RKE CLASSROOM - QE3 & INFLATION - What does that mean for you?Dinar Recaps Note: THIS IS ALL OPINION BASED ON THE INFORMATION FROM THE SOURCES OF THE INTEL PROVIDERS. PLEASE USE YOUR OWN DISCRETION TO DETERMINE WHAT YOU BELIEVE OR DON'T BELIEVE... AND HOW WILL YOU PLAN TOMORROW ACCORDINGLY.
[.rke] What can be more exciting that QE3 and inflation to kick off the weekend?
[.rke] This is going to be a sort of part 2, or other side to BWM’s class the other night, or in a sense, a prequel. While I highly respect BWM and appreciate his recent class on asset based currencies, which was full of good information, personally, I have no plans to invest in any currency in the future. If you do, please review his information, and research further to form your own decision. With any investment, know why you enter it, understand the costs involved, and always have an exit strategy.
[.rke] Here’s the caveat. Foreign currency is usually purchased for short term international business, and is not usually used as a long term investment. While they can be used as a hedge against inflation, there is no guarantee that the foreign currency you hold will not suffer the same inflationary fate. Are you really going to know and understand the monetary policy and hence inflation of Mongolia, China or Russia?
[.rke] So the upshot is just because we are expecting to get a big payout on a speculative currency investment, does not mean that we are now currency investment geniuses.
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[.rke] There are other assets that provide a hedge against inflation including gold, silver, land, and also, the stock market usually outpaces inflation. Each asset has it’s own risks and costs. Seek professional advice, do your research and make your own decisions.
[.rke] Something to consider is Robert Kiyosaki’s definitions of asset and liability: An asset is something that puts money in my pocket. A liability is something that takes money out of my pocket.
[.rke] Now, on to the fun stuff, why you might need this hedge.
[.rke] I and others are concerned that we will see high inflation in the near future. You’ve probably already heard that last week the Federal Reserve announced another round of quantitative easing or QE3. http://federalreserve.go ··· 913a.htm
[.rke] Quantitative easing is an asset purchase program of a central bank designed to stimulate the economy, by increasing the money supply and lowering interest rates.
[.rke] “QE would work by reducing the supply of super-safe Treasuries and Mortgage Backed Securities, and instead push investors into other areas (like corporate bonds), thus depressing yields and borrowing costs in the private sector. Think of it this way: During the crisis, everyone sought refuge in the safety of Treasuries. Bernanke was now seeking to deprive them of this safety valve, and force their cash into areas where it might do some good in the economy.” http://www.businessinsid ··· g-2012-9
[.rke] But QE3 is different from QE1&2 in that it is a mass purchase of mortgage backed securities ($40Billion per month), it’s purpose is to reduce unemployment, and it has no defined end. This is venturing into uncharted waters.
[.rke] Milton Friedman likened this type of policy to a drug with short term benefit and long term pain, but as soon as you try to end it there is short term pain with long term benefit.
[.rke] So far with the world economic problems, in my opinion, we have not seen any central bank or government willing to accept the short term pain in order to face up to the problems. The proverbial can has just been kicked down the road. But eventually we won’t be able to do that as easily.
[.rke] “Prolonged monetary accommodation also carries considerable risks and, as noted by the Bank for International Settlements, may even delay the return to self-sustaining recovery. As demonstrated in spades by Japan, one effect is to insulate banks and governments from the need to address their problems. The economy stagnates rather than heals.“ http://www.telegraph.co. ··· ems.html
[.rke] Will QE3 end? How far down the road will it take us? Do we want to go down that road? And why is the Fed trying to tackle unemployment?
[.rke] “Even if its latest policy only helps at the margins, it further entrenches the Fed in the economy. No one wants to visit a heart surgeon unless there is an emergency, weaning America off the economic equivalent of a shrink could prove trickier.“ http://www.telegraph.co. ··· ink.html
[.rke] Have you ever wondered where the money comes from for QE? Me too.
