The Reserve Bank is expected to push the button on Thursday on the emergency monetary policy of so-called quantitative easing (QE) to support the economy amid the coronavirus crisis.

What is quantitative easing?

It sounds very technical but it boils down to the RBA printing money to pump funds through the financial system. The bank will do this by buying up government bonds and other financial assets from banks and pensions funds, thereby flooding the system with liquidity. The hope is that the financial institutions will use the extra funds to increase lending to households and businesses. It’s often referred to as a “money printing scheme” although the actual funds used to buy the bonds etc are created and exist electronically and not printed notes.

Why is the RBA doing this?

The financial system is under severe pressure as a result of the virus-driven shutdown of the global economy. Just like businesses and households facing loss of trade and wages, the financial system needs money to keep it going. Central banks normally ease this by lowering interest rates but the RBA, like every other major central bank in the world, has already cut them as low as they can go. They have, in the words of many commentators, run out of ammo and the only option is QE.

How much does it involve?

We don’t know yet how much money the RBA is going to create with its version of QE but it will run into billions of dollars. When the Bank of England started the scheme in the GFC, it racked up £375bn (A$750bn) over three years before it stopped in late 2012. The US Federal Reserve reached US$4.5tn in its first five years.

Does it work?

QE, which was used in the US, UK, Europe and Japan to combat the impact of the global financial crisis, is widely regarded as having saved the world economy from collapse.

Sounds too good to be true. What’s the downside?

That’s right. Many people have warned for years that QE – which is still being used in the eurozone and was only recently wound up in the US and UK – should have been wrapped up years ago. It was only ever intended as an emergency measure but, with markets flooded for a decade with the cheapest money of all time, the world economy has effectively doubled down on the debt addiction that caused the GFC in the first place. By keeping QE going for so long – and by keeping rates so low for so long – central banks have been left with no other policy to tackle the current crisis. This has been compounded by the refusal of governments to pump-prime economies with fiscal stimulus, leaving the RBA and others to do all the heavy lifting.