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Today your going to learn “What Quantitative Easing is?”
About a Month ago I was invited to a ACG (Associated Corporate Growth) Reception and the first person I meet turns out to be a very nice guy named Chad G. Chad is just no ordinary average finance guy, he is a respected leader and a experienced Portfolio Manager. Chad is the Senior Vice President and Portfolio Manger for Waddell Reed’s High Income Fund. But meeting him you would never know he manages a huge Asset. He’s just a fantastic nice guy. As soon as I meet him? We immediately connected and began talking shop all about Corporate Finance, M&A, and his work in Asset Management. These are incredibly advanced topics. But very interesting to me.
Talking shop with other Finance Professionals is something that usually does not happen to me as a Entrepreneur here in Kansas City. Most people look at me like I am talking Greek. But here in front of me is a SVP of a Major Kansas City Asset Management Company and Fund. Chad could easily speak my new language of Finance. And truth be told that was really awesome to me. It made connecting with him all that more interesting and dynamic. Thanks Chad! It truly is a Privilege to connect with you Good Sir!
Why was this connection unique to me? Usually I do have a very difficult time meeting and connecting with others who work in Financial Services here locally in Kansas City. But this night would be very different. The entire presentation on the Mergers & Acquisitions state within Kansas City was truly impressive. CC Capital Advisors did a fantastic job presenting. If you missed my article about Kansas City’s best Investment Bankers? Read that (HERE)
The Bond Market Explained By Video
Quantitative Easing Described?
For most out there reading this Post? I will most likely need to describe what Quantitative Easing is in simplistic terms. And please don’t mistake this article as “Quantitative Tightening” thats the reverse of Easing. And a different article.
What does Quantitative Easing Mean?
Quantitative Easing is when the Central Bank approves the creation of Money. This money is invested into Government Bonds. These Government Bonds are held by Banks. These Banks are then able to begin lending to Small Businesses and Individuals. And this in theory will stimulate the United States Markets.
How Quantitative Easing help the Economy?
This is all theory based, it’s only based on what the Economy Academics have brought to the table to explain how this may work. But in general. We don’t know. But what we do know is Quantitative Easing is supposed to stimulate the American Economy when it looks like the Economy is about to freeze or fail from lack of capital being traded.
Quantitative Easing is supposed to stimulate the Economy in three ways.
The federal government auctions off large quantities of Treasurys to pay for expansionary fiscal policy.5 As the Fed buys Treasurys, it increases demand, keeping Treasury yields low (with bonds, there is an inverse relationship between yields and prices).
QE Keeps Bond Yields Low
Treasurys are the basis for all long-term interest rates. Therefore, quantitative easing through buying Treasurys also keeps auto, furniture, and other consumer debt rates affordable. The same is true for long-term, fixed-interest debt. When mortgage rates are kept low, it supports the housing market. Low rates on corporate bonds makes it affordable for businesses to expand.
QE Attracts Foreign Investment and Increases Exports
Increasing the money supply also keeps the value of the country’s currency low. When the dollar is weaker, U.S. stocks are more attractive to foreign investors, because they can get more for their money. It also makes exports less expensive.
QE Could Lead to Inflation
The only downside is that QE increases the Fed’s holdings of Treasurys and other securities. For example, before the 2008 financial crisis, the Fed’s balance sheet held less than $1 trillion. By July 2014, that number had increased to almost $4.5 trillion
WARNING – Some Financial Experts Warn Quantitative Easing could create out of control inflation, and possibly “HYPERINFLATION”.
The more dollars the Fed creates, the less valuable existing dollars are. Over time, this lowers the value of all dollars, which then buys less. The result is inflation.
Inflation doesn’t occur until the economy is thriving. Once that happens, the assets on the Fed’s books increase as well. The Fed would have no problem selling them. Selling assets would reduce the money supply and cool off any inflation.
The Following Three Ways QE could stimulate the Economy was borrowed from “THE BALANCE ARTICLE”.
I do hope you learned more on the topic what Quantitative Easing is today? And I also hope you learned more about the Basics of the Bond Market in the Video.
In conclusion of today’s post it was important for me to share my story of connecting with Chad. Chad’s professional career is certainly involved with the Bond Market. Which in turn is related to Quantitative Easing. But regardless I had to introduce him somewhere. And today’s post made the most since. I genuinely hope you learned a few things today. And as always Stay Tuned. You never know what it right down the road on this journey I am on inside Finance.
Thanks for Reading! GODSPEED.
JS