> TEOTWAWKI Blog: Quick Thoughts on QE3

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9/18/12

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...

6 comments :

  1. Uggg--this stuff makes me so mad! Hands off my dollars government! The "Keynesian economics" notion that the economy is something that can be "jump-started" or that its a "pump that can be primed" is total crap. There are really only two things that can grow an economy: either more people or an increase in supply--which is really an increase in the economy's efficiency. At best QE3 will just inflate a bubble that's going to have to collapse sooner or later. Inflation is only going to hurt the economy and prolong the Great Depression we are living in. Inflation takes down interest rates. If the interest rate is 4% but inflation is at 5% then really you are loosing 1% if you're the lender. This is the opposite of what the economy needs to recover. You want people making investments--investment is what actually builds an economy. Without investment you don't get research, start-ups struggle to grow, an airline can't retrofit an airplane, buildings don't get build, a factory doesn't get a new piece of equipment--you don't get any increases in efficiency. And if our economy isn't getting more efficient then it isn't growing. To invest people and companies borrow money; hoping that their investment will pay off so they can pay off the loan and still have some profit left over. With inflation no one is going to want to lend to those borrows--again why lend if you interest is just going to get inflated away?

    QE3 is good for some people. Its good for big banks--the government is basically giving them tons more "business." Banks are the middle men in all monetary policy so typically they like this sort of thing. Its also good for politicians who like to bribe voters with goodies--printing new money means they can pay for stuff with pretend money. Its really really bad for everyone else. The money you have in the bank, your retirement savings, your annual salary it will all get inflated away. Its even worse than a tax. At least a tax doesn't affect the money you already have stashed away.

    I can't stand the federal reserve. They pretty much do whatever they want without the checks and balances or division of powers in the Constitution. We need to abolish the federal reserve and go back to a gold standard or tie the dollar to some other commodity.

    "A private central bank issuing the public currency is a greater menace to the liberties of the people than a standing army...We must not let our rulers load us with perpetual debt."
    -Thomas Jefferson

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    1. I agree absolutely that the FED needs to go away post-haste but returning to a gold standard (in my ever-so humble opinion) is not the answer. Rather, crude oil is. It makes me sick knowing how much oil we have here CONUS that is completely untouched. I would love to see a president that would come and say something to the effect of, "In the interest of the sovergnty of our nation and our continent, we are going to create an AMERICAN equivilent of OPEC. Let this serve as a notice to the rest of world that we will not be forced into a situation in which we are dependant upon any other nation and that North America will be heard and will be respected."

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    2. Well the problem with a gold standard is it can be a little unstable--someone builds a new gold mine and all of a sudden the gold supply goes up, gold prices go down, which lowers the value of the dollar. Crude oil would be nice but is even more unstable than gold. Look how much the price of oil jumps and falls. Oil wells dry up, someone finds a new supply of oil, some middle east country gets in a war and can't produce oil for a while. Not so great for a stable currency. What I think would work is a dollar based on several commodities--the way a mutual fund is based on a number of stocks. So if you want to trade your dollar in you would get a mixed bag: 10% gold, 10% silver, 10% platinum, etc. That would mostly solve the stability problem. Another thing that would help the situation is to allow for competing currencies. The US government would have its money, but they would also let a company pay its employees in Euros or Canadian dollars or Yen. In turn businesses/stores could choose to accept any currency they want. And if a bank or a company wants to create their own currency they would be free to do so. No one would be forced to use any currency they don't want to--including the US dollar. This would force the US dollar to remain competitive--printing billions upon billions of imaginary dollars wouldn't be an option. And if they did people would just start using Walmart dollars instead.

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  2. The MBS (mortgage backed securities), are not even HALF of the quoted allotment per month for QE3. The MSM is spouting that number around- 40 billion/month. HORSE POO! Yes it is 40 billion/month in MBS, but the total/month is 85 billion. Over 1 TRILLION dollars of "new" debt each year, until they feel like stopping it, which means never.

    QE is not just a US program either.

    EVERY SINGLE MAJOR FIAT CURRENCY HAS STARTED A SIMILAR MONETARY POLICY WITHIN WEEKS OF THE US ANNOUNCEMENT!!!!!

    It's a currency war. A race to the bottom. Who's gonna run out of gas first?

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    1. Glad that you brought the fact that other countries are also printing as well. What this will do to food and energy prices in 3rd World Countries is a crime in itself!

      Off topic a bit but I figured out how to get FREE silver 1 oz bars. We get a cash back bonus on our credit card, which I use to invest into silver monthly. Amazon will even accept the bonus cash right from the Card Company. Slow, but free.

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  3. I know housing is huge in the U.S. but I wish we could create value in different ways ie. exports, more food or oil productions, stuff that would help lower the trade deficit and be a value commodity.

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