The Money Printer

After the 2008 crisis, central banks faced a problem. Interest rates were already near zero — the traditional tool for stimulating economies had run out of room. So they invented a new one.

They called it quantitative easing. QE for short.

Here’s how it works in plain terms: the central bank creates new money electronically and uses it to buy financial assets — typically government bonds — from banks and financial institutions. This pumps new money into the financial system, lowers long-term interest rates, and encourages borrowing and investment.

The stated goal was to prevent deflation, support employment, and stabilise the economy. And in the immediate crisis, it may well have done that.

But QE has a side effect that rarely makes the headlines: it disproportionately benefits asset owners. When central banks buy bonds, they push bond prices up and yields down. Investors, looking for better returns, move into stocks and property. Those asset prices rise. The people who own stocks and property — already the wealthiest segment of society — see their net worth increase.

The person renting, saving in cash, waiting to buy their first home? They watch assets move further out of reach while being told the economy is recovering.

The Federal Reserve’s balance sheet went from under $1 trillion before 2008 to nearly $9 trillion by 2022. That money went somewhere. Mostly upward.

QE was meant to be temporary. It became the default response to every economic disruption. The printer, once switched on, proved very hard to switch off.

Tomorrow: trust in institutions after 2008 — and one person who took a very different view.

— The Daily Bit