Hedge Against Inflation with Real Asset Investments
Since the financial crisis and the “Great Recession” began in 2008, western central banks have responded in a number of different ways. The one method linking all of these central banks activities together has been the use of Quantitative Easing, or QE as it is more commonly called.
The aim of QE is to stimulate the real economy, and it is considered so-called “Unconventional “
Monetary Policy. Generally speaking, a central bank will try to boost economic growth by cutting interest. In theory, lower interest rates will encourage businesses and consumers to increase their economic activity by borrowing money at lower interest rates.
In the post-World War 2 era, lowering interest rates have sufficed to lift western economies out of economic recessions. Since the financial crisis started, however, lowering interest rates has not been sufficient to boost economic activity across western economies. Since 2009 however, interest rates in the European Union (EU), the UK and the US are all one percent or lower, meaning they are at or near the so-called “zero-bound” where they cannot be lowered further, and hence central bankers have turned to QE instead.
The process of QE is best explained by providing a rough overview of the steps involved in its implementation:
1) First, a central bank will create new money. In the past, this meant literally printing money; today however it simply means creating new money electronically.
2) Next, a central bank will use this newly created money to buy more conservative bond investments – generally government or government-guaranteed bonds – directly from financial institutions such as banks, pension funds and insurance companies.
3) This purchase of government bonds by the central bank should lower the interest rates that these bonds pay to financial investors. This is based on simple supply and demand. Large purchases of bonds by a central bank will increase the price of these bonds, which lowers the yield the bonds will pay (when it comes to bonds, their price and yield is inversely proportional).
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