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Future Quantitative Easing Is Still On The Table

26 May 2010 No Comment

Despite a year’s worth of headlines regarding the recovery and “green shoots,” it seems that quantitative easing (QE) in the near future is still on the table.   Yes, of course that makes sense.  A Fed official has said if the US experiences a bad downturn, it might be necessary.

If you’re unaware of what QE actually means, let’s look at some information from Wikipedia:

The term quantitative easing describes a form of monetary policy used to increase money in an economy when the interbank interest rate (in the US, this is called the Federal Funds Rate, in other countries the overnight lending rate) is either at, or close to, zero. In practical terms, the central bank purchases financial assets (mostly short-term), including government paper and corporate bonds, from financial institutions (such as banks) using money it has created ex nihilo (out of nothing).

If that is confusing, think of it as creating money (often called printing money) to buy financial assets to fund/boost/prop up the economy.  It’s an inflationary process since it adds to the money supply; however, due to the massive, opposing deflationary forces in the economy, we haven’t seen this money supply inflation translate to price inflation across the board (we have seen it in some areas like food & commodities).

If you’re not an academic, you probably assume that there’s no way that QE can actually lead to prosperity and you’re right.  QE is a cornerstone of the Keynesian economic policies that are accepted around the world by mainstream economists like Paul Krugman and implemented by leaders around the world like Bernanke and Bernanke-equivalents in Europe.

Why Should You Care About QE?

Yes, I’m actually getting to application versus rambling on about high economic theory that is fairly boring.  You should care about this for two reasons.

#1 – This proves the economy isn’t recovering

If the economy were recovering, the Fed would not need to consider additional QE.  QE comes with risk: big inflation.  They wouldn’t risk inflation unless they have to.  And they do have to.  The economy is collapsing via a sinkhole of too much debt; while the earth is simply disappearing underneath us, the Fed is trying to pour new sand and dirt into the hole faster than the hole is growing bigger.  It’s an ugly dillema.  If the Fed wins, we get inflation; if the Fed loses, we get Depression.  Take your pick.

#2 – Fed-fueled “growth” sets us up for future, bigger collapse

When our economy isn’t built on a solid foundation, we set ourselves up for a nasty boom-bust cycle.  Unfortunately, as I mentioned above, there isn’t a good fix for our economy.  A de-leveraging process and recession is the natural, market-generated answer to a debt-fueled, bubble economy that grew too big.  Avoiding this medicine, while painful, will only result in a bigger, future collapse that is even more painful.  Plan accordingly.

How might you plan accordingly?  Focus on generating income, hoard cash and precious metals, and consider other “real assets”.  Keep a skeptical eye on the markets and any economic data/rhetoric coming from our fearless economic experts and Central planners.  Their track record is not good.

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