The QE process describes the whole process of quantitative easing (QE). It ignores the fact that there are three apparent stages to this process and instead views them as a whole.

In the first stage of the QE process the government instructs its central bank to make a payment, as is its normal practice, day in and day out. Presume that the payment is for £100. The central bank records this by:

A) Increasing the value on the loan account that the government has with it by £100.
B) Increasing the value of the central bank reserve account that the commercial bank that will make payment to the intended recipient has with it by £100.

The commercial bank will then match its receipt of £100 from the government via the central bank reserve accounts by making the required payment to the account that the recipient maintains with it.

In summary, each of the following has increased by £100:

1) The sum owed by the government to the central bank.

2) The sum owed by the central bank to the commercial bank on its CBRA.

3) The sum owed by the commercial bank to the intended recipient.

Note that as a result the commercial bank is a neutral player in this. It only gets a sum on deposit because existing rules do not allow individuals to bank with most countries' central banks.

The process could end at this stage. It does not because by convention, backed in some countries by regulation, central banks cannot make loans to the governments that own them.

As a result, stage two happens. In this stage, the government sells a bond (which is just a form of deposit account) to someone other than the central bank. It does not matter who they are. The result is that the following payments are made:

A) The purchaser of the bond pays the commercial bank £100 for the bond by reducing the balance on their account with that commercial bank.
B) The commercial bank then pays the central bank £100 by reducing the balance on their central bank reserve account with the central bank.
C) The central bank pays the government by reducing the sum owed by the government to it.

The central bank reserve accounts are now back where they were before this process started.

So is the loan between the central bank and government back where it started.

But the recipient of the government's payment still has their money, and the government now owes someone else £100.

The process could be ended here, at stage 2. In fact, it is very often the case that it does.

However, when the QE process is in operation, the process was never intended to stop at stage one or two. Stage three was always intended.

In stage 3 the central bank buys the £100 bond that the government sold to someone in the private sector economy. To do this:

A) The central bank pays the commercial bank that holds the account of the person who owns the £100 bond by increasing the balance on that commercial bank's central bank reserve account.
B) The commercial bank in question then pays £100 to the owner of the bond.
C) The central bank now owns the bond. As a result, it is now owed £100 by the government. The previous bond owner has been repaid in full.

But note that the position now achieved is in substance identical to that achieved at the end of stage 1. The recipient has their money, the commercial bank central bank reserve account is up £100, and the government owes the central bank £100 as a result. All that has changed is the government now owes the central bank £100 in respect of a bond rather than £100 in respect of an overdraft. Everything else is the same as at the end of stage 1.

This now requires interpretation. First, note that to consider each of these stages in isolation is wrong when the QE process plans that all three be undertaken. It is a straightforward error to claim that they are separable if QE is planned. In particular, it cannot be claimed that stage 3, which some describe as QE, is independent of stages 1 and 2 when that clearly cannot be the case. Stage 3 is wholly dependent on stages 1 and 2 taking place.

What that then means is that stage 3, and so QE itself, is not, as some claim, a simple asset swap by a commercial bank that gives up a bond to hold a central bank reserve account balance instead. That is not true because the central bank reserve account balance already existed at the end of stage 1 of this process and is still there at the end of stage 3. So there was in effect no asset swap involving a central bank reserve account in stage 3: a balance was restored, not swapped.

Instead what there is instead is a wholly bogus or sham sale of a bond which the government always intended to repurchase. In fact, the only asset swap is that the government now owes the central bank on a bond and not on a bank overdraft account.

If QE is only stage 3 it would be correct to say that QE does not create new money because that stage does not involve new money creation.

But the QE process is stages 1, 2 and 3 together. As a result new money is created, and is the balance of £100 that exists at the end of stages 1 and 3 and which only disappeared at stage 2 because of the sham bond transaction that then took place.

As such QE does create money, albeit at stage 1, and those claiming otherwise have failed to view the transaction as a whole.

The unintended consequence of all this is that it is the government's spending at stage 1 (not the transactions at stage 3) that creates a central bank reserve account balance that a commercial bank has no role in creating except by acting as a conduit and yet, as a result, it is owed base rate interest on the resulting balance by the Bank of England. It is that outcome that makes almost no sense in all this.

Also note that if QE does create money for the reason noted then quantitative tightening does, when properly understood, destroy money by removing it from use.

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Quantitative easing (QE) is a form of unconventional monetary policy.

QE is used by a central bank to control the rate of inflation within the jurisdiction for which it is responsible when being at or near the zero bound prevents a central bank using conventional monetary policy and the control of bank base rate to achieve that goal.

When using quantitative easing a central bank buys the debt or bonds of the government of its jurisdiction (and occasionally commercially issued debt as well) in the open market and then holds those bonds under its ownership.

The objective of QE is to increase the price of government debt issued by the jurisdiction undertaking the exercise by reducing the quantity of that debt available for sale in financial markets, which scarcity inflates their value, which in turn reduces the effective rate of interest paid on it.

The theoretical justification for QE is that reducing the rate of return on government debt supposedly forces investors to seek an adequate return on their funds elsewhere. It is presumed that they will as a result invest them in risker assets, so providing money for investment in private markets. It is in turn presumed that this investment will stimulate growth in the GDP of the jurisdiction.

