Quantitative Easing: What It Is and What It Did

Quantitative easing is a process whereby a central bank creates new money — digitally, not physically — and uses it to purchase financial assets, primarily government bonds, from commercial banks. The commercial banks now hold cash instead of bonds. The intention is that they will lend this cash into the economy, stimulating growth. In practice, the effect on the real economy was modest. The more significant effect was on asset prices. With central banks buying bonds in huge quantities, bond prices rose and yields fell. Investors seeking returns moved into riskier assets — equities, property, corporate bonds. Those prices rose too. QE inflated asset prices across the board.

The distributional effects of QE are well documented. People who owned assets — property, equities, bonds — saw their wealth increase as QE pushed prices up. People who did not own assets — typically younger, lower-income, renters — saw the cost of acquiring those assets increase without the compensating appreciation. This is the Cantillon Effect in modern form. The money entered the system through financial institutions and spread outward, benefiting those already positioned in financial assets and disadvantaging those trying to get in. This is not a political argument. It is a description of the documented mechanism.

Central bank balance sheets are published weekly and freely available. When a balance sheet expands — the central bank is buying assets, creating liquidity. When it contracts — quantitative tightening — liquidity is being removed. Markets follow liquidity more reliably than they follow earnings, economic data, or news cycles. When global liquidity is expanding, risk assets tend to rise. When it is contracting, they tend to fall. This does not mean you should trade in and out of assets based on balance sheet readings — that is harder than it sounds. But understanding liquidity cycles gives you a more accurate map of what is driving market behaviour than anything you will read in the financial press.