A B C D QE2

A B C D QE2

In my recent weeks of researching what is happening to our economy I heard the term QE2 bandied about.  My first thoughts were that they were talking about the luxury liner Queen Elizabeth 2. But clearly that wasn't the case - it's too old to garner that much attention.  In my cluelessness I decided to check it out. I also asked a few people at work and was surprised at how little we all knew about it. What is QE and what is QE2?  Since it is a #2, obviously it has been done before.  Well, here's what I found out.

QE is an acronym for "Quantitative Easing".  What in the heck is that?  According to the Wikipedia, one of my favorite sites, "Quantitative easing (QE) is a monetary policy used by some central banks to increase the supply of money by increasing the excess reserves of the banking system, generally through buying of the central government's own bonds to stabilize or raise their prices and thereby lower long-term interest rates. This policy is usually invoked when the normal methods to control the money supply have failed, e.g. the bank interest rate, discount rate and/or interbank interest rate are either at, or close to, zero." 

Well that's alarming.  It sounds like it is a "Hail Mary" kind of move to me.

Wikipedia goes on to say ""Quantitative" refers to the fact that a specific quantity of money is being created; "easing" refers to reducing the pressure on banks."

A September 28, 2010 article in the BBC News website says "Lower interest rates encourage people to spend, not save. But when interest rates can go no lower, a central bank's only option is to pump money into the economy directly. That is quantitative easing (QE)."  Later in the article it states, "The way the central bank does this is by buying assets - usually financial assets such as government and corporate bonds - using money it has simply created out of thin air."  We sometimes hear this being referred to as "printing money" which of course in this digital age is not actually necessary.  No actual printing presses, ink or paper are harmed during this delicate process.

The underlying premise is that with more money out there the banks will be more likely to lend, credit easier to get and people and businesses more likely to spend with the end result of stimulating the economy.

Hmmm...I wish I could just add a couple of zeros to my bank account and use it to pay off my house, buy a new car, or lavish Christmas gifts!  Oh wait.  I can't. That would be fraud; or theft.  Too bad, so sad.

Well QE2 was announced a few weeks ago, so that means there must have been a QE1.  I had a harder time finding definitive info on that but it looks like that occurred in late 2008 and into 2009. I guess that didn't work, so they decided to try again.  which will be done over the next six months and put about $600 billion more dollars into play.

Many countries were not happy about the Federal Reserve Bank announcement.  Weeks before it was official, there were a flurry of warnings that this would cause a currency war (I'll blog on that another time) and started loud international murmurings. (UK, Brazil, China, France, Germany, China).

I've even been reading articles by economic experts who don't think this will work.  I've attached links to a few for your reading enjoyment.

• Keith McCullough in CNN article
• Campbell Harvey in The Street
• Jeff Nielsen in The Street
• Paul Farrell in MarketWatch 

What do you think?

Image: jscreationzs / FreeDigitalPhotos.net

Why Prepare?

I love to travel.  I got the bug back in 2001 when my mother, sister and I visited Italy.  While it wasn't my first international trip, it was my first real glimpse at how other people live.  Up to that time, my only other international travels had been to Canada and touristy Caribbean hot-spots via a cruise which really didn't give me the true flavor of a different culture.  One thing that I noticed is that, here in the U.S, everything is super sized.  Huge grocery stores, huge refrigerators, big houses, big yards, big cars, and generally just lots of stuff.  The Europeans go to the market multiple times a week, many even on a daily basis.  The majority don't have big homes. They do not have the Costco to stock up in mass quantities, at least that I saw. 

Gone are the days where much of our population was more self-sufficient: growing our own food, cooking, canning, hunting, building, and sewing.  For most of us those only stories from the days of our grandparents and great-grandparents.

Let me pose to you a question: what would you do if you could not get groceries at the grocery store for a week?  What about if you couldn't get groceries for two weeks?  Four?  What if you couldn't afford the food once you got there? 

What types of situations might make this an issue?

1.  Natural Disasters - the Red Cross, FEMA, and other entities all recommend having a minimum of three days supply of food, first aid, water, light, and more.  We never know when an earthquake, flood, storm, or other disaster might deprive us of the ability to head to the store. In my opinion 3 days is very short sighted.  Just days ago we had a uncharacteric snow storm here in the Puget Sound, with temperatures hitting the low teens.  People all over the area had power outages lasting more than 3 days!  I remember the "Inaugural Day Storm" on January 20, 1993, where over 600,000 people lost power; some in outlying areas didn't get power back for weeks. (My boss at the time lived out past Black Diamond and didn't get her power back on for nearly 2 weeks.)

2.  Inflation/hyperinflation - I won't pick Zimbabwe or even Germany's Weimar republic as examples of hyperinflation.  Germany's situation occurred after WWI, and Zimbabwe is a third world country.  I'll pick a country with more relevance: Argentina.  Argentina is not a third world country; at the beginning of the 20th century it was one of the richest countries in the world. It is one of the G-20 major economies and is currently considered an upper-income country. In 2001 Argentina's economy melted down (not for the first time either).  Government statistics show their current inflation rate at over 10% but many private analysts tag it more than 15% .    According to an article in the BBC News, "A deep recession foreshadowed economic collapse in 2001. This left more than half the population living in poverty and triggered unrest."  Internet site http://www.tradingeconomics.com/ has a charting tool that spans multiple years.  It shows that in 2001 inflation spiked to over 40%! (See attached chart). Can you afford even a year with everything 40% higher? I can't.

