> TEOTWAWKI Blog: Quantitative Easing 3 - What it means

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7/16/12

Quantitative Easing 3 - What it means

There's been some speculation around a 3rd round of quantitative easing this fall, also known as "QE3." While the Federal Reserve hasn't announced anything, there's talk, and you'll probably hear more in the next while. Here's a quick run-down on what the heck quantitative easing (QE) is and what it might mean for the economy.



QE works as follows:

  • Central bank (Federal Reserve) prints up (actually, just types up these days) some new money
  • Central bank uses new money to buy back government debt (bonds/t-bills, etc.) on the secondary market.
QE has two major consequences (for our purposes):
  1. Pumps some liquidity into the market...bond holders now have cash to reinvest elsewhere
  2. The overall supply of cash is increased.
Consequence #1 is why the central bank does quantitative easing; normally, they would lower rates, but rates can't go a whole lot lower. So, they're hoping the debt buyback will get things moving. Unfortunately, there's low confidence levels in the economy, so people are likely to put their money back into low risk investments (like government bonds), which doesn't net us a whole lot of growth.

Consequence #2 has the side effect of potentially lowering the value of the dollar. Laws of supply and demand and all that--as supply increases, demand generally decreases. Along the same lines, QE can also lead to inflation; the value of the dollar is decreased, so businesses increase their prices accordingly.

So, what does that mean?

First, it's not the end of the economy. It's actually intended to stimulate the economy with some liquidity and move new investment. How well that would work is uncertain. It's a gamble.

Second, a third round of QE will probably further devalue the dollar. I would expect a spike in prices of commodities like gold and silver, and an increased demand for low risk investments. After a few months, some inflation would be a fairly safe bet to make too. 

The effect of QE3 would be correlated with its size. If I remember right, QE2 was a massive $900 billion--these aren't drops in the bucket. That's more than the market capitalization of Apple, Microsoft and Amazon combined--a lot of money.

If you're worried about QE3, I'd look at rolling any large cash holdings into a "safe haven" like gold/silver, or looking at investment options. If we're talking a lot of money, you might want to talk to a financial advisor expert person, and not just take my word for it.

18 comments :

  1. The U.S. economy is nothing but a credit card which is past the point of being “maxed-out”. The ludicrous notion that the U.S. can “print” its way out of insolvency is nonsense, for (among many) the reason that the U.S. dollar is already totally worthless. As a basic proposition of arithmetic, worthless paper cannot mitigate insolvency. However trying to do so is how governments produce hyperinflation.

    It is the act of attempting to ward-off bankruptcy by printing ever larger mountains of (worthless) paper currency which has always been the catalyst for hyperinflation; as such extreme/reckless conduct shatters the final delusion of the people that this worthless paper actually has value.

    The analogy of a government which claims it can ward-off insolvency with a printing-press is a simple one. It is identical to the Deadbeat who assures a creditor that he can “resolve” the problem when one of his bad checks “bounces” by simply writing another (bad) check. It doesn’t matter if the Deadbeat writes one more bad check or a million; none of his debts can be reduced, let alone repaid.

    So it is with Deadbeat Governments claiming they can “pay their bills” by simply printing more and more and more and more paper. It is not a question of “if” the people finally and totally reject all of this fiat-paper. The only question which remains is how many months until this occurs? YMMV.

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  2. http://www.youtube.com/watch?v=PTUY16CkS-k

    Quantitative Easing is counterfeiting; or at the very least, the debasement of the currency (such as it is). It's also the death throws of a failed fiat money system.

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  3. DiabloLocoJuly 16, 2012

    QE is theft. It is the governments way of putting a tax on peoples savings accounts. I agree that buying ACTUAL gold and silver is your best bet to hedge against inflation. Always remember- If you can't "hold it", you don't "own it".
    IMHO, PM's will decline in August. Buy then. Late September and all through October will be the "rally" time for PM's and commodities. Of course this just just my opinion. Don't take MY word for it.
    For those weary of precious metals, I would suggest investing in corn, wheat, and oil. Corn and wheat will be good bets, due to drought. Oil is a good bet because it is tied to the dollar very closely. When the dollar gets devalued, oil goes up. Also, with war in Iran and/or Syria and/or North Korea on the horizon, expect a severe jump in oil prices.
    The best advice of all is to pay attention and "buy the dips".

    BUT.....Above all else- Keep your powder dry!

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  4. AnonymousJuly 17, 2012

    Hell, there is always trillions to take from people's IRA/401K's. They'll just replace the money with some sort of worthless "Socical Security Bonds".
    After all, it's not fair that you've worked 10 hours a day for 30 years and saved for your retirement, while some poor welfare Mom has no retirement savings at all.

