How? The bubble is getting bigger and bigger. I believe a lot of naysayers have been speculating another global recession is around the corner many moons ago. But with another round of QE3,4 or 5? lost count! Most of the tangible class of assets have or will be appreciated / inflated. If you intend to accumulate wealth true investing earlier but has not done so due to following the saying of the negative outlook of world economy, you would have banged your head now. Hoping the price will come down as a result of bad economic conditions, instead price has rise to a new level.
Really, there is no real good time to invest in assets. Investment should be a program / system to be consistently apply whether good time or bad time. Whenever you are financially ready you should invest, not overly affected by opinion of someone - who may be just a naysayer. Whether what was predicted will eventually happen or not is everyone guess. Investment conditions will not turn in light speed. Losses may be incurred due to wrong judgement if naysayer is right! if wrong cut loh, is part of a success journey. What if you are right! the rewards is marvelous! Catch the opportunity whenever it arises. A bird in hand is better a couple in the bushes!
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The Fed Doubles The Dosage
On December 12th, the Federal Reserve announced the most aggressive
program of monetary stimulus ever undertaken in peacetime. Beginning in
January, the Fed will more than double the amount of fiat money it
creates each month from $40 billion to $85 billion. On an annualized
basis that amounts to more than $1 trillion a year. This week we will
consider 1) What they did; 2) Why they did it; and, 3) What impact it
will have on asset prices over the short-term.
What They Did:
In a nutshell, the Fed announced it will more than double the amount of
fiat money it creates each month and that it will use that money to buy
government bonds and mortgage-backed securities until the unemployment
rate drops substantially or until the inflation rate accelerates. The
press release stated: “…the Committee will continue purchasing additional agency
mortgage-backed securities at a pace of $40 billion per month. The
Committee also will purchase longer-term Treasury securities … initially
at a pace of $45 billion per month.”
Take note of the word “initially”. That strongly suggests the Fed may
soon increase the amount of money creation beyond $85 billion a month.
Furthermore, the Fed also pledged to keep the federal funds rate at 0 –
¼ percent “at least as long as the unemployment rate remains above 6 ½
percent, inflation between one and two years ahead is projected to be no
more than a half percentage point above the Committee’s 2 percent
longer-run goal, and longer-term inflation expectations continue to be
well anchored.”
In other words, the Fed intends to keep interest rates near zero
percent and to continue creating fiat money at an annual rate of $1
trillion (or more) a year until it succeeds in bringing down
unemployment or until inflation becomes a threat.
Why They Did It:
I believe the Fed took these unprecedented steps because it is
terrified the world is dangerously close to spiraling into a new great
depression. As I have explained before, credit growth in the US has
fuelled economic growth in the US and, therefore, the world since World
War II. Since 1952, any time total credit (adjusted for inflation)
expanded by less than 2% during a year, the US economy has gone into
recession. Now, it is not increasing at all. Consequently, the US
economy is very weak. Imports into the US were no greater in the third
quarter of 2012 than in the third quarter of 2011. US imports have acted
as the driver of global economic growth since the 1980s. Now, with
imports flat, world trade has ceased to expand – and there is a very
real danger that it will begin to contract. The Fed hopes that its money
creation will spur credit creation by pushing down interest rates and
by pushing up asset prices, thereby, preventing a downward spiral into
depression.
The Fed’s fears have been exacerbated by the danger posed by the
“fiscal cliff”. Even if this politically induced fiasco turns out to be
only a fiscal ditch (as I expect it will), it will still inflict at
least some damage on the economy in 2013 and beyond.
What Impact Will It Have?:
The Quantity Theory Of Money states that any time the quantity of money
is increased, it will cause inflation. But there are different kinds of
inflation. What kind of inflation will QE 3 cause?
I expect it to cause asset price inflation. As the Fed creates money
and buys $85 billion worth of assets each month, that money will be
reinvested into other assets and push up their price. That is certainly
what the Fed hopes will happen. That is what QE 3 is designed to do.
Therefore, the price of stocks, bonds and real estate should appreciate.
I also expect commodity price inflation. The price of food and metals –
including gold and silver – seem likely to move up. The near-term
direction of oil is less certain given the enormous surge in oil
production in North America and the rapid development of alternative
energies that will eventually drive the price of oil sharply lower.
The expanding supply of dollars should exert downward pressure on the
value of the dollar relative to other currencies – unless the central
banks of other countries follow the Fed’s example and expand the
quantity of their currencies as well. It is highly probable that many
central banks will choose that course – creating money to buy assets
denominated in their own currencies to boost their domestic asset prices
or else to buy dollars in order to prevent their currencies from
appreciating to protect their export industries. In either case, this
will further add to global liquidity, resulting in still more asset
price and commodity price inflation.
Thus, the Fed’s strategy of creating more money should succeed in
stimulating the global economy in the near term by inflating new asset
price bubbles that create a “wealth effect” that underpins consumption.
This strategy cannot succeed over the long run however unless
accompanied by additional policies that boost median income in the US
and globally. Unless wages rise, the public will soon once again be
incapable of paying the interest on the money they borrowed to purchase
the inflating assets. Then the asset price bubbles will pop and a new
and much worse crisis will ensue.
Economic management through bubble creation is not a viable long-term
solution to a global crisis caused by unchecked, credit-induced economic
bubbles.
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