Tuesday, 10. December 2013 - 05:12
19. 09. 12. - 12:00
QE3 means easy money for the US economy, but is the extra cash creating potential inflation that will filter all the way to Croatian supermarket checkouts? Clem Chambers CEO of ADVFN.com and author of financial thrillers and the Amazon best-selling investment guides '101 Ways to Pick Stock Market Winners' and 'A Beginner's Guide to Value Investing' thinks so. On September 13, the US Federal Reserve announced another round of Quantitative Easting (QE). The trouble is, this financial boosting measure doesnít seem to be working that well, even though vast amounts of money are being "created". That's because the amount of capital destroyed during the credit crunch was so great, that ĎQEísí - from the Fed, ECB BoE and all the other central banks have not been enough to replace it. The beginnings of the credit bubble came about by money creation, driven by new financial instruments like CDO, CDS etc etc. These so-called "toxic derivatives" in effect turned lots of illiquid assets such as loans and mortgages, into cash. In a highly active market these instruments did what the central banks are now doing: created money supply. Sadly, it all went horribly wrong. The powerful tools effectively created cash from assets that didnít really exist, or at best were flimsy. The resultant implosion on money supply is what the governments of the West are now trying to replace - in effect renationalising money supply. Unsurprisingly, this public sector attempt to replace a rampant private sector market hasnít managed to fully repair the damage. This also explains why the inflation/reflation picture is patchy. The many rounds of QE's have had an impact more at the forex/bond level, rather than helping matters for people buying stuff with their credit cards. QE is often referred to as an "unorthodox" measure, not without reason. Its outcomes are, likewise, not easy to predict. One thing though seems predictable - the current cycle of reflation across the US, UK and Europe, including Croatia (although it iss not yet a fully fledged EU member state). Each area has to ease each time a competitor does. No one can let another zone devalue their currency against theirs as that will give them a trade advantage. If the EU eases, so must the Fed and the Bank of England and so on - it's likely that each round creates the next! Swapping bonds and creating cash with them is a process with a limited life span. In the end, unless flimsy bonds are swapped for cash, (the same process that caused the crunch in the first place, ) good bonds are all swapped out. Then, the strategy switches to monetise bonds - i.e. effectively creating money out of thin air without a counterbalancing liability, in what is an express route to runaway inflation. The inflation that we see now, affecting food products for instance, is because QE is creating currency devaluation - hard assets like commodities tend to rise even when economic activity is surpressed, if the currency they are bought in is weak. Then if QE follows QE, naked money printing must begin and then inflation kicks off where it is just not currency depreciation driving price growth but the fact there is free money being handed out. Unless the private sector gets back to creating money supply - and that means the despised banks getting back into their reviled casinos - it will be down to central banks to try and create an economic environment where there is enough money in the economy to make it strong. With trade and budget deficits, QE is effectively just bailing out overspending governments and under competitive economies and creating devaluation, which in turn, makes those countries poorer. Anyway you look at it, money is only going to get cheaper; hard assets more expensive. As such, at some point the asset bubbles will return, as the value of money spirals down and people try and avoid holding much of it. ~Ends ~Visit www.ADVFN.com for free, real-time stock prices ~ Clemís latest news and articles at www.clemchambers.com ~Follow Clem on Twitter: @ClemChambers Clem Chambers (www.clemchambers.com ) is CEO of the leading financial information and investors website ADVFNand author of books including A Beginnerís Guide to Value Investing and 101 Ways to Pick Stock Market Winners, both out now on the Kindle. His latest financial thriller The First Horseman is available for pre-order now. ADVFN : http://www.advfn.com/ Beginnerís Guide: http://www.amazon.com/ADVFN-Guide-Beginners-Investing-ebook/dp/B007HAZV0K/ref=la_B0034OKF36_1_7?ie=UTF8&qid=1343819636&sr=1-7 Ď101 Waysí : http://www.amazon.com/Ways-Pick-Stock-Market-Winners/dp/1907616276/ref=la_B0034OKF36_1_4?ie=UTF8&qid=1343819636&sr=1-4 Latest Thriller : http://www.amazon.com/First-Horseman-Clem-Chambers/dp/1842436546/ref=la_B0034OKF36_1_5?ie=UTF8&qid=1343819636&sr=1-5
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