Trading Stories

Quantitative vs. Qualitative Easing: How Two Little Letters Make All the Difference

By Daniel Lindsay

The Fed is doing it; so is the Bank of England – and the ECB isn’t far behind – combining the practice of doing both quantitative and qualitative easing. So, what exactly is quantitative easing and qualitative easing? There is a distinct difference between the two, and we’ll explain exactly what that is, why they can sometimes work together is harmony. We’ll also discuss how they are helping global banks ease the worldwide economic crisis, look at the future of this one-two punch and talk about why the two largest European Central Banks plan to implement it on a much larger scale.

When I first saw mention of this description, I assumed that some mad scientist with too much time and far too much funding had found a new form of laxative and decided to give it some acceptable brand name in order for it to fly off the shelves at the local pharmacy. Sadly, it appears that the term refers to a financial instrument although the intended remedy has more than a few similarities to any trouble that you may be experiencing in the trouser area. Although whilst in the trouser region, you could also say that quantitative easing is a sort of financial Viagra, but we won’t go there.

So what is quantitative easing and how does it work? Well here is a set of instructions for any government thinking of using the strategy to dig themselves out of a financial hole.

1) Place a large printer on a table with the out tray facing the window

2) Place a real banknote on the glass and load the tray with copier paper

3) Select the option “double sided” for paper settings and enter the number of copies you require

Alert the banking sector that you are about to press the start button If you are unable to adjust the number of copies to the right number due to extreme quantities being required, it may be preferable to consider pretending that you have printed the money by introducing the large amount of cash electronically, which is of course kinder to the environment anyway, well at least from an ecological point of view.

What is Qualitative Easing?

Qualitative easing is a form of monetary policy where a central bank reduces the average quality of the assets backing its monetary base. Which is basically like deciding to shop at Lidl and Aldi rather than at Waitrose and hoping to get the same enjoyment out of your meal without it costing you as much. It also rather neatly sums up the chances of you succeeding in your mission as just like the bank is taking on riskier assets in the hope of satisfying their requirements, you would be pinning your hopes on a taste sensation being achieved from a choice made with the words “Value” and “Basic” at the forefront of your mind.

How has this financial sweeping under the carpet of anything that looks a bit iffy been sold to all of us? Mr Bernanke is going to buy all your assets from you at much higher prices and we are all going to feel a lot better afterwards. No need to worry about the cost of everything going up faster than your income as this will merely be the dark before the dawn. The prices of everything that you want to be more valuable will grow and rise like the sun and everything that you want to be lower will fall like the light summer rain. Wake up, I think we lost you for a few moments there.

In a sort of Ebony and Ivory moment, it is presumed that the two initiatives will go hand in hand and side by side, but if you consider the reasons why they are required in the first place, it is hard not to think that several representatives of the magic circle have not been deployed to use some smoke and mirrors tricks or even a financial version of hypnotism in order to try and convince us that everything is now going to be ok as a result of these measures.

The One-Two Combo

Quantitative and Qualitative easing are a one-two combination punch designed to knockout the global financial troubles that we experiencing, rather like the great Muhammad Ali , we were too busy admiring the dazzling footwork and rhetoric to see what was really happening. Unfortunately the quantitative and qualitative brothers are one double act unlikely to be playing to packed theatres any time soon, but at least they can print their own appearance fee and decide what it is worth.

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