March 23, 2011, 5:00 am

Quantitative Easing & The Impact on Your Investments

by: The Financial Blogger    Category: Investment, Market and Risk
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Is it not the most beautiful concept you have ever heard? Quantitative Easing; the best solution for any economic problem ;-). Until recently, when facing a recession, central banks would drop their interest rates. Low interest rates encourage both businesses and individuals to borrow. Companies will create jobs while individuals will inject money into the economy. However, what do you do when your interest rates are already at their lowest? This is when Quantitative Easing comes into play.

Quantitative Easing in short

In a simple terms; quantitative easing can be describe as a central bank buying back their bonds in order to inject money into the market. Since investors receive money from their bonds, they have to invest it elsewhere. This creates enough liquidity to “make the capitalism motor run”. The FED is already at its second round of quantitative easing (QE2 was announced back in fall 2010). They will be injecting $75G per month up to $600G. Until recently, we thought this would be the last quantitative easing measure required… until Japan’s earthquake.

Quantitative Easing & The Impact on Your Investments

So now that the FED is printing more greenbacks, what’s in it for you? Regardless if you are Canadian or American, there will be an impact on your investment portfolio. You can probably feel the impact if you look back at the month of November and December 2010. If you have a part of your portfolio invested in the market, I bet it did great ;-).

Quantitative Easing has such a positive effect on the stock market because it comforts investors with the fact that Governments won’t let the economy down. The market knows that no matter what is happening with the economy, there will be money available. This encourages investors to keep on investing.

Long term effect of Quantitative Easing

This is the tricky part. We are not quite sure of the long term impact of QEs. On one hand, some people fear that it will generate too much inflation. On the other, some people think that the capitalist system will regulate itself as it always has (a bit too simple, isn’t?). In the end, the FED didn’t have many options (once the rates were down and the economy was still slow). Therefore, instead of doing nothing and watching the train hit a brick wall, they have decided to switch directions and add more fuel to see where the train will be headed. This is also the reason why the FED did QE2 over several months instead of injecting $600G in one shot.

Looking for more Quantitative Easing Measures

As Japan runs into another recession (not that the economy was already thriving!), more quantitative easing measures should be applied. The first move will obviously be the Japanese Government. In fact, they have already announced they will inject money into their economy. If the slowdown is too important and affects the global economy, I would bet on a QE3 from the FED in the summer of 2011. Let’s just hope that this doesn’t happen, I’m not too excited about “unknown long term results solution” !

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Comments

TFB,
I just wrote a post on this also. I don’t particularly like QE, but it seems to be working. When June comes around, I don’t think the Fed will induce another round of QE. As a result, treasury bonds will fall and im curious to see what happens to gold.

Hey, a post on a financial topic. I like it.

I’d like to request more articles on financial stuff and less on making money blogging.

by: The Financial Blogger | March 23rd, 2011 (2:09 pm)

Hey Jeff,

yeah, not sure what will be the long term outcome. However, right now, it does a good effect on my investments 😉

Hey FU!

I’m heading toward more making money blogging… sorry 😉
However, I’m still writing financial stuff on TFB but also on http://www.thedividendguyblog.com, http://www.donotwait.com and experiglot.com

Kinda just establishing the niche for each site!

cheers,

Oh man, there will be an uproar if they go for QE3. Although a little inflation wouldn’t be bad for my loans. 🙂

QE is killing this country’s economy. The FED needs to be banished and we need to get back to a gold standard. I know, I know, I live in a dream world. I’m in the camp that believes this nation is headed for a MAJOR crash in the coming years. Invest accordingly people! Diversify your money and call it a day.

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