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Q is for Quantitative Easing – The Elite Investor Club’s A – Z Guide of Investing

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To get tickets to our flagship event, The Elite Investor Summit, go to – http://www.eliteinvestorsummit.co.uk/ To join the Elite Investor Club, head on over to http://www.eliteinvestorclub.com/ Just a couple of episodes ago we talked about the importance of money supply. Today we’ve reached the letter Q and we are forced to cover the illegitimate cousin of money supply because Q stands for quantitative easing. Governments and central banks love to interfere with markets. It helps them feel like they have a purpose in life. Time was when only fascist or communist governments would try to control the economy to achieve their warped political ends. Today, every developed nation on the planet has just as much central management of its economy as China or the Soviet Union at their worst. The only blessing is we don’t have to listen to David Cameron reeling off five year plans for wheat production, iron ore mining or shipbuilding. But we do have a generation of bureaucrats who genuinely believe they are in control of all the levers of supply and demand, inflation and deflation. The two thousand and eight crisis gave them the golden opportunity to play with all the toys in their nursery. They started with interest rates, lowering them to nought point five per cent as an emergency measure. A measure that is still in place almost a decade later. Then they turned their hands to the broken banking system. When I spoke to QE expert James Ferguson recently he explained that the authorities thought the banks had a liquidity problem, so they started throwing cash at them. But what they actually had was a solvency problem, because they had made so many poor quality loans that were going bad that they became over-leveraged and effectively ran out of capital. But central banks can’t do much about insolvency. So they stuck with their original plan and turned the printing presses up to warp speed. Let’s have a look at how Quantitative easing works. The central bank purchases government securities such as treasury bonds or gilts or other securities from the market in order to increase the money supply. It floods financial institutions with capital in an effort to promote increased lending and liquidity. As I’ve mentioned, the banks had a solvency crisis so the last thing they wanted to do was make more loans. So a lot of the money created by QE was left to shore up the banks’ balance sheets as they sought to recover from the crisis. The rest of it has found its way into physical assets like real estate, works of art and classic cars. They’ve all seen asset bubbles forming as those with capital seek to maintain the value of their portfolio when interest rates remain low. To give you some idea of the scale of money printing, America’s Federal Reserve pumped four point five trillion dollars into the US economy between two thousand and eight and twenty fourteen. In Britain there was a mere three hundred and seventy five billion pounds of QE, while in Europe there is now a commitment to one point one trillion euros of bond buying, even though there’s no such thing as a euro bond because each country has its own government bonds despite sharing a common currency. But the daddy of them all is Japan. Currently the Bank of Japan is creating seventy billion dollars worth of new yen each month, almost matching the peak in America despite having an economy only one third the size. Those poor wage slaves relying on earned income have hardly benefitted at all from QE as wages have barely moved in a decade. Hence all the talk about income inequality and the need for more taxes on the rich. The real lesson in all this is that you need to move out of the working class and into the investor class. Fiat currencies are now stretched to breaking point. Historically we’ve never gone this long without a currency collapse so we are on borrowed time. You need to examine your portfolio and see how well it will survive the inevitable fall out from QE. Most of the people whose opinion I respect are anticipating a painful period of contraction as these asset bubbles burst, especially in areas where property prices have inflated hugely. They then expect the end game to be inflation as prices and currencies adjust. They also hold a percentage of their portfolio in gold, the only form of money with a long term track record. Of course no one can predict the timing of any of this. It may be tomorrow. We may limp through another five years. But there’s one thing that we can be clear on. QE is the only weapon left in the Central Bank arsenal. As things unfold, I suspect Money Week’s Tim Price may be right when he says ‘we ain’t seen nothing yet…’