The end of quantitative easing - so what happens now?

Ok, so quantitative easing is coming to an end, but what is this and what does it mean? Quantitative easing is a reasonably unconventional monetary policy tool as opposed to older style government policy where the central bank flooded the economy with newly printed money. But quantitative easing is still likened to printing money in some respects; however, this time a central bank purchases government debt securities from the bond market lowering interest rates and increasing money supply in the economy.

So, quantitative easing increases money supply by flooding bond markets and hence financial institutions with capital increasing liquidity promoting lending between institutions. When the GFC hit in 2007, institutions held onto their capital refusing to lend to other institutions drying up capital flows worldwide. We recently saw in Greece when banks stopped distributing money actually closing their doors for a week or so.

The GFC was a complex financial meltdown primarily caused by interest rates held too low for an extended period during periods of growth where interest rates should have risen to curtail economic activity. So instead, quantitative easing was created to counter periods when short-term interest rates are approaching zero to stimulate lending without the printing of new banknotes and all the problems associated with demand pull inflation.