The Effects of Quantitative Easing on Your Investment Decision-Making
The world economy has seen some of the most challenging times in the past two years. Millions of people have lost their jobs, and businesses broke their budgets to cope with the changes. With millions of companies losing their customers, entire industries started losing money and the ability to hire as many workers as needed.
The leading global financial institutions and banks try to mitigate the consequences of such situations by offering lower interest rates. Lower rates mean investors and savers get less interest on their invested funds, making savings and investments less attractive in the eyes of potential investors.
In the case of savings, people save money in banks simply because of the promise of earning high returns thanks to favorable interest rates. However, even though less interest makes savings less attractive, lower rates make it more cost-effective to lend or borrow money, making it easier to grow your business, buy property, etc.
The only way for a country to protect jobs and run a healthy economy is to have a steady flow of investors and people interested in buying goods, products, and services. If interest rates are barely above zero, that will surely leave a mark.
Thankfully, when economic times are hard, banks can resort to quantitative easing (QE) to encourage investment and spending. Let’s see some of the most critical effects of quantitative easing.
How quantitative easing works
Central banks are in charge of a country’s money supply. These institutions limit how much money is in circulation in one country’s local and regional economies. That means that each bank reserves the right to resort to alternative ways of creating money.
In the case of QE, banks create new electronic money. Even though many financial specialists would describe the process of quantitative easing as printing money, QE doesn’t involve the creation of new physical banknotes.
This electronic money creates a financial balance in a time of crisis. Most financial institutions invest heavily in buying government bonds. This type of investment allows banks to become owners of government bonds.
In other words, banks lend money to the government and receive bonds in return. Those bonds make for a good promise of high returns. Governments make a deal with banks to pay back a certain sum of money in an agreed period.
Banks use that agreed period to charge their respective interest. That’s how the prices go up in the bonds market. Because of these deals between banks and governments, local economies can see billions pouring in and pushing the price up.
It’s a simple law of prices going up when the demand increases. Why is that important? Simply because government bonds’ prices impact the interest rates on loans banks and financial institutions offer to residents and businesses.
If the price of government bonds goes up, the interest rates on loans should go down, making loans and savings more affordable and attractive. Affordable loans make it easier for businesses and individuals to borrow and spend money, allowing the local economy to thrive and develop.
How QE helps investors
One of the most critical effects of quantitative easing for investors is recognizing the right moment to buy or sell. QE is vital for performing accurate quantitative analysis investment in times of crisis.
It helps investors find the best times to buy government bonds and ensure their investments are safe and lucrative at the same time. Investing in government bonds is one of the safest ways to ensure good returns simply because governments have never failed to repay.
However, there’s a particular risk involved with this type of investment. It can become quite expensive, but only if the bank drives the price of the bonds up. While a higher price may make investment more expensive, it can also create new opportunities for investors.
Higher bond prices could encourage investors to lend money to businesses or buy more shares. Either way, the local economy benefits from both scenarios. That’s why many holders of government bonds and assets benefit from QE.
When the price goes up, they can sell their assets, helping both the economy and the commercial banks increase their reserves. The biggest beneficiaries of QE have been financial institutions and banks that profit from the increase in the price of bonds. The higher the price, the higher their liquidity.
Quantitative easing is an excellent monetary policy that every central bank uses to increase the money supply and help the economy grow. However, it’s not very beneficial to investors, who must turn to riskier investments to get an opportunity for higher returns since interest rates are down.
The effects of quantitative easing include helping both banks and governments ensure more robust economic growth. When these institutions work together, they guarantee low unemployment rates, higher wages, and top investment opportunities for all interested in investing in bonds, funds, shares, etc.
However, it all comes down to maintaining a balance between growth and potential consequences of QE, such as higher prices of bonds and property and other investment types like shares. While high
prices benefit certain members of society, it makes it difficult for others to build up savings, buy real estate, etc.