The laissez-faire position of the American people around Quantitative Easing [QE] has been troublesome we have just allowed the Federal Reserve and Administration to place our economy on autopilot with it headed directly for the Hudson River and Sully Sullenberger is nowhere to be found this time around. For those that missed the sarcasm in this, the New York branch of the Federal Reserve will be the branch executing the bond purchases for Quantitative Easing.
So how many of you out there really understand how Quantitative Easing will affect us, well not too many hands went up which is concerning. So let’s take a look at why you should be concerned about this, as its simple the government is messing with our money, yes our money! As Quantitative Easing runs the risk of going too far, by increasing the money supply within a system it has an inflationary effect by diluting the value of a unit of currency. So people like you and I who have saved money will find it has become devalued by this implied inflation. Now combine this with the associated lower interest rate returns, this will put people who rely on their savings in difficulty as well as reduce the earning potential of our investments. In essence this will create two negative moving reinforcing loops which will rob us of our affluancy.
From an international perspective if the affects of devaluation in our currency are seen externally to the country it will affect our international credit worthiness of which in turn will lower the appeal of foreign investment. This loss of investment will mean less “physical” dollars are returned to our shores meaning a liquidly problem will arise which will mean we will have to do this again as there won’t be enough internal currency to meet our own demand let alone service the foreign obligations.
History proved this out too as Quantitative Easing was tried unsuccessfully by the Bank of Japan to combat domestic deflation in the early 2000’s during the implosion of their economy. Then QE just like old-fashioned money printing caused the country of Zimbabwe too suffer a severe case of the same as the risks of quantitative easing by printing money which made its currency virtually worthless.
Remember currency is a “closed loop system” there is only so much of it therefore a primary component of its valuation is comprised of this fact. Therefore if more “units” are added the implied value is diminished for those of us who dream of retiring someday as by doing this they “stole” from us this value to give to those who have not bothered to save. As this has been a huge problem in our overall societal model as it continually rewards the loser rather than the winner.
To follow the adage that a picture is worth a thousand words, I’ve taken the liberty to borrow a graph of the Monetary base to provide a visual of the impact. Note this is a “change” in the money supply as a percent so as you can see post World War-II it had only moderate rises , into the 1960’s you see small upticks because of the Vietnam War* and even into 1972 with the Bretton Woods Agreement the movement is moderate. However fast forward and what do you see? Now you see the reason for the fear in my eyes, as our pockets have picked and we didn’t even know it…
*Note: the debt resulting from the Vietnam War concerned Richard Nixon (Nixon Shock)so at the time it lead to the end of the Bretton Woods Agreement taking the US off the “gold standard” which it had been on since effectively 1944