During the Covid crisis this did not, however, appear to be the motive of central banks using QE. Instead, those central banks appeared to be funding the expenditure of the governments that controlled or owned them during this period^[1].

The practical consequence of quantitative easing is to increase the central bank reserve account balances of commercial banks held with the Bank of England, with the increase representing the amount that a central bank has paid to buy back the bonds previously issued by the government that owns or controls it.

Since the central bank reserve accounts held by commercial banks are a significant part of what is termed ‘base money' (see separate entry) the consequence is that QE increases that part of the money supply because the sums paid for the bonds purchased by the central bank inflate these balances, meaning that QE results in, or provides cover to, money creation by a central bank although many central banks appear to deny this, as do almost all politicians since this process proves the existence of what they call the magic money tree.

For a critique of quantitative easing see unconventional monetary policy.

See also the QE process, which is an essential addition to this post.

[1] As the New Economics Foundation has shown, between April 2020 and July 2021 99.5% of UK government deficits were funded by quantitative easing. https://neweconomics.org/2021/10/99-5-of-government-covid-debt-has-been-matched-by-so-called-bank-of-england-money-printing

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Quantitative tightening (QT) is an unconventional monetary policy, but is unusual in that it is one that a central bank can use when the constraints of the zero bound do not apply.

QT represents the reversal of the quantitative easing (QE) process. As a consequence, a central bank pursuing a policy of QT will sell back to the financial markets some or all of the bonds that it acquired when undertaking quantitative easing.

QT can be motivated by a desire to:

• Force interest rates upwards.  This is done by making more government bonds available to financial markets. That increased availability reduces the price of those bonds. Since the market rate of interest on government bonds is inversely related to their price since the nominal rate on them is fixed for the duration of their life, forcing the price of these bonds down increases the market rate of interest earned on them. This can be used by a central bank to support a policy that keeps market interest rates above those that the market would otherwise settle upon.
• Reduce spending power in the economy by reducing the supply of government-created money in central bank reserve accounts. As a result, QT can be described as an anti-inflationary policy.
• Draw funds away from private sector market-based investments, meaning that QT is likely to reduce growth in GDP.
• Reduce the size of the balance sheet of a central bank, which size is inflated by QE.

The effectiveness of quantitative tightening is as yet largely unknown as only the Bank of England and US Federal Reserve have tried to do it, and then in relatively limited amounts.

For a critique of QT see unconventional monetary policy.

See also the QE process, which is an essential addition to this post.

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The quantity theory of money (QTM) claims there is a direct and proportional relationship between the money supply and the general price level in an economy. It is most famously expressed by the identity:

MV = PT

Where:

• M = the quantity of money in circulation

• V = the velocity of circulation, or how quickly money moves between transactions

• P = the average price level

• T = the number of transactions (or sometimes real output)

This equation is an identity: it is suggested that it must always balance because it describes what money does. The controversy comes with the theory attached to it.

From the late nineteenth century onwards, economists, most notably Irving Fisher, argued that V and T are constant in the short term. That assumption implies that if governments or central banks increase M, then P must rise in proportion. In other words, Fisher claimed that inflation is always a monetary phenomenon. Milton Friedman later made this claim the foundation of monetarism in the 1970s. It was used to justify austerity, the shrinking of government, and the deregulation of finance.

However, the theory fails when tested in the real world:

• Velocity is not constant: in fact, it is highly volatile and collapses in crises, as it did in 2008 and did again during Covid, meaning that huge increases in the money supply often do not translate into inflation.

• Output is not fixed. Economies can expand production when demand rises. If more money supports the production of more real goods and services, prices need not increase.

• Banks create most money through lending; governments have a role, but it is often a lesser one, most especially in the post-cash era. Loans expand the money supply when issued, and shrink it when repaid. QTM says very little about this, which is a fundamental flaw in its argument.

• Inflation frequently arises from non-monetary causes, whether they be supply shocks, wage suppression, profiteering, energy price spikes, or the exploitation of market power; all of these play significant roles.

QTM's most significant flaw, however, is its reverse causality. Instead of excess money causing inflation, it is inflation, driven by real-world constraints and power dynamics, that most often forces money supply to expand to keep the economy functioning.

Nevertheless, the theory remains popular with those wanting to limit the role of government. It provides a simple-sounding cautionary tale, suggesting that spend too much, and inflation will punish you. But simplicity is not truth. Modern Monetary Theory shows that what matters is real resources, and not arbitrary limits on money. Money is a tool we issue to mobilise the productive capacity we already possess.

Inflation is undoubtedly a challenge, but it requires real economic solutions, and not outdated monetary dogma. Those who offer that dogma always have one true agenda, which is to constrain the role of government within society.

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The quick ratio is calculated based on the accounts or financial statements of a reporting entity.

It is the ratio of cash or near cash assets within the current assets of the reporting entity to its current liabilities.

The quick ratio is said to indicate the capacity of a reporting entity to make payment of its current liabilities when under financial pressure to do so.

The current ratio is often considered more useful. It is the ratio of current assets to current liabilities. It assumes as a consequence that a longer timescale for the conversion of all current assets into cash is available, including the collection of trade debtors and the sale of stock and work in progress.

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See public company

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