What is Quantitative Easing? The Bank of England has produced a nice little video, but it’s essentially a central bank buying back government bonds from bond holders, such as insurance companies and pension funds.
The price of the bonds increases thus lowering the yield of the bond – forcing bond holders to sell them. The (artificial) capital that bond holders receive from the central bank is used to buy shares and bonds in companies – thus having a trickle-down effect in the economy.
Theoretically, this is what happens. In reality it aids banks in recapitalising their balance sheets without any trickle-down. Even if the Quantitative Easing worked in practice as it does in theory, it should create concern in policy makers.
Government bonds are usually held by institutions, such as pension funds, because they’re stable. If you remove the stability that government bonds provide, you end up having a…
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