Quantitative easing (QE) - generally referred-to in the media as ‘printing money' - is a method central banks have of trying to inject further liquidity into the economy when they've played all their monetary cards, i.e. dropped interest rates to near zero.
By buying back government bonds with money that didn't previously exist, the theory is that there's more money around, which should in turn persuade banks to lend again, and provide an overall stimulus to the economy. Although the chairman of the US Federal Reserve - Ben Bernanke - oddly seemed to insist otherwise when writing in the Washington Post last week to explain why there is to be another round - i.e. QE2.
"Our earlier use of this policy approach had little effect on the amount of currency in circulation or on other broad measures of the money supply, such as bank deposits. Nor did it result in higher inflation," wrote Bernanke, despite stating that the aim of QE2 was to create jobs and raise inflation.
So what was the real purpose of QE2? To weaken the dollar - and thus help exports - and to reassure markets. The latter effect seems to have happened, at least in the short term, as the main US stock indices both jumped around three percent last week. Whether or not this will be the panacea Bernanke seems to think it will be is another question, however.
"Easier financial conditions will promote economic growth," he insisted. "For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion."
Among the beneficiaries of this latest monetary stimulus were AMD and Qualcomm, with the latter's share price also boosted by decent Q3 earnings. The only losers on the week were Oracle, which has just shelled out a billion dollars on yet another acquisition, and ARM - as the speculative bubble continues to deflate.
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