> TEOTWAWKI Blog: Quick Thoughts on QE3



Quick Thoughts on QE3

If you're wondering what the heck this QE3 mumbo jumbo is, here's my intro to the idea of quantitative easing and what it means at a high level. Written back in July, when QE3 was an uncertainty...but hey, if you were concerned about the Fed printing presses and sunk money into gold/silver you'd have got a pretty good little gain.

This new round of quantitative easing - QE3 - is a bit different from past rounds. This time, the Fed is buying mortgage backed securities (MBS), and there's no time horizon given...basically as long as they see fit to buy. 

An MBS is a different animal than a bond, which is basically government issue debt. An MBS is essentially purchasing the rights to principal and interest payments on a pool of mortgages - from everyday people. Yes, they send their payments to the bank, but the bank only takes a small part (servicing fee) and then the rest is forwarded on to the investors, who are technically the owners of the mortgage.

Now, when structured with good mortgages, investors can earn decent returns on an MBS for comparatively lower risk. When they are filled with crap mortgages, well, you have problems (see: 2008 collapse). 

So, this time around, the Fed is printing money to buy investments (MBS) instead of retiring .gov debt (bonds). It's not as bad...the investments should pay out and the .gov should earn some decent returns on its newly invented monies. 

The point behind the print & buy is to inject some liquidity into the market (indirectly force investment holders to re-invest) and help jump start the economy, specifically housing. The market was largely expecting QE3, which is why we saw a run up in August. There was a big bump the day of the announcement, and the market has been flat since. Of course, QE3 hasn't really started yet, so what/if further effect its has on the economy.

Of course, with the Fed printing out more imaginary money, the value of the dollar will suffer. The question is how much. The dollar index (a weighted index of various currencies vs. the USD) has fallen a point post-announcement, but 4 points since the rumors about QE3 started to gain momentum. The Consumer Price Index for August was up 0.6%, and that often lags behind the rest of the market - many price increases take some time to work their way downstream to the consumer.

We haven't seen any big bad moves yet, and I don't foresee any kind of world-ending hyperinflation here, guys and gals. Some moves, yes. Wheelbarrows of Benjamins to pay for a load a bread, no. 

But, keep an eye on things. Keep an eye on things as the program progresses, especially on how long the Fed keeps the program running. Don't expect the value of the dollar to do great things. If you've got a lot of 'em sitting around, think about investing them - wisely.

Will QE3 have positive effects on the economy? Let's hope so - because the Fed is rolling with it. Previous attempts haven't jump started the economy, so I don't have a ton of faith. But hey, I write a blog about the end of modern civilization...