Tuesday , 21 May 2024

What Does QE Really Do – and NOT Do?

[As you know, earlier] this week the Federal Reserve…promised to keep short-term interest rates low through late 2014 … up from a previous pledge of 2013. Not only that, the Fed also said it would continue with its “Operation Twist” policy of selling shorter-term Treasuries and buying longer-term ones. The goal [is to] hold down long-term interest rates but what does QE really do – and not do? [Let me explain.] Words: 500

So says Mike Larson (www.moneyandmarkets.com) in edited excerpts from his original article*.

 Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!) has edited ([ ]), abridged (…) and reformatted (some sub-titles and bold/italics emphases) the article below for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

Larson goes on to say, in part:

What is QE – REALLY?

QE is money printing by a country’s central bank – and…

  • it devalues the currency of the country doing the printing,
  • it erodes the purchasing power of the country’s citizens,
  • it inflates the price of commodities, making every gallon of gas you buy and many of the groceries you purchase more expensive,
  • it drives down the yield on virtually all of your savings vehicles, forcing you to scrounge for pennies in your couch cushions or take on huge risks to generate the same amount of income you made previously and
  • it artificially boosts the value of paper assets, including everything from junky bonds to stocks.

In other words, if you’re an average American, you get screwed, but if you’re a seven-figure-salary investment banker at Goldman Sachs, you hit paydirt. You can peddle more stocks and bonds, make a lot of money doing so, and maybe afford a new Ferrari or house in the Hamptons. Ain’t life grand?

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The fatal flaw of QE, though, at least in terms of its impact on the REAL economy, is those pesky side effects. Sure, QE temporarily juices stock prices but because it also drives up the cost of living, it drives down the disposable income of everyday citizens. Eventually prices rise so high that no one can afford them, and that’s when the economy collapses…

What to Do

Never mind that [QE] won’t work, at least if by “work,” you mean help the real economy. Fed policymakers like Ben Bernanke aren’t going to let the facts get in the way of a good story. They need to look like they’re not just sitting on their hands so they’re going to keep doing the same wrong things, expecting a different result.

The best way to protect yourself is to own some gold, own select fixed income investments that do NOT pose excessive risk, and own select stocks with solid fundamentals.


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