Quantitative Easing Explained
Quantitative Easing Defined
There has been a lot of talk around Quantitative Easing lately, which is sometimes referred to as QE2. The 2 represents that fact that this is the second dosage of QE.
Quantitative Easing is defined by Wikipedia as:
Quantitative easing (QE) is a monetary policy used by some central banks to increase the supply of money by increasing the excess reserves of the banking system, generally through buying of the central government's own bonds to stabilize or raise their prices and thereby lower long-term interest rates. This policy is usually invoked when the normal methods to control the money supply have failed, i.e the bank interest rate, discount rate and/or interbank interest rate are either at, or close to, zero.
In the video provided below you will find a funny (in a weird sort of way) cartoon that directly deals with what QE is all about.
What Are We Really Talking About?
antitative easing in all of it's fancy lango is really nothing more then monetizing the debt. Monetization is the process of converting or establishing something into legal tender. This typically refers to the printing of banknotes by central banks.
Whether we want to fess up or not, the reality of life is that the United States is broke. Well, that is actually a nice way to put it because it is really worse then that. Broke would refer to zero. But it is far worse then zero, we have a huge amount of debt so we've actually gone horrendously into negative territory.
In spite of this the Federal Reserve (which is neither Federal or a Reserve) is still printing money. So, how much debt does the US have? Estimates are as low as $14 Trillion if you want to believe the governments numbers or as high as $100 Trillion. But that is not even the worst of it. We are still spending in an out of control manner increasing this amount each and every day.
Because of this huge debt there is another problem that we must deal with -- the interest on the debt. The interest amount is unsustainable.
Any investor wants to be as secure as possible, therefore due to this current state of affairs our biggest buyers of T-Bill debt no longer want anything to do with our troubled paper. Do you? Probably not! Therefore, the only buyer is the Federal Reserve (which is neither Federal or a Reserve).
The Federal Reserve (which is neither Federal or a Reserve) is now the second largest holder of US T-bills. The Federal Reserve is not in the business of taking on bad debt. They are in the business of exploiting crisis in order to profit. That's where you and I come into the picture. Through their clever tricks and schemes you will see your wealth transferred away from you through the hidden tax called inflation. In this environment savers are the ultimate losers. While many will try to prepare for the worst building up their cash reserves they are actually loosing money as the dollar declines.
What Can We Do?
In reality we don't have a whole lot that we can do as it pertains to the Federal Reserve (which is neither Federal or a Reserve). But there are things that we can do to position ourselves. First of all we need to deal with our thinking. We have all been programmed to save and get out of debt. But both of these are counterproductive in the times that we are living.
Debt is an asset during inflationary times. Think about this with your home. If you have a $100,000.00 mortgage on your home today then it would take $100,000.00 in today's dollars to pay off the debt. If the dollar declines 25% then value of your mortgage is now only $75,000.00. You have gained $25,000.00. Contrast this with having $100,000.00 in a CD. Your saved money is now valued at $75,000.00. Which do you want?
This is a great time to acquire assets with debt. When we look at real estate it is probably safe to assume that we are not going to see large increases in values anytime soon. But does that make real estate a bad deal? Absolutely not! Making money in real estate is made when you purchase the property not when you sell it. If you buy a property right then you will have positive cash flow in it not to mention the tax benefits. Acquiring property with debt that can later be paid off with dollars that are worth nothing is a great way to increase your assets.
But what about the cash that we have? Gold and silver are the perfect hedge against inflation. Many people are talking about gold and silver being in a bubble. They are crazy in my opinion. Yes, we will see the price of these metals go up and then retrace, increase and then retrace, but it is in the retracements that we find our buying opportunities. One area that will greatly be affected by inflation is food. We've already seen the prices in our grocery stores increasing dramatically. So why not buy stock in DBA, RJA, CORN or other funds that are affected by the price of agricultural commodities?
While we are living in dangerous times (financially speaking) it is time to reposition ourselves so that the decisions of those who are in power don't crucify you and me, the average Joe's.