ll sell back the bonds, regaining the cash, which they’ll put in the furnace (metaphorically speaking).
(If the above is wrong, I’d be very grateful if someone in the know could correct me).
This sounds reasonable, but, after what’s been happening for the last ten years or so, and then with the current bailouts, we’re all very suspicious of financiers and regulators and central bankers, and, technically or not, it is printy printy. And we can’t help noticing that some governments (especially the US and the UK) are going to need to borrow an awful lot more this year, just at a time when creditors are finding themselves a bit short too (China et al. suddenly doesn’t have so many dollars to park now that its exports have fallen so greatly). The amount the UK intend to use in QE (2 x £75 bn) just happens to match, I believe, the projected gilt issuance this year. The US tells us that it expects the recession to end this year, that it wants to see what effect everything else its done has and then it suddenly comes out with massive QE (e.g. see Stephanomics
And, finally, of course, QE is all wrapped up in mumbo-jumbo, smoke and mirrors, it is printing, it’s not printing, etc.
So, what’s the view here? Is QE just what it says on the tin? Or is it something more?