Deadline June 30th: End of Quantitative Easing?

To combat virulent recession, the Fed started Quantitative Easing in November-2008, by buying-out “toxic assets” and circulating money into the economy. The QE is an ad-hoc monetary policy used to stimulate the national economy when conventional monetary policy has become ineffective. Central banks utilize QE by purchasing financial assets from banks and other private sector businesses with new money that it creates electronically. This action increases excess reserves of the banks and also raises the prices of financial assets bought, which lowers their yield (price up, yield down). The whole process aims at reigning in lower interest rate regime, making it cheaper for businesses to raise capital. It is also an inflationary tool and can be used to ensure that inflation does not fall below target, thereby boosting economic activities.

At some point, cash emerge from bank reserves and flow faster into a larger economy. Private sector money would change hands more rapidly. The expectation is that hiring would rise; banks would lend; loans would be cheap and lots of people would buy houses.

After QE1 (starting from Nov-2008) added $1.75 trillion to federal debt with little positive impact, the Fed might have chosen to abandon quantitative easing. But in November-2010, the Fed again began injecting another $600 billion into the economy- this time QE2.

Almost closing the deadline June 30^th, the QE2 involves buying up long-term treasuries in order to depress long-term interest rates. The tactic could stimulate lending as mentioned above, but will boost inflation, which, due to the Fed’s money injections, is already poised to continue climbing. At the least, it is evident the desired results are far from visible. Ironically, it was also endorsed by the Fed Chief in a way, when Mr. Bernake admitted publicly last week that: “ Maybe some of the headwinds that are concerning us, like the weakness in the financial sector, problems in the housing sector-some may be stronger and more persistent than we thought.”

When the deadline comes to a close on Thursday June the 30^th, what might happen to the already depressing economic scenario? To bolster hope over economic recovery, may be plethora of QEs (QE3, QE4….) will continue to inject billions/trillions into the thin air. Meanwhile, the economy will continue to be in the doldrums. This shakiness was evident, as the U.S. stock market started to nosedive, at one point sending the DOW more than 200 points. Stocks continued to slide-the market finishing down for the seventh week out of the last eight. There is a potential of an ensuing market collapse. Correspondingly, we might expect a strong push in gold and silver prices, taking them to new heights.

Return to the Gold Standard?: Part-I

The unprecedented changes in global economy in last couple of years and its aftershock have evoked debates over several unique economic issues, one of them being the possibility of returning to the Gold Standard. This particular economic phenomenon is nothing new, as far as economic history is concerned. The classic gold standard was in place from last part of 19^th century till First World War.  This allowed a country to maintain a balance between its monetary reserves and its gold holdings. It also allowed an economy to limit the amount of credit it could create. In essence, it forced a country to maintain a balanced budget and prevented it to “go beyond its means”.

Under the Gold Standard, a government is limited-both legally and practically-as to how much paper money it can print. As recently as the Lyndon Johnson administration (1963-1968), the U.S. could print paper dollars equal only to four times the value of the nation’s gold reserves. Under this standard, governments that print too much paper money risk runs on their gold reserves. Runs occur as holders of the paper seek to convert to gold before the vaults are empty. A run on the dollar is what happened in the late 1960s, which culminated in President Richard Nixon “closing the gold window” in 1971.

The subsequent offshoot was the governments creating budget deficits to the unsustainable level. As at present (in May 2011), the US debts amount to $14.32 trillion, representing 98% of 2010 GDP of $14.66 trillion (source: Wikipedia). This undue expansion has had its consequences, with the dollar losing its value (in purchasing power) of over 80% in last 40 years, after the abandonment of gold standard. In this crucial junction of global economy, it is worthwhile to think of some drastic changes, at least there are some learning points from this particular issue of Gold Standard.

Fall of the Dollar:part-1

The primacy of US Dollar as global Means of Exchange as well as World Reserve Currency is in tatters, due to various geo-political and economic reasons. From the early 20th century, United States has enjoyed unprecedented economic and political clouts of global scale. This enabled Uncle Sam to exercise supreme control everywhere in the world. This also enabled the country to alter the traditionally established means of exchange and reserve currency, i.e-Gold Standard. For meeting its ever expanding fiscal deficit, it was forced to break the system of balancing its money with reserve (i.e. gold). So it was virtually free to expand its monetary base, without having to keep any corresponding reserve. By selling its own-currency-denominated debts like US Treasury Bills and Bonds, it has borrowed virtually indefinitely. Foreign countries, mostly the central banks, have hold mega amounts of US dollar reserves on their accounts, which in turn, don’t carry much value other than promise to pay. Dollar has also been established as means of exchange to trade oil, which is the “global fuel” for energy, for no real economic reasons. The costly wars that the US has been engaged with, starting from Vietnam War to recent Iraq & Afghanistan War, have caused gigantic pressure on its fiscal balance for long. The most powerful country on Earth, apart from its fiscal imbalance, is also entangled with its own economic crisis like real estate collapse and financial sector collapse. The seemingly indispensable Quantitative Easing policies will continue to shatter the US currency further. Time will say where it is heading to.

Investments- All About Growing Wealth

Investments is vital for life, just like education or healthcare. It deserves our attention and energy (and offcourse some of our money). Its about timing. When we spot an opportune time and take a small action, it gets a multiplied yield for us. Its about being aware of the present Market, following the events impacting it and making ripples (and waves). Taking those situations into consideration, identifying some directions and opportunities-are all the market-conscious investors do. There are some principles, which are almost as powerful as laws- act as dynamics and gives positive leverage to our invested money. All these things and concerns we will explore and cultivate on regular basis. These will lead us to growing our wealth.