Best of the Week
Most Popular
1.UK General Election BBC Exit Polls Forecast Accuracy - Nadeem_Walayat
2.UK General Election 2017 Seats Final Forecast, Labour, Conservative Lib-Dem, SNP - Nadeem_Walayat
3.UK General Election 2017 Forecast: Conservative 358, Labour 212 Seats - Nadeem_Walayat
4.Theresa May to Resign, Fatal Error Was to Believe Worthless Opinion Polls! - Nadeem_Walayat
5.UK House Prices Forecast General Election 2017 Conservative Seats Result - Nadeem_Walayat
6.The Stock Market Crash of 2017 That Never Was But Could it Still Come to Pass? - Sol_Palha
7.[TRADE ALERT] Write This Gold Stock Ticker Down Now - WallStreetNation
8.UK General Election Results Map 2017 vs 2015 vs Opinion Polls - Nadeem_Walayat
9.Orphaned Poisoned Waters,Severe Chronic Water Shortage Imminent - Richard_Mills
10.How The Smart Money Is Playing The Lithium Boom - OilPrice_Com
Last 7 days
Nether Edge By Election Result: Labour Win Sheffield City Council Seat by 132 Votes - 23rd Jun 17
Grenfell Fire: 600 of 4000 Tower Blocks Ticking Time Bomb Death Traps! - 22nd Jun 17
Car Sales About To Go Over The Cliff - 22nd Jun 17
LOG 0.786 support in CRUDE OIL and COCOA - 22nd Jun 17
More Stock Market Fluctuations Along New Record Highs - 22nd Jun 17
Understanding true money, Pound Sterling must make another historic low, Euro and Gold outlook! - 22nd Jun 17
Green Party Could Control Sheffield City Council Balance of Power Local Election 2018 - 22nd Jun 17
Ratio Combo Charts : Hidden Clues to the Gold Market Puzzle - 22nd Jun 17
Steem Hard Forks & Now People Are Making Even More Money On Blockchain Steemit - 22nd Jun 17
4 Steps for Comparing Binary Options Providers - 22nd Jun 17
Nether Edge & Sharrow By-Election, Will Labour Lose Safe Council Seat, Sheffield? - 21st Jun 17
Stock Market SPX Making New Lows - 21st Jun 17
Your Future Wealth Depends on what You Decide to Keep and Invest in Now - 21st Jun 17
Either Bitcoin Will Fail OR Bitcoin Is A Government Invention Meant To Enslave... - 21st Jun 17
Strength in Gold and Silver Mining Stocks and Its Implications - 21st Jun 17
Inflation is No Longer in Stealth Mode - 21st Jun 17
CRUDE OIL UPDATE- “0.30 risk is cheap for changing implication!” - 20th Jun 17
Crude Oil Verifies Price Breakdown – Or Is It Something More? - 20th Jun 17
Trump Backs ISIS As He Pushes US Onto Brink of World War III With Russia - 20th Jun 17
Most Popular Auto Trading Tools for trading with Stock Markets - 20th Jun 17
GDXJ Gold Stocks Massacre: The Aftermath - 20th Jun 17
Why Walkers Crisps Pay Packet Promotion is RUBBISH! - 20th Jun 17
7 Signs You Should Add Gold To Your Portfolio Now - 19th Jun 17
US Bonds and Related Market Indicators - 19th Jun 17
Wireless Wars: The Billion Dollar Tech Boom No One Is Talking About - 19th Jun 17
Amey Playing Cat and Mouse Game with Sheffield Residents and Tree Campaigners - 19th Jun 17
Positive Stock Market Expectations, But Will Uptrend Continue? - 19th Jun 17
Gold Proprietary Cycle Indicator Remains Down - 19th Jun 17
Stock Market Higher Highs Still Likely - 18th Jun 17
The US Government Clamps Down on Ability of Americans To Purchase Bitcoin - 18th Jun 17
NDX/NAZ Continue downward pressure on the US Stock Market - 18th Jun 17
Return of the Gold Bear? - 18th Jun 17
Are Sheffield's High Rise Tower Blocks Safe? Grenfell Cladding Fire Disaster! - 18th Jun 17
Globalist Takeover Of The Internet Moves Into Overdrive - 17th Jun 17
Crazy Charging Stocks Bull Market Random Thoughts - 17th Jun 17
Reflation, Deflation and Gold - 17th Jun 17
Here’s The Case For An Upside Risk In The Global Economy - 17th Jun 17
Gold Bullish on Fed Interest Rate Hike - 16th Jun 17
Drones Upending Business Models and Reshaping Industry Landscapes - 16th Jun 17
Grenfell Tower Cladding Fire Disaster, 4,000 Ticking Time Bombs, Sheffield Council Flats Panic! - 16th Jun 17
Heating Oil Bottom Is In.(probably) - 16th Jun 17
Here’s the Investing Reason Active Funds Can’t Beat Passive Funds—and It Worries Me a Lot - 16th Jun 17
Is There Gold “Hype” and is Gold an Emotional Trade? - 16th Jun 17
The War On Cash Is Now Becoming The War On Cryptocurrency - 15th Jun 17
The US Dollar Bull Case - 15th Jun 17
The Pros and Cons of Bitcoin and Blockchain - 15th Jun 17
The Retail Sector Downfall We Saw Coming - 15th Jun 17
Charts That Explain Why The US Rule Oil Prices Not OPEC - 15th Jun 17
How to Find the Best Auto Loan - 15th Jun 17
Ultra-low Stock Market Volatility #ThisTimeIsDifferent - 14th Jun 17
DOLLAR has recently damaged GOLD and SILVER- viewed in MRI 3D charts - 14th Jun 17
US Dollar Acceleration Phase is Dead Ahead! - 14th Jun 17
Hit or Pass? An Overview of 2017’s Best Ranked Stocks - 14th Jun 17
Rise Gold to Recommence Work at Idaho Maryland Mine After 60 Years - 14th Jun 17
Stock Market Tech Shakeout! - 14th Jun 17
The #1 Gold Stock of 2017 - 14th Jun 17

