1. Understanding Quantitative Easing

2. Let’s say there was a prosperous village –
Sukhsagar. Most of the villagers were into
agriculture, and their lands were fertile and
the farmers were happy.

3. The village had good
schools, shops, entertainment
hubs, hospitals, municipalities, et
c.

4. One day, a pundit who was well respected
amongst the villagers, came to visit.
The villagers believed the pundit was
blessed with the ability to predict the future.

5. One evening, the pundit called for an
urgent meeting to tell the villagers about
their future. These meetings had become a
regular occurrence and most people
attended it because the pundit’s prediction
often was accurate.

6. During the meeting, the pundit had
bad news for the villagers. He told them
that he expected that the villagers would
soon lose their jobs and source of
livelihood.
Their incomes would vanish!

7. The pundit urged them to store all they had
so they could overcome the bad times.
The petrified villagers acted upon his
instruction without any further delay. They
began to save their money like there was
no tomorrow.

8. People stopped visiting the markets, they
stopped going to the entertainment hub.
Every place in Sukhsagar was deserted.
The fear of losing jobs and source of
income was sucking out every aspect of
happiness from their lives.

9. The demand for all goods and services
nosedived. The producers of goods felt the
pain and reduced prices to get some hold
on their lives.
But the demand simply did not lift.

10. Clearly, negative sentiments had come to
enshroud the entire village leading into a
standstill of economic activity.
One day, a government official came to
Sukhsagar but quickly noticed that it had
turned into Dukhsagar.

11. The official tried to convince the villagers
that there was no imminent danger of bad
times befalling on them.
However they remained to live in fear. They
had more faith in the pundit than the
official.

12. Seeing that his advice was falling on deaf
ears, he invited another learned person to
address the villagers.
But all his efforts were in vain.

13. Soon the villagers started suffering. The
producers of goods and services suffered
due to a fall in the demand. So either they
closed shop or left the village.
So now, there was even a shortage of
goods.

14. Since there was no demand, the prices had
stopped falling. So while people had
money in their homes and prices had come
down still there was no economic activity!
Without economic activity, the markets had
dried up just like a car would get stalled
without petrol.

15. Just like car engine would get dehydrated
without petrol, so did the markets in the
village in the absence of money. The
money that was not reaching the markets
even though there was plenty of it in the
homes of the villagers.

16. There was only pain and misery left in the
village. Although there was no external
threat to their jobs, the peculiar behavior of
the villagers to save money and stop
buying goods and services was turning out
to be the cause of job losses.

17. The government official was afraid the
villagers would destroy themselves if they
continued on this path. So he thought of an
idea to help the villagers get out of their
pessimism.
He made an unprecedented announcement
to jolt the villagers into action.

18. The key parts of his announcement were:-
1. Money would be made available to everybody at 0%
interest
2. As much money that would be needed would be
provided
3. Villagers could pay their debts over a comfortable
period of time
4. The government would take on the debts that others
owed them

19. This announcement was manna from
heaven for the villagers.
The assurance of easy money made them
realize that it was futile to hoard money in
their homes. They started to buy goods and
services from the market.

20. Soon, the producers of other goods and
services who had fled from the village started
to return in large numbers. And even the
entertainment hub sprung into action.
The economic engine sputtered into action just
as a car engine would when supply of fuel
resumes.

21. The sentiments of the villagers took a U
turn from negativity to positivity and
Dukhsagar turned back into Sukhsagar.

22. The process of releasing money into the
hands of people to revive sentiment and
getting people to actively participate in
economic activity is what is known as
“Quantitative Easing”.
Quantitative Easing literally means
increasing the supply of money in the
economy by printing additional currency.

23. The cheap money released became an
incentive for the people to consume and
invest. While consumption increases, the
demands of goods and services infuses life
to the production process.

24. Changing sentiments is a self fulfilling
prophecy that helps the economy gain
momentum and sustain itself.
The moment sentiments change, people
are inclined to hoard less and inject more
money into the economy. The infused
money acts a the lubricant for the economy
to chug along smoothly.

25. Hope this story has clarified Quantitative Easing
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26. Disclaimer
The views expressed in these lessons are for information
purposes only and do not construe to be of any investment,
legal or taxation advice. They are not indicative of future
market trends, nor is Tata Asset Management Ltd. attempting
to predict the same. Reprinting any part of this presentation
will be at your own risk and Tata Asset Management Ltd. will
not be liable for the consequences of any such action.
Mutual Fund investments are subject to market risks, read all scheme
related documents carefully.