Hi all, After seeing "QE3 and "QE infinity" bandied around in these forums I wondered if everyone knew what the ideas of Quantitative Easing (creating money from nothing) where. I found a nice article that might help some: http://www.businessinsider.com.au/quantitative-easing-for-dummies-2013-2 Like many of these articles, the author is wary of this method of fiscal problem solving declaring that people owning bonds, shares, futures and other paper assets are all at risk if QE is over exploited and causes too much instability in the US$ or a bunch of other possible (VAGUE) problems. Apparently, while QE is likely to downgrade the price of physical assets like gold and silver (which seem counter-intuitive to me) if it is over done then the currency itself may collapse making silver and gold very much worth having. Would anyone like to put in there 2c worth? M
Here's Peter Schiff on this issue from last night. http://www.zerohedge.com/news/2014-10-28/fireworks-fly-peter-schiff-warns-economy-lives-qe-dies-qe In summary, Schiff reckons QE is inflationary and as soon as people realise that the FED is trapped into ongoing monetary manipulation, gold will launch upwards. Everyone else is backing the FED to keep the music playing with successive manipulations that will keep everyone else dancing...the never ending monetary dance rave party! Woohoo!! "Keep the printing presses working and nothing will go wrong" versus "you'll be killed picking up pennies in front of a steamroller" This argument for an inexhaustible ability to manipulate, is much the same argument put forward by proponents of the "housing will be stronger for longer" argument. They are backing the controller's ability to keep tightening the fiscal and monetary screws...the endless threaded screw of the government! So far they are correct. Personally, I do not believe that devolving into fascism can ever be a long-term solution, but who knows where their screwing thread runs out.
"A central bank implements quantitative easing by buying financial assets from commercial banks and other private institutions, thus creating money and injecting a pre-determined quantity of money into the economy." That's hardly true, otherwise the "economy" would have engaged into hyperinflation. That pre-determined quantity of money is injected into the banking system, not the economy. The banking system puts that money circulating only on digits, either as savings or investments on financial issues. That's why the price of "things" does not necessarily go up, only numbers that represent businesses, promises or commodities (where people have their wealth stored). See the entire banking system as a giant black box where people deposit their savings from the wealth produced every month. They do it not as a sport but always thinking to get it back one day. That black box is a kind of promise to all its depositors and, although it's too complex to understand the mechanics, it presents numbers to notice people about its health. And all QE does is a change in those numbers so that reality doesn't seem bad. Precious metals are also a kind of termometer (if they go too much high, then the economy might be sick) but they also found a way to manipulate their price and keep it down. Both manipulations may eventually originate catastrophic scenarios, since things are getting very unbalanced. "Apparently, while QE is likely to downgrade the price of physical assets like gold and silver " No, it's not. That's like saying QE is likely to lower the prices of bread and milk. It does nothing to their prices (those are 2 separate worlds). If anything, it threatens causing hyperinflation (if those 2 separate worlds collide). Precious metals' prices are down because of other kinds of manipulations. The only thing I don't get about that great article you've posted is why currency expansion lowers interest rates. If the currency expands, hasn't a loan to be better rewarded with greater interest rates)? Similarly, if the currency shrinks significantly, wouldn't a loan even at 0% interest rate be too much aggressive? Otherwise, I would be very interest in loaning my money on deflations and keeping it (in other kinds of investments) on inflations.
I agree that QE is something new. It means that instead of actually paying debts, governments and create money and pay the debts off. Governments have sold bonds to raise money for a long time and now, with created (non-gold based) currency they can pay these debts (bonds) without actually taxing the citizens. In a strict sense currency has become a bit meaningless. imagine this scenario: I am the headmaster's son in a school where bringing toy cars to school is banned. My father has said that I can bring my cars to school but I can bring only 10 and he must sign each one so that he knows it is OK. I trade a few toy cars for my morning tea and lunch and end up with 5 cars. Word gets around and the value of cars goes up and each car is worth a whole meal. I spend another couple of car a kiss from a girl who doesn't really like me, but she likes my car. Billy offers to trade me his bike for 3 cars, but having only 4 left I am reluctant to actually let them go. I issue billy 2 cars and two promisory notes for the other two cars that I will keep safely. I have just created currency. Billy trades the promisory notes and everything is great. After a while, I decide that I want more lunches and stuff I create two more promisory notes and spend them. I still possess 4 cars. My Dad gets wind of the fact that other people have my cars and asks me about them. I lie and say that I still have them all but I have 'lent' them out. I go away and recall all my cars but since the value of cars have sky rocketted many do not wish to give the cars back as they are fun to play with and when girls see cars they give kisses even just to hold the car for a while. I end up having to issue more promisory notes than I have cars to get them all back. Shhhh. Don't let the public know I have not enough cars. I ask Dad for more cars to try and fix my problems. He lets me have another 10 but tells me clearly that this is all I can ever mine from him. The mine is played out. I take the cars back and count the promisory notes and realise that I have issued 18 and still own two cars. Meanwhile there is a whole economy out there that has grown based around the car but there are problems. The "car" has a massive value and cannot be broken into pieces. for the last two cars I issue 1/10 and 1/20 car notes and spend them. The value of cars still increases as the trading continues. I offer to take the larger notes and issue smaller fractional notes. I now realise that there is such a demand for currency that people no longer care much about the cars. I decide to debase the currency and continue to issue notes. I use the notes to buy more and more stuff. I decide to sell a car. I put it up for auction and the highest bid is 2.3 cars. Of course I sell the car for the profit. Some people get wise and ask how could that be? I say that have borrowed money with the issue of bonds. I start actually doing this. I issue bonds for currency and then spend the currency thereby stimulating the economy and keeping cash in circulation. After a while I notice that there is still a shortage of cash and I need to keep the value of cash down. Also, the interest rate on the bonds I have issued is irritating so I decide to create more currency to pay the debts off thereby increasing the volume of cash circulating and reducing my debt overhead. Dad takes all the cars back. I have to buy that one back that I sold but there is no problem. I issue 3 cars worth of bonds to the guy and he is happy at the profit. I feel liberated to no have to worry about controlling how many cars I have and not being able to control the value of cars. ...