Market Oracle FREE Newsletter

The MRI 3D Report

Why Quantitative Easing Is Similar to Monopoly

Interest-Rates / Quantitative Easing Nov 03, 2010 - 04:44 AM GMT

By: Jared_Levy

Interest-Rates

Best Financial Markets Analysis ArticleThe second iteration of quantitative easing (QE2) is supposed to make "money easier" -- make it flow from the banks to consumers to businesses, etc. The first round of quantitative easing pumped billions of U.S. dollars into the system, but not much of it made it into my hands, and I'm guessing yours either...

If you have ever played Monopoly and have been "the bank," you get to control all the money that is divided out to each player.


Remember that the "extra" money is not part of the money circulating in the game yet.

Did you ever cheat and add a little of that "bank" money to your own reserves? I know some of you may have at least thought about it. I mean, how cool was it to just print or add money as you saw fit, so you could buy more stuff?

That is essentially what the Federal Reserve is doing. The Federal Reserve, which is the central banking system of the U.S., is printing extra U.S. dollars to buy "stuff." That stuff they are buying is not Boardwalk or Park Place on the Monopoly game board but rather government bonds, corporate bonds, mortgage-backed securities, and other securities from banks and other financial institutions around the country.

It's considered a good thing for banks to sell (to the Federal Reserve) the risky and not-so-risky stuff (assets) that is sitting in their inventories. They can exchange that stuff for cash so they can go and lend new cash in the form of loans and such to Americans who are in need of it.

This extra cash is also required by most banks as reserves. Think of reserves as "just in case" money. The Fed has also lowered these reserve requirements to encourage banks to lend and not hoard their cash.

So you'd think with all this Monopoly money flying around and the banks being required to keep less of it to protect their loans, "We the People" should be able to get money just as easy, right? Wrong.

