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Quantitative easing: the step to make it highly effective

Quantitative easing (QE) programs, i.e. purchase of bonds by Central Banks, have been used to inject liquidity in the economy.

Yet studies show that less than 10% of generated liquidity by investors effectively reaches ‘the real economy’. QE programs have created massive liquidity, deposited at Banks.

The bottleneck

Banks have a structural cap to funding third parties… equity.

Indeed, capital utilization naturally caps the funding capacity of Banks to the private sector, even with State guarantees (e.g., provided to promote funding under COVID-19).

Investors stand on massive deposits… while the private sector is starving for liquidity.

The good news 

A new scheme enables creating unmatched fluidity of liquidity in an economy.

Inspired by supply chain financing, the key is that it desynchronizes receivables and the investment without the need for securitization.

The trick: a receivable is the sum of its units: a 1000.00€ receivable is the sum of one thousand 1.00€ units of receivables, commonly called GENs ‘Genuine Enterprise Notes’.

GENs creates flexibility and liquidity for investors on trade receivable down to 0.01€ independently from the size of the receivable.

When applied to trade receivables on public entities, it creates an attractive sovereign deposit for investors:

  • Public entity suppliers: Immediate liquidity on eligible receivables to public entities;
  • Public entities: Additional liquidity through deferred procurement payments;
  • Public entity supply chain: Strengthened balance sheets through percolating liquidity;
  • Investors: new sovereign deposit equivalent: units of trade receivables on public entities, maximizing investment flexibility and liquidity;
  • Central bank: Increased liquidity fluidity strengthening the local ecosystem.

This innovative scheme is simpler, more flexible and more scalable than securitization.

Building on quantitative easing

By sponsoring the implementation of the above scheme, Central Banks effectively achieve their initial goal with quantitative easing: inject liquidity in the real economy.

Investors’ added liquidities resulting from QE find a safe haven: units of sovereign (public entities) receivables.

At the same time, the sale of those receivables by public entity suppliers directly channel liquidity in the real economy with no need for cumbersome funding approval.

Under post COVID19 economic slump, the Central bank routes investors’ QE liquidities directly in the real economy, at no change in money supply, with no additional risk.

 

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Olivier Gazon

Olivier Gazon

CEO

Sustainable Base Finance

Member since

21 Apr 2020

Location

Brussels

Blog posts

3

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