[.rke] Actually it is created out of nothing. QE is really nothing more than the increase in the money supply (printing or digitizing money).
[.rke] Much of the money created so far in the earlier rounds is sitting on bank balance sheets. Governments have criticized banks for not lending, but they made the regulations requiring them to increase balance sheets, preventing them from lending.
[.rke] So far, money has been forced into the system, but is not circulating. Yet. The effects won’t really be felt until it circulates. You can lead a horse to water, but you can’t make him drink.
[.rke] Will this money begin to flow post rv? Or when/if the economy recovers? And what affect will it have? In my opinion: yes, yes and high inflation.
[.rke] Inflation is caused by the increase of money supply; however, with low velocity, inflation is held low. http://en.wikipedia.org/ ··· of_money
[.rke] So, inflation is probably not a huge problem while the economy is at slug level. Post rv is another matter.
[.rke] How high will it go? I don’t know, but hopefully not this bad: http://www.businessinsid ··· s-2012-9 (notice the common theme: monetizing debt or printing money)
[.rke] What is inflation? Most associate it with increase in prices. While this is apart of it, prices can go up without inflation. The value of the goods don’t go up with inflation, but rather the value of a currency goes down.
[.rke] Devaluing a currency devalues debt and savings, punishing savers and rewarding borrowers. This obviously discourages saving and encourages spending. Internationally, a weaker currency encourages exports. This is how QE can act as a short term stimulus, but in my opinion is harmful long term.
[.rke] “Brazilian Finance Minister Mantega has just blasted the Fed's QE3 policy for setting off "Currency Wars". What he means by this is: The Fed has prompted every country to attempt to weaken the value of their currencies in order to boost exports. The reason Mantega is furious about this is that he believes it dangerously boosts inflation, especially in emerging markets like his, Brazil.” http://www.businessinsid ··· 77HOWrWR
[.rke] If you want to do a bit more research on this then check out these: http://www.youtube.com/w ··· e=relmfu Milton Friedman “The Role of Monetary Policy” http://www.aeaweb.org/ae ··· 1-17.pdf
[.rke] If you’re a liberal and don’t like Milton Friedman, then you probably don’t like much that I have said anyway, and probably have already logged off by now. :D
[.rke] Well, that is my reason for the discussions of hedges against inflation. I don’t want to frighten anyone, but I do want you prepared. It may not happen, but if it does, then we can plan, not just to survive, but to thrive. The last thing any of us want is to have our new found wealth destroyed through no fault of our own.
[.rke] And please, don’t be this guy: http://www.businessinsid ··· n-2012-9
[.rke] And finally, for those following God, don’t be afraid of the future, don’t put your trust in your new found wealth but in God and you will be fine no matter what happens around you. For those not following God, well, good luck with that.
[.rke] And now that I’ve blasted you with all that. Any questions?
[AndieZ1] What about QE3 makes you the most uncomfortable?
[.rke] what makes me the most uncomfortable is that there is no defined end to it. theoretically, it can go on indefinitely.
[maple] What does QE3 have to do with Brazilian finances? I thought that they were NOT part of all of this, more self sufficient
[.rke] Brazil's finance minister was responding to a worldwide move of central banks that would devalue currencies, and as he said would hurt the emerging markets the most.
[.rke] the change in value of currencies impacts international trade.
[dpa820] If the estimated amount of dinar holders in America, Say its 8 million people leave their jobs post Rv and those jobs are filled and the 8 million dinar holders spend $100, 000 each in America, How does this affect the ecomony???
[.rke] well, if the dinar holders leave their jobs, then that opens jobs for others, reducing unemployment. but it also increases the flow of money. and this is my concern that high inflation will result. it is just my opinion, but a possibility to be aware of.
[maple] What exactly does it mean to us if does go on indefinitely?
