It is easy to get caught up in the HOUSE OF CARDS that is QUANTITATIVE EASING. You have a right to know what our politicians are doing.
Generally, quantitative easing involves central banks buying up bonds with newly created money. This scheme is expected to boost economic growth as it has the following effects:
• Buying up large quantities of bonds suppresses long-term interest rates. This is extremely important, as long-term interest rates are far more important for economic growth than short-term interest rates.
• Substantially forcing down interest rates – particularly yields on government bonds – encourages investors to seek refuge in riskier investments because the return is higher. Oops, the risks are also MUCH higher. In other words: Quantitative easing generates an increase in investment in stocks, company bonds, and the like.
• Lower interest rates prompt more borrowing and less saving. I don’t think that is good for the people since 31% said they went without some form of medical care in the last year because they couldn’t afford it. One in five said their spending exceeded their income over the last year, just 63% said they saved any money at all over the past 12 months and 31% of nonretirees said they had no retirement savings or pension.
• Higher stock and bond prices improve the balance sheet position for many parties. If too many old debts were the reason for not borrowing any more, that situation changes if asset values rise and particularly if housing prices rise as well.
• Generally, the currency of the country implementing quantitative easing depreciates, as it becomes more appealing for domestic investors to invest in the country in question, due to lower interest rates. There is also more money in circulation, part of which will probably be invested elsewhere. A cheaper currency then aids foreign trade.
However, QE cannot simply generate wealth, and the drawbacks and potential risks of even more QE will become greater the more money that the U.S. prints out of thin air. Therefore, QE has several drawbacks worth considering for both policy makers and investors:
• It will only buy more time. It does not solve the underlying economic problems.
• The pressure on politicians to take the necessary structural measures to create higher economic growth is temporarily alleviated if interest rates are being depressed.
• Speculation of quantitative easing has an upward effect on commodity prices. As Western countries and Japan have to import a lot of commodities, that inhibits growth.
• Quantitative easing forces investors to step into ever-riskier investments. That could cause an enormous problem in a subsequent recession.
• Should QE achieve to temporarily lift economic growth through higher credit extension, inflation will rise immediately as the enormous amount of money created flows into the real economy. Investors in bonds will anticipate this, and will begin selling bonds – they lose more value the higher inflation expectations – so there is a high risks that interest rates rise even more than inflation. The result is that it becomes increasingly expensive for both the government and the private sector to refinance debts, and risks of bankruptcy loom.
• If the central bank does try to avert higher inflation and interest rates when the economy starts growing again, it has to drain the money it has pumped into the banks before. The more money printed, the more money has to be withdrawn. To the extent that high money creation boosted asset prices, the opposite occurs if liquidity is withdrawn from the system. The more money printed, the more downward pressure there will be on asset prices if the central bank reverses this process.
So, here we are between a rock and a hard place. If printing dollars out of thin air was good then the more the U.S. prints the better, right? Sort of like the minimum wage; if raising the minimum wage to $15 an hour is good, raising it to $100 would be GREAT, right? In my humble opinion, Gold Prices should be at least triple what they are and stock prices about one third of what they are. So how does this work? If only gold was traded it could not be easily manipulated because it is a finite commodity. No problem, just create derivatives. During the last two years gold is up in a bull market in EVERY currency in the world except one, the dollar. In the dollar gold is down. Draw your own conclusions.
DEFINITION OF ‘DERIVATIVE’
“A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.”
The contracts to buy or sell gold FAR EXCEED the total supply of gold. The same can happen with any commodity. A farmer wants to lock in the price of his corn so he sells futures on 100,000 bushels of corn that expire in September. When that contract expires in September the farmer must produce the corn or buy back the contract. Traders or speculators setting in a skyscraper on Wall Street can also sell corn. They can sell as much as people will buy even if the contracts exceed all the corn on the whole planet. If they think the prices will go down they sell, if they think prices will go up they buy. In the House of Cards you can sell things you don’t have. So what is determining the price of corn, the supply and demand of the corn or the action of the derivatives?
It is one big game played on a giant stage. Speculators buy orange juice futures, rumors circulate that a freeze is coming and prices soar. A drought falls over the Corn Belt and prices soar. Rain comes and prices drop. Someone’s great aunt has a toe pain and pork bellies collapse.
THIS WAS IN THE NEWS A FEW YEARS AGO:
“GOLDMAN SACHS HEDGE FUND GETS $3 BILLION BAILOUT
Goldman Sachs Group said a group of investors that includes Eli Broad and Hank Greenberg will sink $3 billion into one of its biggest hedge funds, which has seen its value plunge amid market volatility.
The investment bank said its Global Equity Opportunities fund “suffered significantly” as global markets sold off on worries about debt and credit. The fund lost as much as 14% of its value during the past 12 months, according to media reports, and is currently worth about $3.6 billion.
Goldman Sachs will lead the group of investors to help bail out the hedge fund, which relies on computer-driven trading strategies. Other investors include Broad, Greenberg’s C.V. Starr, and Perry Capital.
In addition, the investment bank said that two other hedge funds it manages — Global Alpha and the North American Equities Opportunities Fund — have also suffered during the market dislocation. Goldman said it “reduced risk and leverage” in the funds to stem losses.”
The Media and Democrats applied the term, TRICKLE DOWN ECONOMY to Ronald Reagan’s tax cuts in the wake of Jimmy Carter’s liberal policies. The term has been attributed to humorist Will Rogers, who said during the Great Depression that “money was all appropriated for the top in hopes that it would trickle down to the needy.”
During this period of government bailouts and wild money printing, the Trickle Down Economy should be in its glory days but 47% of Americans say that if they had a $400 unexpected expense they would have to sell something or borrow money to pay it. The median family income has dropped about $5,000 in recent years. Americans are struggling and things can get MUCH worse. Our government punishes our legitimate businesses with the world’s highest taxes, the world’s most burdensome regulations and forced expenses like minimum wage and forced unionization. The result is as predictable as the sunrise. Companies either go bankrupt or move overseas. On top of all this, our government has opened the flood gates to the world’s poor, uneducated, unhealthy huddled masses yearning to jump on the welfare gravy train. It’s called Immigration Reform.
Don’t worry; all the politicians have been promising to help the middle class for several years!
Maybe the Stock Market will never crash AGAIN and the House of Cards will stand forever? I read the speculation about a recession and more QE this year but how would I know? I think we all should pay close attention to the totality of the threat to the American Way of Life. You will not learn it from the Media or your friendly politician.