Quantitative easing (QE) is an unconventional monetary policy used by central banks to stimulate the national economy when standard monetary policy has become ineffective. A central bank implements quantitative easing by buying financial assets from commercial banks and other private institutions, thus creating money and injecting a pre-determined quantity of money into the economy.
This is distinguished from the more usual policy of buying or selling government bonds to change money supply, in order to keep market interest rates at a specified target value.
The above definition comes from Wikipedia, for a more detailed explanation click here.
What this means is the Government prints money, most people do not understand how this affects the individual. Without getting to technical on this issue and keeping it in very basic terms printing money is when the Governments central bank actually prints money to pay for things.
A simple explanation is that if the Government wants to build a new bridge they simply print some money and pay the workers with these funds for the cost of the bridge.
Although this sounds simple enough by doing this the value of the dollar is reduced.
This is because printing money will increase inflation, as there is now more money in circulation, which leads to more spending by consumers and a reduction of the goods available.
As more consumers compete for the goods that are available the price will go up, this is the basis of the free market.
At present, the central bank of America is currently employing this strategy. It seems to be working, as inflation has not got out of hand.
The affect on Australia is our dollar is now increasing against the US, as we are not employing the same strategy here. This is affecting Australia as our major exporters being the mining companies are now receiving less due from exports due to the higher exchange rate.
Over a long period of time this may cause a major slow down in Australia as miners shelve new projects and expansion.
The risk in America is that they print too much money and cause hyperinflation. This has happened a number of times in history in many countries. During periods of hyperinflation the cost of goods increase so quickly that your money becomes worthless.
Although printing money is a tool that governments use, it does affect the wealth of every citizen. If the government were to print 10% of the money supply in circulation, the value of your worth would decrease the same amount. That is, $100 would now only buy $90 worth of goods.