[.rke] a continuously increasing money supply, possibly no end to high inflation. the other possibility is what is happening with Japan. they are on something like QE8, and have had not growth for about 20 years. Their example may suggest that QE actually causes stagnation, but that is debatable.
[hardtorecall] If it can go on indefinitely, then you don't forsee an economic collapse of some kind?
[.rke] imo, and economic collapse is very possible, but this type of monetary policy seems to just kick the can down the road, possibly preventing collapse, but also dooming the economy to long term stagnation. this is where japan is, and appears to be where europe is headed.
[ofish] my union bro's were talking back in 09 before we all got laid off, would it have made more sence to disperce the moneyes to actual people for the bank loans rather than the people that caused the problem to begin with , pay off ur loan no realestate crash
[.rke] this is an interesting question, which I have pondered myself. economists will tell us that would be disasterous, but i have not heard an explanation as to why.
[shasta7] Isn't it true that these Mortgage Back Securities the FED is taking are toxic garbage - simply meaning homes that were forclosed on... which then simply will be sold back to the unknowing public thru the financial system... that started this mess in the 1st place??? Meaning screwing the citizens!!!
[.rke] some of them are delinquent or in foreclosure, yes. i don't think it is even possible to even determine what percentage.
[dpa820] How do you achieve the desired result of balancing inflation ?
[.rke] i'm assuming you mean from a monetary policy standpoint. usually through interest rates.
[katfur2] How many months until these mental midgets realize QE3 is not working? Don't you think that less regulations will stimulate small business and loosen up the banks so they can make loans so currency can start to flow?
[.rke] the reason we have QE3 is because it was thought QE1&2 were not big enough and long enough, so, i don't think they will ever accept that it does not work. yes, i think less regulation would help business, as well as lower taxes, and probably more important is certainty from the government. business doesn't know what the gov't is going to do next, or what extra cost, burdens it will impose.
[maple] How does qe3 impact what our money may be worth in the future? Will it devalue and continue to devalue?
[.rke] there is a delay from when the money supply increases to when we see the actual effects, about 1-2 years. it will devalue, and continue as long as the program runs. remember though that this is not a single blast, but is a bit each month, so we may not see a sudden devaluing, but a sustained devaluing over the course of many years.
[.rke] imo, though post rv, whenever thatwill be :) that could very well provide a single blast of devaluation.
[maple] hmmmmmm (okay, maybe my brain is fried...) but isn't Brazil part of Bric? AND being part of that... Wouldn't they be relatively untouched by the crash and burn of other markets/countries? They have an aliance NOT to use the dollar... so how can QE3 effect them?
[.rke] Brazil was not just concerned with QE3, but with other countries QE as well (UK, Euro, Japan). they all are devaluing too. this hurts the emerging market most as they tend to be major exporters.
[shybaby] How does the " Aging of America " fit into the desired overall outcome of QE3 & vice versa....
[.rke] it's not just america that is aging, most developed countries are aging as well. QE pushes down bond rates, which hurt investors, pensions, and pension providers. http://www.telegraph.co. ··· ole.html
[shasta7] Just a comment... everything that Fed Reserve is doing WON'T work!! They should be doing the opposite... all they are doing is making things worse which will take more money away from the citizens. Increasing money supply IS the problem!!! The policy makers don't care because they will be gone!!
[.rke] that is my opinion as well. but i almost think that they feel they have no choice since the governments of the world are really doing nothing to address the real problem. maybe they think they just need time to deleverage, and the economy will then recover. i call it kicking the can down the road. the piper played. we danced. he came for payment, and we sent him away. eventually he will collect his payment. it won't be pretty then.
[shasta7] .rke YES it is... that will kill the DOLLAR... NO printing of money then will help... & the sad part of this is our gov't/politicians are allowing it to happen...
[.rke] shasta7 i think i saw that russia is now or will soon be the no 1 producer of oil, and is determined to raise their currency to international reserve status. yes, it is huge.