1. It drives inflation much higher. This is the biggest concern around quantitative easing. As more money circulates through the economy, prices rise. Why? While the supply of money increases, the supply of goods remains the same. Thus, the competition for each good increases, leading to increased prices, which in turn leads to inflation. Excessive inflation leads to distortion of prices and incomes, and can cause an economy to operate inefficiently.
2. It creates havoc with international trade. Newly printed money can be used by the government and consumers to import new goods and services from other countries. These goods and services are more or less coming in for free. Sounds like a great deal, right? The problem is that sooner or later other countries end up getting sick of exchanging goods and services for what they feel are worthless sheets of paper. In other words, the value of the importer’s currency decreases, which can discourage exporters. For example, China stopped exporting valuable minerals to the U.S. due to its quantitative easing program.
3. Threat to the U.S. dollar. Many countries get frustrated with attempts at currency manipulation like quantitative easing. They feel that these practices reflect an inability by the country to generate real growth and to honor debts. For example, other countries have become weary of lending the U.S. more money. Also, the status of the U.S. dollar as the world reserve currency is in jeopardy, likely because of quantitative easing.
4. Benefits don’t outlast QE programs. When the central bank stops printing money, the recovery often gets put on hold, or worse, begins to reverse. Although the hope is that new consumer confidence will inspire a real recovery, many feel these programs are only a short-term fix. This effect is exhibited by the fact that stock markets often fall when it is announced or speculated that the quantitative easing program will be brought to an end.
5. Encourages debt. Another key worry about quantitative easing is that the increased money supply and low interest rates encourage additional borrowing by both consumers and businesses.