I heard somewhere that QE is not the same as printing money -- in fact as I know it, QE is the purchase of assets in exchange for more liquid and high-quality, better collaborated debt. In other words, it stimulates the exchange of liquid fiat, and indirectly increases the money supply in circulation (that is, money not in reserves) by inducing banks to lend, and therefore practice fractional reserve banking. So the analogy to "printing money" is a misnomer.

Is this explanation wrong?


It is correct that quantitative easing (QE) is not exactly the same as just printing money. However, I would hesitate to say equating it to printing money is complete misnomer (although its not accurate analogy either) and I also dont think that your description of QE is completely accurate.

QE actually begins with creation of new money. As explained by Fed St. Louis QE is defined as:

large-scale asset purchases—in the hundreds of billions of dollars range—of, for example, mortgage-backed securities and Treasury securities.

Moreover, this large-scale asset purchase is payed for by Fed creating new reserves. This creation of new reserves is in principle equivalent of actually physically printing out the bills even though it is done electronically.

The reason why the above should not be equated to just printing new money (as explained here in this VOX article) is that:

asset purchases by the central bank are financed by money creation, but not money in the form of bank notes. The money is in the form of reserves held at the central bank. That form of money is a liability of the public sector – taking the central bank and the government together in an expanded definition of the public sector. It is a liability that pays the interest rate set by the central bank.

The above is why QE can be considered an asset swap and why you can argue that the asset purchase just by itself is not money creation (although it indirectly encourages it) as it also reduces the money supply since Fed (or other central bank) is taking the money (in form of those bonds that can count as broad money) out of economy.

However, there is a caveat to this. The ultimate purpose of QE is to increase money supply which also happens when you print new money. The QE, if successful, does de facto increase the money supply when it encourages more lending. Even if the original swap of reserves for bonds might leave broad money supply unchanged the additional lending will increase it.

Thus this is essentially an argument about proper nomenclature/semantics. For example, lets say that in certain situation we know that if central bank would lower the interest rate by some percentage the corresponding increase in lending would make money supply expand by $\\\$ 1000$ and we know we could also do that directly by just printing out the $\\\$ 100$ bill which through multiplier (assuming $10\%$ reserve ratio) would also expand the money supply by $\\\$1000$. Hence, is it valid to call cutting interest rate printing money? Well certainly from narrow scientific semantic point of view that would be a misnomer as it would not follow proper economic nomenclature that makes distinction between the two actions. But this being said, since those actions would have equivalent effect I would not say that using such analogy is completely incorrect.

On a certain level this really is just an English language/semantics problem - If you go somewhere and later realize that you have to turn back and backtrack to the same spot would saying; 'well that is the same as staying still,' be a good analogy or a misnomer? The actions have different implications in terms of effort etc. yet in both cases outcome is the same. Moreover, before turning to economics I used to study physics which abounds with analogies that are far more outrageous yet commonly used in classroom (see this rant).

Hence to sum up, while calling QE printing money is not completely proper, the analogy has some merit to it.

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  • $\begingroup$ Is there any evidence that a QE associated increase in reserves actually induces banks to lend more? They already have massive excess reserves so in my view they are more constrained by the availability of creditworthy borrowers. $\endgroup$ – dm63 Jul 11 at 11:58
  • $\begingroup$ @dm63 yes there is some evidence that QE was effective (see link below). Also a side note QE can really only achieve all its macro-policy objectives by expanding money supply - if it doesn’t it’s failure - changing interest rate etc is dependent upon money supply as they depend on money market equilibrium. If you just argue the analogy is completely invalid because it empirically was not effective in some cases one could make a separate analogy of person going to printing press just to find that its unplugged and so it does not print. papers.ssrn.com/sol3/papers.cfm?abstract_id=2719021 $\endgroup$ – 1muflon1 Jul 11 at 12:12
  • $\begingroup$ @dm63 moreover, I think this whole issue of denouncing or proclaiming love for the analogy to money printing is misguided. The problem is that in some countries (I am looking at you Germany) printing money became a taboo and ugly word that one can’t even mention in polite conversation (yes I am exaggerating a little bit). So some economists are trying to distance QE from such analogy as far as possible. To the extent that the analogy makes people oppose QE when it’s necessary the analogy makes more harm then good. However, I would argue it’s still a good analogy when you even try to explain $\endgroup$ – 1muflon1 Jul 11 at 12:24
  • $\begingroup$ I agree QE was likely effective- I’m arguing that the mechanism is via reduction of interest rates rather than simple availability of reserves. $\endgroup$ – dm63 Jul 11 at 12:27
  • $\begingroup$ the effects of QE to lay public in places where that ugly connotation does not exist or even to students. For example, typical macro 101 class will discuss monetary policy as if it would be done by printing money instead of changing interest rate or QE or host of other things even though modern central banks almost never resort to outright printing of the money. Still a great deal of analysis from just printing the money carries to interest rates and QE. Hence, even in advanced classes you will often hear teachers say this or that effect of QE/interest rate is equivalent to gov printing such $\endgroup$ – 1muflon1 Jul 11 at 12:27

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