For those of us who are only semi-literate on the financial system, can you please give us a “For Dummies” explanation of why this will hurt us and what we might do on a personal level to protect ourselves?
Is it dangerous to hold government bonds right now? GNMAs?
I can only answer the first part. :)
They are essentially printing $600B U.S. Dollars, backed by nothing but air. This will drive down the value of the dollar and result in inflation.
I would invest in guns and butter.
what we might do on a personal level to protect ourselves?
Recommended investment vehicles: Bottled natural gas, consumable foodstuffs suitable for long-term storage, shotguns, and ammunition are good places to start.
Without Fed purchase of treasuries, USGOV would have trouble selling the amount of treasuries that must be sold, and the market would adjust by requiring a higher yield (i.e. rate of return) on the treasuries, which would result in higher treasury rates.
The Fed purchase of treasuries will help keep the longer term treasury rates down; however, the Fed’s ability to purchase year after year is limited, and once the rates do go up, the treasuries then held by the Fed will decrease in value, thus harming the Fed’s balance sheet, which would probably require a USGOV bailout.
In short, the QE plan is a means of putting off the inevitable pain of USGOV spending more than it has, but any plans to put off a financial burden only increase the severity of the burden once it comes due.
Wiki Case Study:
Zimbabwe Hyperinflation 2003-2009
Inflation rose from an annual rate of 32% in 1998, to an official estimated high of 11,200,000% in August 2008 according to the country’s Central Statistical Office.[94] This represented a state of hyperinflation, and the central bank introduced a new 100 billion dollar note.[95] As of November 2008, unofficial figures put Zimbabwe’s annual inflation rate at 516 quintillion per cent, with prices doubling every 1.3 days. Zimbabwe’s inflation crisis was in 2009 the second worst inflation spike in history, behind the hyperinflationary crisis of Hungary in 1946, in which prices doubled every 15.6 hours.[96] By 2005, the purchasing power of the average Zimbabwean had dropped to the same levels in real terms as 1953.[97] Local residents have largely resorted to buying essentials from neighbouring Botswana, South Africa and Zambia.
In 2005, the government, led by central bank governor Gideon Gono, started making overtures that white farmers could come back. There were 400 to 500 still left in the country, but much of the land that had been confiscated was no longer productive.[98] In January 2007, the government even let some white farmers sign long term leases.[99] But, the government reversed course again and started demanding that all remaining white farmers leave the country or face jail.[100][101]
In August 2006, a new revalued Zimbabwean dollar was introduced, equal to 1000 of the prior Zimbabwean. The exchange rate fell from 24 old Zimbabwean dollars per U.S. dollar (USD) in 1998 to 250,000 prior or 250 new Zimbabwean dollars per USD at the official rate,[102] and an estimated 120,000,000 old or 120,000 revalued Zimbabwean dollars per US dollar on the parallel market,[103] in June 2007.
In January, 2009, Zimbabwe introduced a new Z$100 trillion banknote.[104] On January 29, in an effort to counteract his country’s runaway inflation, acting Finance Minister Patrick Chinamasa announced that Zimbabweans will be permitted to use other, more stable currencies (e.g. Sterling, Euro, South African Rand and the United States Dollar) to do business, alongside the Zimbabwe dollar.[105]
On February 2, 2009, the RBZ announced that a further 12 zeros were to be taken off the currency, with 1,000,000,000,000 (third) Zimbabwe dollars being exchanged for 1 new (fourth) dollar. New banknotes are to be introduced with a face value of Z$1, Z$5, Z$10, Z$20, Z$50, Z$100 and Z$500.The banknotes of the fourth dollar were to circulate alongside the third dollar, which remained legal tender until 30 June 2009.[106]
Let us say the entire value of the economy is represented by ten dollar bills. You hold them. Then the federal reserve decides to add more dollars. The value of the economy isn’t changing, but the value of the dollars you hold will shrink instead to cover the difference.
I write on this subject, but can’t reveal who I am to lurkers.
Here is the simple version.
The Fed credits its own account with money it has created out of thin air. The Fed then purchases financial assets from banks and other financial institutions in a process referred to as open market operations. The purchases give banks the excess reserves required for them to create new money by the process of deposit multiplication from increased lending in the fractional reserve banking system.
In layman’s terms, they print $600 billion WITHOUT a printing press! Ain’t technology grand?
In theory, all this excess money is used by the banks to lend, allowing for economic growth. BUT banks haven’t been lending. If they continue not to lend, what has this accomplished?
What QE accomplishes is a massive devaluation of the dollar. This makes imports (oil, copper, coffee, etc) more expensive. BUT it makes our exports cheap! If we actually produced anything anymore.
So, the likely outcome is inflation in import costs which will cause goods in the US to rise as well.
They are essentially “kiting” money.
Here’s how it works. Suppose you have $10 in bank A but you write a check on the account for $500 and deposit it in bank B. Before that deposit can be processed, you go back and tell the teller at bank B that you want to withdraw $400. The teller gives you $400 in cash, and you disappear before the check bounces.
That’s a very simple kite. More often it’s a bit more sophisticated and involves a lot of money. Check kiting requires at least two accounts, and very often involves two or even three banks. The money rotates in a complete circular fashion between accounts.
Hicks says a kite can take down a financial institution.
“A small credit union in northern Illinois took a $4 million kite loss and had to close its doors. Within the last five to seven years we’ve seen kites in excess of $10 million to $20 million.”
Dedicated fraudsters are often responsible for the high dollar check kiting schemes, but regular customers do much of the smaller kiting that goes on.
“Kiting happens on a daily basis at just about every financial institution,” according to Young. “It may be a customer with a longtime relationship or a new customer. Most kiting occurs with individuals that have businesses that don’t have enough income or revenue to keep going.
“They supplement with check kiting. I think they have every intention to make everything good, but if the money doesn’t come in the situation gets worse and worse. Others do it to run up the dollars and get out of Dodge and leave one of the banks holding the bag.”
http://www.bankrate.com/brm/news/chk/20021203b.asp
We are the victim bank in this case.
Buying silver is a good hedge.
There’s aanother aspect to this. The dollar has been the global reserve currency since ‘48, this may change soon. If there’s another currency or basket of currencies that come into internation use, the buying power for things such as Saudi oil will increase.
Count me in on that.