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Investment Tip of the Day
If you are an active investor and have kept with worldly economic news you will have heard of the term Quantitative Easing (QE). But what exactly is it and why are so many countries moving towards utilizing it for their economies?
Quantitative Easing (QE) came into the public consciousness during the 2008 US Financial Crisis. Thereafter, several other countries followed suit. QE is a monetary policy used by governments as a way to stimulate the economy in times of deep recessions. But doing so is always as a last resort because its implementation can risk an inflation explosion and result in currency instability.
In more accurate terms, the government increases the money supply available by buying public and private securities. This QE results in an increased amount of cash for financial institutions which it is hoped will result in increased lending and liquidity. No country likes to stay in a recession too long and so QE only exists to help a weakening nation.
For proponents of QE they believe by handing over money to banks that these financial institutions will be more willing to lend money at lower rates. With lower interest rates it encourages consumers and businesses to borrow so they can turn around and spend it — stimulating the economy. With more people spending businesses have more cash on hand to hire new employees. And with healthy balance sheets stock markets rise providing a boost in confidence to consumers, leading to an economic revival.
Although Canada has never used QE in its history many countries around the world have depended on it. Canada has been fortunate because of its healthy fiscal positioning and stable banks due to strong regulations. But because Canada can ignore QE and continue on its way doing what it needs to do to lower national debt it doesn’t mean Canada is immune from using it in the future, especially when Conservatives have majority control which traditionally has shown that national debt rises under their watch.
QE has its opponents. Those against QE point to a high risk of inflation, currency devaluation, and encourages consumer debt due to the fact that they can borrow at significantly lower rates. Many also point to many historical examples of QE being more a short term fix as a result of a deeper underlying problem within a nation. For example, the US has gone through two rounds of QE since 2008 and talks are in the works for another round already.
For Canadian smart investors it is always good to understand the many complexities to worldly economies prior to making your investment choices. QE is one of those factors. The more you understand what drives an economy the better you and your money will be in the long-term.