What happens on balance sheets during QE
Suppose a central bank buys a bond from an investment fund through a commercial bank. The central bank gains a bond as an asset and credits new reserves as a liability to the commercial bank. The bank credits a deposit to the fund. The private sector has exchanged one kind of asset for a more liquid one, while both sides of the central bank's balance sheet have grown.
If the central bank buys directly from a bank, the bank may exchange a bond for reserves without an immediate new deposit for a non-bank customer. The slogan ‘QE prints the same amount for people’ is therefore inaccurate. Reserves remain accounts for eligible institutions, and subsequent decisions by banks, firms and households determine the broader economic effect.
How purchases are meant to support output and inflation
A large buyer increases demand for selected bonds, generally raising their price and lowering their yield. Investors that sell may seek other assets. Prices and yields can shift across markets, long-term funding may become cheaper, asset-holder wealth may rise and the exchange rate can adjust. Announcing a programme also changes expectations of future policy rates.
The objective is not one bond's price for its own sake, but easier financial conditions when short-term rates are close to their lower bound. Cheaper finance can support investment and consumption, and thus demand and inflation. The channel's strength depends on bank health, willingness to borrow, available projects and whether the economy is constrained by demand or by a real shortage of goods.
- portfolio channel: sellers replace the purchased asset with alternatives
- signalling channel: the programme changes expectations of future rates
- credit channel: stronger balance sheets may improve financing
- exchange-rate and wealth channels: import prices and asset values change
QE is not a free lunch
Results are uncertain and distributional. Higher bond, equity or property prices initially benefit their owners, even when the broader goal is employment and price stability. Very easy conditions maintained for long periods may encourage excess risk or asset overvaluation. Conversely, too little intervention in a deep crisis may allow deflation and unemployment to do greater damage.
The central bank bears interest-rate and market risk. If it later pays banks higher interest on reserves while holding longer, low-yielding assets, profit may fall or an accounting loss may appear. A central bank is not an ordinary company and may operate with negative equity under its legal framework, but consequences for transfers to the treasury, communication and credibility are real.
QT shrinks the balance sheet; Bitcoin fixes issuance
Under quantitative tightening, a central bank lets some bonds mature without reinvesting or sells them. Assets and reserves gradually decline, potentially tightening liquidity and pushing yields higher. QT need not be an exact reverse film of QE: market conditions, communication, regulation and the demand for reserves are different.
Bitcoin has no central-bank balance sheet or asset-purchase programme. New units arise according to an issuance schedule within the block reward, and nodes enforce validity. This makes supply more predictable, but leaves no authority to inject system-wide liquidity in a panic or deliberately lower long-term rates. The benefit of a binding rule and the cost of less flexibility are two sides of the same design choice.