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Date: July 15, 2009
Subject: Why Currencies Hate Quantitative Easing (QE)

This is
G&G Associates Tax & Financial Consulting
e-Newsletter


Why Currencies Hate Quantitative Easing

Dear G&G Readers,

One of my paid subscribers just asked me how QE can be so bad for a currency when it forces liquidity into the markets (more dollars to stimulate the economy). This got me thinking. So I started surfing the Internet to see how other outlets explain QE. Here’s a snapshot of what I found below:

Investopedia describes Quantitative Easing as …

“A government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity.”

Investopedia explains QE as:

“Central banks tend to use quantitative easing when interest rates have already been lowered to near 0% levels and have failed to produce the desired effect. The major risk of quantitative easing is that although more money is floating around, there is still a fixed amount of goods for sale. This will eventually lead to higher prices or inflation.”

Meanwhile, Wikipedia says:

“The term quantitative easing describes an extreme form of monetary policy used to stimulate an economy where interest rates are either at, or close to, zero.

“Normally, a central bank stimulates the economy indirectly by lowering interest rates but when it cannot lower them any further it can attempt to seed the financial system with new money through quantitative easing.

“In practical terms, the central bank purchases financial assets, including treasuries and corporate bonds, from financial institutions (such as banks) using money it has created ex nihilo (out of nothing). This process is called open market operations. The creation of this new money is supposed to seed the increase in the overall money supply through deposit multiplication by encouraging lending by these institutions and reducing the cost of borrowing, thereby stimulating the economy. However, there is a risk that banks will still refuse to lend despite the increase in their deposits, and in a worst case scenario, possibly lead to hyperinflation.

“Quantitative easing is sometimes described as 'printing money', although the central bank actually creates it electronically by increasing the credit in its own bank account.” "Can anyone say Government Ponzi Scheme."

In normal times, central banks ease and tighten credit and monetary supply in the economy through increasing / decreasing interest rates. But that’s not really quantitative easing. This is standard monetary policy.

However, in times of crisis (like now) the U.S. monetary policy is at a standstill because interest rates are at near zero levels. In Europe rates are still at 1% so there is still some room. But when a central bank cannot stimulate growth using monetary policy, it has to resort to QE.

In a simple analogy, if a company is worth $100 and has 100 shares outstanding. The value of each share is $1. Now the company decides to print and circulate an additional 100 shares. What will happen to the value of each share? It will drop in half, right?

Similarly at times of QE, central banks create money out of thin air and circulate it in the economy. But the net value of the county has remained the same.

So the value of each dollar before and after the printing event will change and the value of the dollar will drop. That’s why QE is bad for the value of a currency. It leads to inflation as too many dollars are chasing the same amount of goods and services. Do you see now for the past year and a half I've been encouraging my readers to buy Gold and Silver...REAL MONEY with intrinsic value.

Any central bank that implements QE is basically agreeing to let the currency value fall. QE can never be good for the currency, ever!

So, why are you still plunging money into your 401K and not buying currencies that increase in value as the dollar plummets and real money such as Gold & Silver?

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V/R,
Gary Gray
Tax & Financial Consultant, RFC
G&G Associates
877-817-6031 toll-free
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www.gngassociates.net

* Knowledge without wisdom = fruitless, nothing, zero
* Wisdom without knowledge = impossibility
* KNOWLEDGE APPLIED = WISDOM
Ezzrath Shem



LEGAL NOTICE: This work is based on SEC filings, current events, interviews, corporate press releases and what I've learned as a financial consultant. Nothing herein should be considered personalized investment advice. It may contain errors and you shouldn't make any investment decision based solely on what you read here. It's your money and your responsibility. Also, please note that due to our commercial relationship with Publc Gold, G&G Associates may receive compensation from a membership purchased at www.publicgold.com/gngpreciousmetals.


 

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