The QE process describes the series of transactions undertaken through the central bank reserve accounts maintained by commercial banks with a central bank as a consequence of a government deciding to use quantitative easing (QE) as a part of its monetary policy.

The QE process reflects the totality of the transactions undertaken when a government decides to use QE. A three-stage process is involved.

In the first stage, a government spends using money created for it by its central bank in the routine fashion in which all government spending is financed. In other words, in accordance with the instructions of the government to which it is responsible, the central bank makes the payment it has been instructed to make by recording (if all intermediate steps are taken out of consideration) that the government in question now owes it an increased sum (which, for example's sake, we might call £100) and that the central bank in question now owes a commercial bank that same sum of £100 on that commercial bank's central bank reserve account because that commercial bank has now accepted the obligation to make payment to the government's chosen recipient of the payment due. This is how all government-created money is injected into the commercial banking sector.

It is important to note that the process could be ended at this point. The government would have an increased overdraft or loan with its central bank; the central bank reserve account of the commercial bank will have increased; and the person to whom money was owed will have been paid with that fact being reflected in them having an additional deposit in their bank account with the commercial bank.

It is important to note that if the government could inject government-created money straight into the economy without having to do so through a commercial bank (which would, for example, be possible if there was a central bank digital currency in use) then the role of the commercial bank in this transaction would be of no consequence. Not only would its service not be required, but its central bank reserve account (an asset on its books) and the sums owing to its customers in respect of deposits that they hold with it (a liability on its books) would both be unchanged.

It is, however, the case at present that it is officially unacceptable for a central bank to make loans to the government that owns it. It is only for this reason that quantitative easing is used.

The next stage in the QE process is for a government to issue a bond to cover the cost of its spending, or £100 in this case. Either a commercial bank or a customer of that commercial bank buys that bond (it makes no difference which does so). As a result, a payment is made from the commercial bank to the central bank. That payment would, in this example, be for £100. As a consequence, the increase in the central bank reserve account created by the government spending is now cancelled, and given that the payment was made for the benefit of the government, because it issued the bond, so too is the sum owing by the government to it central bank reduced by the same amount.

Again, it important to note that the process could be ended here. Indeed, to do so would reflect the usual pattern of government funding when taxes are not used to cover spending. The government has now spent. The recipient has their money, and as a result someone other than the government and its central bank (it does not matter who) now has a sum owing to them on loan (or bond) account by the government.

However, when the QE process is used that is not the end of the matter. When the QE process is used it is always intended that the bond issued by the government should be repurchased from the person that has just acquired it. The person undertaking that reacquisition is the central bank, not the government itself. This is the pretence or sham at the heart of QE: it is claimed that by acquiring the government's bonds the central bank is not making a loan to the government that owns it even though the substance is, of course, that the government does as a consequence owe the central bank in exactly the same way as it might if the loan had been left outstanding at the end of stage one of this process. All that has happened is that the form of the loan has changed. The financial position is, however, exactly as it was at the end of stage one, i.e., the government owes the central bank £100, whilst the central bank owes the commercial bank £100 on its central bank reserve account, and the commercial bank owes its customer £100, representing the sum due to them.

In that case it can be argued that QE achieves nothing. Stages 2 and three of this process could not take place and the economic substance of what had happened would not have changed.

However, convention, regulation and central bank ritual (including that on independence) requires stages two and three.

It could also be argued that stage two is not QE, and that would be correct if viewed in isolation.

As a result, some argue that only stage three represents quantitative easing. They then say as a result that no money is created by QE and QE is only an asset swap with a balance on a central bank reserve accounts being substituted for a bond in the non-government sector of the economy.

This, however, is not true. The QE process is the entirety of these transactions,  not any one stage in them. QE is done to permit a central bank to lend to the government that owns it whilst rather pathetically trying to hide that this has happened when in reality it has. There is no asset swap at stage three, because stages two and three were always intended to net each other out and to view either in isolation is wrong. All three stages have to be viewed together, and when they are it is clear that the QE process is designed to provide cover for the government injecting newly created money into the commercial banking economy. As a result it is right to say that QE does create money.

The corollary is that quantitative tightening (QT) reverses this process, withdrawing money from the commercial banking economy.

QE and QT do, therefore, have real economic consequences, albeit that they exist to disguise that fact.