By MoneyMorning.com.au
Our first thought this morning was, ‘So when will QE4 start?’
It’s an irrelevant question, because QE3 (otherwise known as money printing) is now an ongoing program by the US Federal Reserve. QE3 will be ‘QE Forever’.
The old saying is that the definition of insanity is doing the same thing and expecting a different result.
We can now reveal a new saying: the definition of criminal insanity is doing variations of the same thing and expecting a different result.
But there’s something more important than that. In today’s Money Morning we’ll show you exactly why these inflationary policies are bad news for you, and how it has a devastating impact on your wealth…
So, what exactly is the US Fed up to?
Before this, the Fed has bought short-dated treasury bonds and mortgage-backed securities. It did this over a fixed timeframe.
The policy failed. It didn’t have a positive economic impact (unemployment is still high), although it did achieve one of their goals in reducing interest rates.
Unperturbed, the Fed varied the plan. This time it shifted from owning short-dated bonds to owning long-dated bonds. Again, it achieved the goal of reducing long-term interest rates…but it did nothing to fix the economy (unemployment is still high).
So now, after those policies failed, the Fed has varied the plan again. It plans on printing USD$40 billion per month to buy American mortgage debt. Plus it now says it will keep interest rates low ‘at least through mid-2015.’
In other words, by that time the US economy will be just three years away from completing a lost decade…a lost decade central banks and governments told you wouldn’t happen because they would do everything to prevent it from happening.
Of course, they’ve done exactly the opposite. The intervention ensured a lost decade. We warned of that nearly two years ago when we wrote, ‘Welcome to America’s Lost Decade’.
And just three months ago we warned that this current bear market ‘Could Last Another 18 Years…Just Like Japan’s’.
Both predictions have just edged closer to reality.
We won’t go into the details of the Fed’s latest madcap plan. We’re sure you’ll get to read about the nuts and bolts of it in the mainstream press here, here, here, and elsewhere.
Our role isn’t to spew up the same news you can read about anywhere else. Our role is to distil the news and give you the key bits of info that are important to you.
And in our view, there are few things more important to you than the value of money and the impact it has on your wealth…
The Hidden Danger of Inflation
Inflationary monetary policies are perhaps the greatest threat to wealth there is.
The reason it’s such a threat is because in the short-term it appears to help your wealth. As the money supply goes up, it filters through the economy, credit expands, and asset prices tend to rise.
You get higher house prices and higher share prices.
For those who own houses and shares, that’s great news. The problem is for those who don’t yet own those assets. The assets become more expensive. And gradually they become unaffordable for people unless they use credit.
This creates an upward spiral in prices. Prices rise so people start to panic. They fear that if they don’t buy now then they’ll never be able to afford it. So they borrow as much as they can. This naturally pushes prices up further.
That takes the market to the next phase of hysteria. That’s where prices have risen over such a long period that buyers and owners believe prices can never fall…because prices have always gone up.
This creates what Austrian School economists call malinvestments. In simple terms, these are investments that people wouldn’t otherwise make in a normal market.
But eventually these malinvestments go bad, and it has a terrible knock-on effect through the economy.
No-one wants to buy the assets at high prices, and lenders don’t want to lend money for people to buy these assets because they believe the price could fall further. If that happens it would make it tough for borrowers to repay the loans.
But aside from those fancy economic terms, inflationary policies have a further negative impact on your wealth. And that is on the value of the money in your pocket…
What if the Numbers Changed on Your Money?
The reason inflation is bad for your wealth is because it’s hard to see the impact on a day-to-day basis.
Sure, you know that things are more expensive today than they were 20 years ago. But it’s harder to gauge the change in prices over shorter periods.
It’s a bit like when you look at someone day after day, and don’t notice that they’ve aged. But look at a photo of someone from five years ago and compare it to how they look today and it’s pretty easy to see the change.
That’s the problem you get when you try to value money. You can’t see the devaluation on a daily basis.
When the central bank prints money, it devalues your money. But you can’t see that devaluation. After all, the $5 in your wallet or purse still has $5 printed on it, regardless of how much the central bank prints.
But what changes is the purchasing power of the $5.
Because the face value of money doesn’t change, the price of goods has to change in order to factor in the devaluation of the currency.
That’s why the central bankers love printing money. It’s much harder for you to see the devaluation.
But imagine if it didn’t work like that. Imagine if the numbers on the money in your wallet did change to take into account central bank money printing and devaluation.
‘Your $5 is Now $4.97′
Imagine if four times a year the central bank held a news conference. Each time it would instruct you to change the value on the bank notes in your pocket:
‘the little pink notes that used to be $5 are now $4.97; the blue notes that used to be $10 are now $9.95; the red notes that used to be $20 are now $19.89; the yellow notes that used to be $50 are now $49.73; and the green notes that used to be $100 are now $99.47.’
Can you imagine the uproar? You’ve worked for this money. You expected the $20 you worked for last month to still be worth $20 this month…but it’s not, it can now only buy you $19.89 of goods.
But that’s just one quarter’s change. It gets worse over time. For instance, if you had put a $5 note in a jar five years ago when we first published Money Morning, and every quarter you wrote the new value on it, that $5 note would only be worth $4.44 today.
That’s nearly a 12% devaluation of your money in just five years. You can see this on the chart below:
Data Source: Reserve Bank of Australia
If the face value of the money in your pocket changed on a daily or monthly basis, we can guarantee people wouldn’t stand for it.
That’s part of the reason why central bankers and governments don’t like gold as a currency, because the value is in the consumers’ pocket, rather than in the central bankers’ computer.
So the task we’ll set for you today is this: get hold of a $5 note. Stick a piece of paper to one side of it and in small writing, note the following in the top left-hand corner: ‘May 2007 – $5′. Then, immediately beneath it write ‘July 2012 – $4.4369′.
Each quarter, when the Reserve Bank of Australia (RBA) releases the latest monetary aggregates, we’ll publish the new value (purchasing power) of that $5 note here in Money Morning.
As you can see from the chart above, in most cases it will involve the devaluation of the note. In only six quarters during the past five years the RBA has contracted the money supply.
Granted, doing this may not achieve much. But it will show you exactly how central bankers the world over are intent on destroying your wealth…that includes the central bankers at the RBA.
Cheers,
Kris
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