The Era of Central Bank Pump-Priming: How Quantitative Easing Reshapes Financial Markets

The Power of Quantitative Easing Viewed Through the Pandemic

In 2020, the outbreak of the pandemic caused the global economy to instantly freeze. Factory closures, unemployment, and stagnant consumption came too suddenly. The Federal Reserve and the European Central Bank did not hesitate and directly unleashed their “big move”—unlimited quantitative easing policy. This action shocked the entire financial market, and investors' panic gradually eased, with abundant market liquidity and a significant decrease in financing costs for businesses and individuals. At that moment, quantitative easing was no longer just a concept in economics textbooks, but a real market change.

What is Quantitative Easing?

In simple terms, quantitative easing is when the central bank directly purchases government bonds, mortgage-backed securities, and other assets to inject cash into the financial system. Imagine the economy as a poorly functioning machine; quantitative easing is like giving it extra horsepower. When traditional tools like interest rate cuts have been exhausted (with rates near zero), the central bank resorts to this tactic to stimulate the economy.

Large central banks like the Federal Reserve and the European Central Bank have increased market liquidity by purchasing a large amount of government bonds and other securities. Banks have ample cash, and naturally, they are willing to lend to businesses and consumers at lower interest rates. With cheaper loans, investment and consumption become more active.

The Chain Reaction Caused by Excess Liquidity

The liquidity released by the central bank first impacts the financial markets. Bond yields decline, and the stock market becomes more attractive—after all, in comparison, stock returns look more enticing. Corporate financing costs decrease, making companies more willing to expand and invest. The entire financial ecosystem operates more quickly under the stimulus of the central bank's accommodative policies.

But this also brings potential risks. Excess cash chases limited assets, pushing up asset prices; the supply of goods and services cannot keep up with the growth in demand, and prices begin to rise. History tells us that the most common side effect of quantitative easing is the continuous accumulation of inflationary pressures.

New Variables in the Cryptocurrency Market

The impact of quantitative easing on Bitcoin and other crypto assets has become a hot topic in the investment community. Some believe that it is the central bank's excessive liquidity that has driven up Bitcoin prices—traditional currency depreciation has attracted significant funds to crypto assets as alternatives. Others hold the opposite view, arguing that the cryptocurrency market operates independently and is only marginally affected by central bank policies.

Regardless, since the pandemic in 2020, Bitcoin has risen from less than ten thousand dollars to several tens of thousands of dollars, which coincides with the unprecedented period of quantitative easing by global central banks. Whether it is a coincidence or causation is worth pondering.

Winners and Losers in the Market

The most direct beneficiaries of quantitative easing are asset owners—stockholders, real estate owners, and bond investors watching their assets continuously appreciate. Corporate financing costs decrease, making expansion easier. However, ordinary wage earners and savers are having a hard time; cash is depreciating, savings yields are negligible, and purchasing power is being eroded.

In the long run, unchecked quantitative easing may inflate asset bubbles. Certain stocks and real estate market prices are artificially driven up, and once policies shift or economic fundamentals reverse, these bubbles will burst.

When the policy exits is key

Quantitative easing cannot last forever. When the economy recovers and the central bank faces inflationary pressures, it must consider “balance sheet reduction”—gradually decreasing asset purchases and even selling assets to withdraw liquidity. This process is fraught with risks, as the market has become accustomed to the liquidity support provided by the central bank, and a shift in policy often triggers market adjustments or even crashes.

Underlying Logic: How Quantitative Easing Changes the Financial Ecosystem

No matter how complicated the name is, the core of quantitative easing is one thing: central banks create a large amount of new currency, lower interest rates, and stimulate consumption and investment. In the short term, it is effective in providing immediate relief, but the long-term costs are inflation, asset bubbles, and exacerbated wealth disparity. For investors, understanding the quantitative easing cycle is to understand the operational logic of modern financial markets.

During the period of quantitative easing, finding beneficial asset allocation; when policies shift, promptly adjusting positions—this is key to surviving in a central bank-driven market.