The Real Issues
Without getting overly complex, banks are being stingy with their reserves. Over the past year, yields (interest rates) on corporate bonds have fallen, while rates on smaller commercial and industrial loans have risen. That's not good. That means that big companies can borrow money cheaper, but it's still pretty darn tough for the "little guy" to get a loan or a mortgage in many cases. Banks have more cash on hand now than they have ever had and not by some small amount if you look at the chart below.

Free Money, No Risk
If you could borrow money for 0.75% per year, and lend it to a risk-free buyer at 1%, you would have what is called an arbitrage (aka riskless profit). This was a large part of the "lending" that banks have been doing since the economic crisis began. They could borrow from the Fed and turn around and buy a Treasury note, capturing free interest. The Fed has adjusted its discount rate to discourage that action, but yet banks are still not coughing up the cash to consumers.

But get this: Much of the banks' current cash on hand is NOT even borrowed from the Federal Reserve, meaning they are not paying interest on it, giving them even less of a reason to lend it to us!

(Investing doesn't have to be complicated. Sign up for Smart Investing Daily and let me and my fellow editor Sara Nunnally simplify the market with our easy-to-understand articles.)

Won't It Cause Inflation?
With the billions of U.S. dollars already having being printed and 500 billion to 1 trillion expected in QE2, that puts severe downward pressure on the U.S. dollar. In Monopoly, this can be equated to every player owning property with hotels on it and just going around the board once may end up costing you $5,000 or more. No more $4 rent on Baltic Ave.

In that case (or severe inflation), the dollar bills you have are basically worthless and you MUST have real estate to survive the game. This is the simplest form of inflation; dollars become worth less and less, which equates to everything costing more and your "nest egg" of $100,000 cash may only get you around "life's Monopoly board" for a short time before you're broke from expenses.

Obviously, this is a dramatic scenario and some experts believe that there is a positive to this... I just wish it would trickle down to us. Although I do know how you can profit from it!

What Should You Do?
Making the U.S. dollar less expensive does have its merits (if you're an optimist). A weaker U.S. dollar will continue to drive gold, silver and most U.S. dollar-denominated commodities higher, so make sure you have exposure there.

Real estate and hard assets like land and even numismatics will have a benefit from any inflationary pressures that might come down the pike. Even most of the stock market loves a weak U.S. dollar.

So while Helicopter Ben continues to shower the banks with more money, even though they are not passing it along to us like we would expect, at least you can put what money you have in investments that will be driven by the effects of QE2.

P.S. My colleague and currency expert Michael Sankowski has declared that "World War III" has already begun. The truth is, the currency wars that are igniting around the globe could have a devastating effect on your personal wealth. Mike's done countless hours of research and thinking about this situation. And he has several ways to not only protect yourself from these currency wars... but to profit from them handsomely. Get all the details here...

Don't forget to follow us on Facebook and Twitter for the latest in financial market news, investment commentary and exclusive special promotions.

Source : http://www.taipanpublishinggroup.com/tpg/...

By Jared Levy
http://www.taipanpublishinggroup.com/

Jared Levy is Co-Editor of Smart Investing Daily, a free e-letter dedicated to guiding investors through the world of finance in order to make smart investing decisions. His passion is teaching the public how to successfully trade and invest while keeping risk low.

Jared has spent the past 15 years of his career in the finance and options industry, working as a retail money manager, a floor specialist for Fortune 1000 companies, and most recently a senior derivatives strategist. He was one of the Philadelphia Stock Exchange's youngest-ever members to become a market maker on three major U.S. exchanges.

He has been featured in several industry publications and won an Emmy for his daily video "Trader Cast." Jared serves as a CNBC Fast Money contributor and has appeared on Bloomberg, Fox Business, CNN Radio, Wall Street Journal radio and is regularly quoted by Reuters, The Wall Street Journal and Yahoo! Finance, among other publications.

Copyright © 2010, Taipan Publishing Group


© 2005-2017 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife