The coronavirus pandemic plunged the global economy into a historical crisis characterized by collapsing stock market, rising inflation and skyrocketing unemployment. To keep the economy afloat, central banks resorted to pumping more money into the economy to keep it afloat through various Quantitative Easing (QE) approaches.
According to data acquired by Finbold, between January 2020 and November 2021, four major central banks expanded their Quantitative Easing programs by a total of $9 trillion to support their economies. The United States Federal Reserve and the European Central Banks each accounted for $3.4 trillion during the period. The Bank of Japan ranks third at $1.6 trillion.
Elsewhere, the balance sheet of the Federal Reserve, European Central Banks, Bank of Japan and Bank of England surged 60.13% between 2019 and 2021 from $15.5 trillion to $24.5 trillion. Data on central bank balance sheet size is provided by global QE tracker Atlanticcouncil.org.
The need for Quantitative Easing
Quantitative Easing refers to a monetary policy where the central bank purchases longer-term securities from the open market to increase the money supply to encourage lending and investment. The bank, in return, spends most of this money buying government bonds. Worth noting is the central banks do not print the money since it’s a task assigned to their specific treasuries. Instead, the central banks make large asset purchases on the open market by adding newly created electronic money to banks’ reserves.
The overall goal of pumping more money during the pandemic is to keep markets functioning alongside making credit easier to obtain, with a more significant money supply and lower interest rates. Notably, without such measures, the highlighted economies would have crashed further.
The central banks have their models of assessing reasons to print more money. Notably, the decisions are based on many complex factors related to financial stability, inflation level, stability of the exchange rates, among others. In general, pumping more money into the economy remains a controversial topic. Most central banks usually approach the subject with caution.
When the pandemic struck, economists and industry leaders called for additional money printing to help boost expenditure during the pandemic. Notably, the uncertainty occasioned by the health crisis ensured the monetary policy was regular. In general, the approach is used as a strategy to fight a recession.
Worth noting is that attempts to expire the measures were met with extensions driving the sum of newly created money up, considering that most economic performances remained dismal. It also called for the need to taper the additional stimulus to manage emerging crises gradually.
Furthermore, money pumped into the economy amid the pandemic partly surged due to the nature of the QE measures. The current measures are highly considered flexible, allowing market participants to become comfortable compared to other financial crises. Policymakers also reiterated that they would support the economy as much as possible as long as it works.
Concerns on pumping money into the economy
Notably, printing money has several shortcomings, with inflation remaining the most significant concern, especially if the economic output fails to support demand. For instance, the United States is currently grappling with skyrocketing inflation that has hit 6.1%, the highest in almost three decades. Most economists project that inflation will keep soaring due to the monetary policy adopted amid the pandemic.
Interestingly, most central banks embarked on pumping money into the economy to improve the economy. However, the pace of recovery remains uncertain. Most governments continue to feel some of the policies’ adverse effects even as economies reopen and some of the measures expire.
There are lingering concerns on the impact of entirely depending on QE and setting expectations both within the markets and the government. In this case, an explosion in the money supply could potentially harm the currency.