3.  Food Shortages - http://www.dailyfinance.com/ has an article, that is not even a year old, by Bruce Watson where he quotes popular investor Jim Rogers.  Jim says "a severe food shortage is on its way." Jim spoke with CNBC in an article by Antonia Oprita, and said "Sometimes [sic] in the next few years we're going to have very serious shortages of food everywhere in the world and prices are going to go through the roof."  WorldNetDaily's website has an article that states there may even be a government cover-up of a world food shortage.  The article goes on to say that, "Stores have only an average of 72 hours of inventory on hand and very few families are capable of producing their own food, so even a temporary shortage of food supplies could be catastrophic."  This statement recalls to me news footage of empty grocery store shelves hours before a hurricane or storm is scheduled to hit the gulf coast region.  We've seen the footage where everyone heads for the store for food, water, batteries, beer, and whatever else they can grab that is left.

Below is a 6+ minute video from the National Inflation Association (http://www.inflation.us/) that outlines some of their theories on food shortages in our grocery stores.  They believe that not only are food shortages an issue, but firmly believe we will see hyperinflation within a few short years due to the U.S. economic condition. 

On the bright side, we CAN do things to prepare and be ready.  If nothing happens and life goes on, same-old-same-old, then we simply use up the resources we've gathered.  Nothing lost; peace of mind gained.

That Didn't Take Long - What Does it Mean?

The U.S. Dollar is the "world currency", and is the currency oil is traded with; has been for many many decades.  It is estimated that China has about $1 Trillion dollars in reserves in order to purchase oil and other commodities that trade in U.S. Dollars. Russia is likely in a similar position. If these countries don't need the dollar to purchase oil and commodities, they will dump it, and fast. That potentially means a glut of dollars surging into circulation that lower it in value quickly.

Because the U.S. continues to print our money (fiat currency - not linked to any standard since the early 70's), China, Russia, and several other countries have threatened and even encouraged others to drop the dollar as the world currency.  There has been talk of using a "basket" of currencies that include the Yuan (China), the Yen (Japan), and the Euro (though the Euro is also experiencing a lot of trouble due to several Euro-nations huge in huge debt crisis).

What does that mean? It means that the U.S. will no longer be able to sell our supply of U.S. treasuries to pay for our its deficit spending. Of course, QE2 had the Fed creating the money and then using that money to buy their own treasuries! I still haven't figured out the math on that one. Either way, we have no way of paying our debt or paying the interest on our debt.

So what does THAT mean?  It means that they'll have to raise interest rates to gather the money back in.  They'll also have to print even MORE money so they can make the interest payments on our national debt. Bottom line: INFLATION!  Some experts believe it may even lead to hyperinflation.

What does THAT MEAN?  That means we need to prepare so we can still function when bread costs $10 a loaf (or more?), gas is $10 a gallon, and your monthly grocery bill triples or quadruples. 

So what am I suggesting?  Stock up. 

Why am I saying this now?

On November 23rd, in the China Daily News, there was an article that China and Russia have decided to renounce the US dollar and resort to using their own currencies for bilateral trade.  While it is not a wholesale quitting of the dollar from a world-wide perspective, it is two of the more powerful countries making their first HUGE step towards the eventual destruction of the U.S. Dollar, which I believe will have a domino effect on other countries holding U.S. dollars.

Here's just some examples of what I've noticed lately about rising prices.  In some cases these increases haven't hit the consumer yet, but they will once the companies can no longer sustain the losses:

Sugar prices already rising over 70% this year alone
General Mills and Kraft to raise prices due to grain price increases
Rising Corn prices
Cotton going up

Where is the U.S. Dollar Headed?

 Things have really changed in the U.S. economy since 2007.  The real estate we've held has dropped dramatically, cutting into our networth in the hundreds of thousands. I am thankful for a good job that pays me well, but I don't even begin to assume that I'll have that forever.  I've seen some amazingly talented workers get laid off in the last 2 years.  I've watched them struggle to find jobs, make mortgage payments, and many have filed bankruptcy or simply lost their homes.  We've all heard the stories.  The lines at the food banks get longer each week while our country's leaders borrow more in a misguided effort to stimulate the economy.  Most of us know that with our own household budgets, you cut spending when you can't meet your bills; borrowing more simply leads to a bigger fall in the end.

So what do we do?  Do we sit back and passively wait to see what the Federal Reserve and the White House comes up with to try to save our economy?  Or, do we do some legwork of our own to find out what history can tell us about other countries that have struggled similarly?  How did the people survive when their monetary system crashed?  How can we personally avoid adding to the problem and actually become part of the solution?

Just some questions and thoughts that have been on my mind lately.  I'll post more with links to some research I've done of late.  I know that this is not a popular subject.  We all would like life to go on as it has for decades.  I just really don't think that is going to be the case.  I think the next 10 years is going to look dramatically different than the last 10 and I want to be as ready for it as I can possibly be.

Image: Salvatore Vuono / FreeDigitalPhotos.net