Why nobody knows where it goes when it comes to quantitative easing.
The study of economics basically comes down to supply and demand. When there is a lot of something, it tends to have a lower value than something that is rare. The most obvious example of something we all hold dear is Gold, whose total global supply would only fill an Olympic size swimming pool. Equally, if a lot of people need something, say food, then the price of a potato can sometimes exceed the value of a diamond earring, as it did after the war. As such, people have been able to put a price on things for millennia.
Which brings us to so called “quantitative easing” and the thing that few of us will ever understand is why money has not become worth a lot less, as the central banks have been creating trillions and trillions of new Dollars, Euros and Yen? Fortunately, we will not have to waste any time trying to make sense of it all, when you have Nobel prize winning economists on either side of the argument. However, we do have our money to invest, so best to have a closer look at the biggest financial experiment in the history of mankind.
The basic idea is simple: lower interest rates stimulate the economy. Businesses can borrow for lower rates than their return on capital and consumers can pile on debt to increase their spending or buy houses they could otherwise not afford. The whole thing then escalates into something called the money multiplier effect and we live happily ever after. Great, but what about the principal? You see, it is absolutely fine to borrow a few billion quid amongst friends and pay no interest for years to come, but you know, at some point somebody is going to want to have their money back.
At this point, two things become very clear: one, my father wasted a lot of money paying for my tuition in studying something that no longer makes sense (supply and demand et al) and two, if governments were run like a business, we would have gone bankrupt a long time ago. The problem is that we have gone to the well too many times and after printing ourselves out of the Global Financial Crisis we have now created the biggest debt burden in history to combat Covid.
Surely, we cannot keep printing money and sell it to ourselves at artificially suppressed (read: manipulated) interest rates forever. So, what is the endgame here? If you have been wondering why cryptocurrencies have become so popular, then you have one answer. Lest we forget that Bitcoin was born because people lost faith in the government’s ability to manage their way out of the last crisis, let alone the current one. However, if the downfall of society and the utter devastation of life as we know it isn’t your thing, then there is always hope. Maybe, technology is the answer to all things, and we will simply grow out of this mess. Who knows, but one thing is for sure: if there is another crisis, printing more money will no longer be an option.