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If I understood well Quantitative Easing basically means a Central Bank prints out more money of its own currency.

It seems simple to understand that it saves the country banks and the States by their huge debts, because it lends them the new printed money, but what are the side effects of this on the economy?

  • inflation, but why?

  • the currency devalues against other currencies? If yes why?"

  • other...

I'm basically try to understand if Dollar could lose value against other currencies like Australian Dollar in case FED makes another Quantitative Easing.

  • If you think this question is not enough personal moeny realted please discuss this here meta.money.stackexchange.com/questions/511/… prior closing it stright away, I can edit it and fix it. – Marco Demaio Jun 8 '12 at 18:01
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    "It seems simple to explain that it saves the counrty banks and the States by their huge debts, because it lends them the new printed money" - ridiculous statement. I vote to close it as off-topic. I understand your frustration with the closing of economics.SE, but here is not the place. – littleadv Jun 8 '12 at 21:09
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    Since the Fed sometimes does quantitative easing and is intended to directly stimulate the economy, and thus affect the stock market, I think understanding how this might affect investor decisions would be a helpful addition to SE.money. Perhaps the question can be reorganized to more clearly indicate this? – Chelonian Jun 8 '12 at 21:30
  • @littleadv: could you discuss it on meta? I don't understand, MrChrister there told me it could be ok. Beside this why do you say the phrase you pointed out is a ridicolous statement? If it is, it clearly means, I did not understand what Quantitavie Easing is all about, but wouldn't this be one reason more to answer to my question and explain it?! – Marco Demaio Jun 9 '12 at 14:19
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    The problem is this is not about your investments. You want to understand complicated(and controversial) economics policy. This is about economics not personal finance. – user4127 Jun 14 '12 at 18:33
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Quantitative Easing Explained: http://www.npr.org/blogs/money/2010/10/07/130408926/quantitative-easing-explained

The short of it is that you're right; the Fed (or another country's Central Bank) is basically creating a large amount of new money, which it then injects into the economy by buying government and institutional debt.

This is, in fact, one of the main jobs of the central bank for a currency; to manage the money supply, which in most fiat systems involves slowly increasing the amount of money to keep the economy growing (if there isn't enough money moving around in the economy it's reflected in a slowdown in GDP growth), while controlling inflation (the devaluation of a unit of currency with respect to most or all things that unit will buy including other currencies).

Inflation's primary cause is defined quite simply as "too many dollars chasing too few goods". When demand is low for cash (because you have a lot of it) while demand for goods is high, the suppliers of those goods will increase their price for the goods (because people are willing to pay that higher price) and will also produce more.

With quantitative easing, the central bank is increasing the money supply by several percentage points of GDP, much higher than is normally needed. This normally would cause the two things you mentioned:

  • Inflation - inflation's primary cause is "too many dollars chasing too few goods"; when money is easy to get and various types of goods and services are not, people "bid up" the price on these things to get them (this usually happens when sellers see high demand for a product and increase the price to take advantage and to prevent a shortage). This often happens across the board in a situation like this, but there are certain key drivers that can cause other prices to increase (things like the price of oil, which affects transportation costs and thus the price to have anything shipped anywhere, whether it be the raw materials you need or the finished product you're selling). With the injection of so much money into the economy, rampant inflation would normally be the result.

    However, there are other variables at play in this particular situation. Chief among them is that no matter how much cash is in the economy, most of it is being sat on, in the form of cash or other "safe havens" like durable commodities (gold) and T-debt. So, most of the money the Fed is injecting into the economy is not chasing goods; it's repaying debt, replenishing savings and generally being hoarded by consumers and institutions as a hedge against the poor economy. In addition, despite how many dollars are in the economy right now, those dollars are in high demand all around the world to buy Treasury debt (one of the biggest safe havens in the global market right now, so much so that buying T-debt is considered "saving"). This is why the yields on Treasury bonds and notes are at historic lows; it's bad everywhere, and U.S. Government debt is one of the surest things in the world market, especially now that Euro-bonds have become suspect.

  • Currency Devaluation - This is basically specialized inflation; when there are more dollars in the market than people want to have in order to use to buy our goods and services, demand for our currency (the medium of trade for our goods and services) drops, and it takes fewer Euros, Yen or Yuan to buy a dollar. This can happen even if demand for our dollars inside our own borders is high, and is generally a function of our trade situation; if we're buying more from other countries than they are from us, then our dollars are flooding the currency exchange markets and thus become cheaper because they're easy to get.

    Again, there are other variables at play here that keep our currency strong. First off, again, it's bad everywhere; nobody's buying anything from anyone (relatively speaking) and so the relative trade deficits aren't moving much. In addition, devaluation without inflation is self-stablizing; if currency devalues but inflation is low, the cheaper currency makes the things that currency can buy cheaper, which encourages people to buy them. At the same time, the more expensive foreign currency increases the cost in dollars of foreign-made goods. All of this can be beneficial from a money policy standpoint; devaluation makes American goods cheaper to Americans and to foreign consumers alike than foreign goods, and so a policy that puts downward pressure on the dollar but doesn't make inflation a risk can help American manufacturing and other producer businesses. China knows this just as well as we do, and for decades has been artificially fixing the exchange rate of the Renmin B (Yuan) lower than its true value against the dollar, meaning that no matter how cheap American goods get on the world market, Chinese goods are still cheaper, because by definition the Yuan has greater purchasing power for the same cost in dollars.

    In addition, dollars aren't only used to buy American-made goods and services. The U.S. has positioned its currency over the years to be an international medium of trade for several key commodities (like oil), and the primary currency for global lenders like the IMF and the World Bank. That means that dollars become necessary to buy these things, and are received from and must be repaid to these institutions, and thus the dollar has a built-in demand pretty much regardless of our trade deficits.

On top of all that, a lot of countries base their own currencies on our dollar, by basically buying dollars (using other valuable media like gold or oil) and then holding that cash in their own central banks as the store of value backing their own paper money. This is called a "dollar board". Their money becomes worth a particular fraction of a dollar by definition, and that relationship is very precisely controllable; with 10 billion dollars in the vault, and 20 billion Kabukis issued from Kabukistan's central bank, a Kabuki is worth $.50. Print an additional 20 billion Kabuki and the value of one Kabuki decreases to $.25; buy an additional 10 billion dollars and the Kabuki's value increases again to $.50. Quite a few countries do this, mostly in South America, again creating a built-in demand for U.S. dollars and also tying the U.S. dollar to the value of the exports of that country. If Kabukistan's goods become highly demanded by Europe, and its currency increases relative to the dollar, then the U.S. dollar gets a boost because by definition it is worth an exact, fixed number of Kabukis (and also because a country with a dollar board typically has no problem accepting dollars as payment and then printing Kabukis to maintain the exchange rate)

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Well if your looking to explain inflation to children, I would use this example.

Take two fruits they like IE: Apples and Oranges.

Give them both 2 of each. Ask them how many of your apples would you give for 1 orange and how many apples would you want to get 1 orange(most likely they will say 1). Now give them 5 more apples each. Then ask them the same question.

In economics and finance many things can not be proven, so to tell you what QE will do for a fact can't be said, you can only be told theories. There are to many variables.

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