Quantitative Easing Explained

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The FED started this week with Quantitative Easing (QE) that certainly shall speed up the evidence of further decline.
I wrote about this in one of my previous articles. QE will weaken the dollar and its potential as reserve currency, the beginning of the end for a downfall of the US-Empire as world power.

For a better understanding: QE means that the Central bank (FED) expands the money supply by using newly, electronically, created money instead of printing it, to buying toxic assets from banks and other financial institutions. The aim is to boost the economy by giving sellers of these toxic assets money to spend on goods, services or ‘better’ assets.

Why this new spending spree? The answer may be that the Fed and its policymakers are concerned that the previous deluge of money to improve credit conditions not were sufficient to get consumers back to their shopping habit, more precise the old routine ‘shop till you drop’!

In spite of this even a child will understand that adding more water to an inundated country can not make it dry. So why more money when there is already too much?

The hope is to revitalize the economy by restarting shopping sprees, which won’t happen. QE is just another nail in the coffin of the economy it speeds up the downfall of the dollar as reserve currency. Let’s hope when more people in authority start to understand what is happening a political shift toward something else will begin.

It is reminded that this is not a recession but depression so not reviving but restructuring is required. This QE medicine prescribed by the FED kills the patient in this event it steers the badly needed economic recovery away!

In the 18th century it was John Law, under the name of ‘Banque General de France’, who bought up the debt of France, in a similar experiment of this scale that was followed in England soon after, known as the South Sea bubble. It worked similar in that the bank substituted pieces of (worthless) stock in the South Sea Company for government debt.

When those debt buy-up schemes were put in place in the 18th century, at first their stock rose. John Law's shares were a great hit. Shares in the South Sea Company, meanwhile, went up 10 times in a single year. As earlier in the 1630s with the TULPOMANIA in Holland thousands of people, from the wealthiest merchants to the lowliest street traders were caught up in a frenzy of buying and selling. The object of the speculation was not oil or gold, but the tulip bulb, a delicate and exotic bloom that just had arrived from the East. Over the period of three years rare tulip bulbs changed hands for sums that would have bought a house in Amsterdam a piece. Fortunes were made overnight, and then lost when within a year the market collapsed, with similar disastrous consequences as we do face today.

Until now all the bailouts and stimulus plans haven't worked. The problem still is debt, not liquidity. Buying up the securities of Fannie and Freddie, the Fed will lower the cost of mortgage debt. This will give homeowners an opportunity, most probably the last one in their lifetime, to refinance their houses at lower interest rates. In the short run, if the homeowner is able to refinance at a lower rate, he reduces his monthly cash-flow burden and frees up cash for other things as paying down his credit card debt. In the long run, if he's able to lock-in those lower rates, he will almost certainly see the debt burden itself significantly be eased as a result of rising inflation.

In that event the prudent savers see their savings and interest income melt away!

Nothing else for us boondoggles to do as Wait and See, prepare for the worst and hope for the best.