    It's O.K. Comrade Obama will spread the wealth around! (sarc)

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  5. AnonymousJuly 17, 2012

    UGLY ROOSTER

    Sounds like QE3 perspective and wisdom abounds among your T-Blog readership. So, no waxing eloquent from me. But a brief perspective of True Riches can salve some fears. Some see Riches as the concentration of PM'S held by the king. Actual Riches lies elsewhere... In our bodies, homes and on our land.

    With the gold, the king or rich purchase land, food or other useful things. Or they purchase labor, aka power.

    The long and short of it is that the king is actually dependent upon the mass of people. Riches are always traded down for food, land, labor or equipment. So, if you can fish, hunt, or grow... You are the wealthier man. A most extreme example is the Rich man with a million ounces of gold... But no food. He is the beggar.

    Square away the food and bullets. Then stock up on as much silver as you can get your hands on. The great thing about silver and gold is the portability and its convertiblity. Powder dry!

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    1. Agreed. Productive land, family and a resilient lifestyle are indeed true wealth...

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  6. ThinkingmanJuly 17, 2012

    *This is not a criticism of the original post, nor anybodys comments, but a general observation on the way the economy is handled in the media*

    With the forthcoming election there is a lot of nonsense being spouted about economic risks and how the economy works. I would urge aybody who wants to be truly informed to challenge what they are hearing when it follows party lines - there are some shocking lies out there at the moment, and some people quoting things that are just not so (however plausible they sound) because they suit their political agenda. This sits on both sides of the political divide.

    Try and find some basic data, and see what it says. Measures like austerity in the Euro for example have no basis in the data, but they 'sound' like a good idea, and will lead to greater problems because they will not address the real issues. There are pundits telling us that the markets fear a rapid growth in inflation - as has been predicted, and not happened, for years. The markets are signalling no concerns over inflation.

    If you consider yourself independant, then please think for yourselves.

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    1. AnonymousJuly 17, 2012

      @Thinking Man,
      If you don't know history, you will repeat it. Our President is a Marxist. That is not "Party line" that is fact! Why don't you try speaking with people who lived under Marxism. Cubans, Germans, Russians, people from Cambodia/Viet Nam or Poles. There are plenty of them living amoung us. I'm sure they will fill you in on what is happening.

      Then speak with Vets who fought against Marxism like Vets of Korea, Viet Nam, Central America, or the Cold War. We'll fill you in on how deceitful and deceptive the Marxist movement is.

      Last of all, look up the term, "Useful Idiot". Lastly, look into a mirror and look to see if there is one with you.

      Delete
  7. Thinking manJuly 17, 2012

    Anonymous: Ouch. A few thoughts:

    One - my whole argument was not to jump on party lines but to use data and facts to construct an argument. Saying 'Obama is a marxist' is not actually a fact - it is an opinion.
    Two - I actually do not consider my self to be left wing or liberal. But understanding the way the economy will respond to stimulus (be that tax hikes, tax cuts, change in interest rate etc) is possible - and denying it because it doesn't fit your world view isn't very helpful
    Three - I have nothing but respect for servicemen and their commitment to their country. Doesn't have anything to do with the questions at hand
    Four - Useful idiot? Well, that is better than just idiot.

    I had hoped that I might have provoked some rational thought; if your position had merit I presume you would find reviewing evidence and facts would be helpful in supporting your position or if not might lead you re-think. I didn't think you would find it so threatening. One of the freedoms I believed the west had fought for was the right to be informed and question their leadership - unquestioning obedience to a position was the sign of a totalitarian state?

    *Note to Alexander Wolf*- apologies if my comments irritated some of your readership; I hope a reasonable reading of my comments will show that was not my intention, merely to inspire people to look beyond the soundbites in the media. I see little benefit in arguing in public with those who have closed minds, and think it might cause problems for you moderating, so will withdraw from this thread. Keep up the good work with the blog - it is a excellent piece of work.

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    1. AnonymousJuly 17, 2012

      @Thinking man, Oh, so I guess you missed my point huh? History friend-H-I-S-T-O-R-Y! Who cares about your "Deep Thoughts" as they are "Deep B.S. Your agenda is garbage if it flies in the face of current events.
      1/3 of the world's population in currently under control of Marxism..a fact! Marxism has killed more America's than Hitler's Germany and Tojo's Japan...fact! Marxism has murdered 100 million people in the last 100 years....fact! The policies of Obama are the same as those of other Marxists in other countries..A FACT!

      Do you really have doubts that Comrade Obama is not a Marxist? If so, it just shows how naive and out of touch, or in the bag for our Dear Leader you are.

      You seem to believe that you are some sort of expert on the economy and you have all the answers as to how to fix the world's debt problems,....funny I keep missing your show on the T.V.?

      What's not so funny is that you also seem to follow BO tract on economic issues, which is down right stupid. Just in case you were frozen for the past 4 years, the unemployment rate is 8%, gas is almost $4.00 a gallon, gold is $1,500 an oz. and most people's homes are under water.

      Let us not forget Greece, Italy, and all the riots in Spain. "Nope, no problems in Europe', you say.

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    2. Anon - Keep it civil and avoid personal attacks.

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  8. AnonymousJuly 17, 2012

    You cannot attempt to control or dictate to a well-armed and independent people without a large scale event or action. Medical...economic...environmental…act of God...act of man, it doesn’t matter. In the end, a crisis causes people to act irrationally and accept laws, policies, actions and restrictions on liberties in return for safety and/or the façade of normalcy. Would you have ever imagined so many people would believe that taking off their shoes and carrying less than 3 ounces of liquid will keep them safe from terrorist? Those who choose to prepare now put themselves in a much better position to deal with any crisis that may come. These preparations not only provide refuge and safeguard from the calamity, they provide the prepared the ability to dictate one’s own fate and live on their own terms. If you need any person, entity or government to provide you with food, water or protection, you must do so on their terms. No one is better suited to determine what is best for you then yourself. Prepare now!

    -DB

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    1. Sadly, the average person is poorly educated, misinformed and not very independently minded.

      "An educated citizenry is a vital requisite for our survival as a free people." - Thomas Jefferson

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    2. AnonymousJuly 19, 2012

      Amen Brother! It's up to us to hold the line. Keep the faith and this blog going. It is a dose of sanity in a society lost in distraction.

      -DB

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  9. Brother Wolf...
    Glad to see you using all that edumacation and incorporating real time events and real time problems here..
    The public is tired of finding out later how much these ideas cost...
    The "what would happen if we done this?" philosophy doesn't cut it anymore...AND the answers will not come from a bunch of old set in their ways farts such as myself...the answers will come from the young professionals with their eyes wide open, the abilities and the strengths to look threw the crap and see their future...then implement the changes to get there...Believe me , the "good old days" sucked and secrets,greed, lies and deceptions of our elected officials have put us here while we thought our backs were being watched..
    The federal reserve is a private company very intent on making money...they don't do favors...

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  10. AnonymousJuly 17, 2012

    The truly educated among us will understand this- Beware the "Red Shield". I'm not going to say more than that.

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    1. AnonymousJuly 19, 2012

      The Rothschild family known as The House of Rothschild,or more simply as the Rothschilds, is a European dynasty, of German-Jewish origin, that established European banking and finance houses starting in the late 18th century. Five lines of the Austrian branch of the family have been elevated to Austrian nobility, being given hereditary baronies of the Habsburg Empire by Emperor Francis II in 1816. Another line, of the British branch of the family, was elevated to British nobility at the request of Queen Victoria. During the 1800s, when it was at its height, the family is believed to have possessed by far the largest private fortune in the world as well as by far the largest fortune in modern world history. The family's wealth is believed to have subsequently declined, as it was divided amongst hundreds of descendants. Today, Rothschild businesses encompass a diverse range of fields, including: private asset management, mixed farming, wine, and charities.

      The first member of the family who was known to use the name "Rothschild" was Izaak Elchanan Rothschild, who was born in 1577. The name means "Red Shield" in old German. The family's ascent to international prominence began in 1744, with the birth of Mayer Amschel Rothschild in Frankfurt am Main, Germany. He was the son of Amschel Moses Rothschild, (born circa 1710), a money changer who had traded with the Prince of Hesse. Born in the ghetto (called "Judengasse" or Jewish-alley) of Frankfurt, Mayer developed a finance house and spread his empire by installing each of his five sons in the five main European financial centres to conduct business. The Rothschild coat of arms contains a clenched fist with five arrows symbolizing the five dynasties established by the five sons of Mayer Rothschild, in a reference to Psalm 127: "Like arrows in the hands of a warrior". The family motto appears below the shield: Concordia, Integritas, Industria (Harmony, Integrity, Industry.

      Will definately check out Wikipedia first next time instead of spending 15 hours on the Comic-Con site. http://en.wikipedia.org/wiki/Rothschild_family

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  11. Inflation is the worst tax of all! The government spends money by essentially making everyone else poorer.

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