Since the outbreak of the 2008 global financial crisis, the policy tool known as "Quantitative Easing" (QE) has frequently appeared in major financial media and government discussions. So, what exactly is quantitative easing? How does it impact the economy? And why is it important for ordinary investors to understand this policy?

What is Quantitative Easing?

At the time, he was working in Japan and pointed out that Japan's economic problems could not be resolved solely through traditional monetary policies, such as lowering interest rates. Werner believed that central banks needed a new strategy—directly increasing the money supply to stimulate credit expansion in the economy. This strategy later became known as "quantitative easing."

However, the modern interpretation of QE has significantly diverged from Werner’s original concept, especially after 2008, when major global central banks began implementing it on a large scale. Despite Werner himself opposing these central bank actions, QE has become a common monetary policy tool in today’s economic system.

How Does Quantitative Easing Work?

1. Lowering Market Interest Rates – By purchasing large amounts of bonds, central banks raise bond prices, which in turn lowers market interest rates.

2. Increasing Market Liquidity – The injection of capital by central banks enhances cash flow in the market, making it easier for banks to lend money, thereby stimulating economic activity.

The Evolution of Quantitative Easing：

Beginning in 1999, the Bank of Japan increased the money supply to combat prolonged economic stagnation and deflation. However, despite the significant rise in money supply, Japan’s economy remained sluggish and failed to regain vitality.

Following the 2008 global financial crisis, central banks worldwide adopted large-scale QE measures to counter economic recession. Institutions like the U.S. Federal Reserve, the Bank of England, the European Central Bank, and the Bank of Japan all implemented similar monetary expansion policies, leading to a substantial increase in their balance sheets.

Controversies and Criticisms of QE：

Although QE aims to stimulate economic growth and boost employment, it has sparked significant controversy and criticism.

Risk of Asset Bubbles：

With massive liquidity injections, much of the money does not flow into the real economy but instead enters asset markets such as stocks and real estate. This can lead to irrational asset price increases and the formation of bubbles. For example, during the Federal Reserve’s QE programs from 2009 to 2012, stock and commodity prices surged significantly without corresponding real economic growth, potentially increasing financial market instability.

Currency Wars：

QE can also trigger international currency competition. When a country’s central bank expands the money supply, its currency may depreciate, making its exports more competitive. Other countries may respond with similar actions, leading to competitive devaluations—a phenomenon known as "currency wars." Such competition can negatively impact the global economy.

Widening Wealth Gap：

While QE provides financial institutions with greater liquidity, most of the funds end up benefiting large banks and corporations rather than ordinary citizens. Federal Reserve's QE programs bailed out large banks, but executives at these institutions continued to receive high salaries. Meanwhile, middle-class workers and small businesses saw little improvement in their financial conditions, exacerbating income inequality.

Is Quantitative Easing Effective?

Proponents of QE argue that it has helped prevent a complete economic collapse. Without QE, the global economy might have suffered a deeper recession and higher unemployment.

However, critics contend that QE has only a limited long-term impact.

Limited Effect on Real Economic Growth：

Although QE increases the money supply, much of the capital remains within the financial system rather than flowing into the real economy, reducing its effectiveness in stimulating economic growth. A notable example is the U.S., where, despite years of QE, inflation remained below the Federal Reserve’s 2% target, raising concerns about deflation.

QE Dependency and Diminishing Returns：

QE can become an addictive policy, similar to a stimulant. Initially, it has a strong impact, but its effects diminish over time. If QE is withdrawn, the economy may revert to a lower growth level or even fall into recession.

Conclusion

As a monetary policy tool, QE has played a crucial role in times of crisis by injecting necessary liquidity into the global economy and preventing deeper economic collapse. However, it also carries significant risks, such as asset bubbles, wealth inequality, and potential currency wars.For ordinary investors, understanding how QE works and its economic implications is essential for making informed financial decisions. While QE alone cannot solve all economic problems, it remains an influential tool in modern monetary policy.