Quantative easing – or QE, as it is known – is a monetary policy tactic used by Governments and central banks to stimulate the economy. It’s a way of creating and pumping money into a failing financial system. Why would they do that? So that banks and credit companies can continue to lend money to us, as consumers.
There’s only so many houses to buy but the amount of cash is increasing so in simpler terms, when QE takes place the value of our money is diluted and gradually, it becomes worthless.
We all know that our economy is flagging – it’s becoming stagnant. So QE is all about propping up a dead horse. QE1 happened in England in the spring of 2009. QE2, the second round of borrowing, may have passed you by but it happened in the winter of 2010. And just so you don’t miss the next round, QE3, will probably begin shortly after 2nd August, 2011.
The Bank of England creates the cash and buys Government bonds with it. It’s a loan agreement, with interest, and the bond is given as surety. The Government gets the money but then has to buy back the bond at a certain date at a certain price. So the Bank of England creates some money and lends it to the Government at interest. The Government then gives that cash to other banks to bail them out – at no interest – so that they can lend it to us as consumers. At interest. This is not a good deal for the Governement and it’s not a good deal for us either.
So why will QE3 happen shortly after 2nd August? Because of the amount of debt the USA is carrying and the fact that they’ve maxed out their credit cards. Their parliament – Congress – passed a bill saying that the USA could not borrow over and above a certain limit and unfortunately that ceiling, or ‘cap’, was hit on May 16th, 2011. The figure – 14.294 trillion US dollars. That’s $14,293,975,000,000! Sums that big are hard to comprehend. Their borrowing agreement has been re-negotiated and the ‘cap’ has been raised 74 times since 1962!
The challenge the US faces is that one of two things has to happen. Either (1) Congress agrees to borrow more money or (2) America will default on its loan repayments.
And why does this bother us here in England? The old rule of “when America sneezes England catches a cold” applies because we are now part of a globalised economy. What bothers them, bothers us.
So, either a) the USA can reduce spending or b) they can increase borrowing or c) they can acknowledge their situation and default. Either way, the tipping point happens on the 2nd August 2011. And as our economies are so closely linked, our taxes will increase (fuel, tobacco, alcohol etc) and spending will decrease too.
What happens if we don’t keep up the payments on our house, car, TV or anything else that we’ve accumulated on credit? Answer – it gets repossessed by those who we owe the money to because they own it, not us. It’s exactly the same with entire countries that are in debt, like the USA and the UK.
Is it really that bad? That the US has to borrow money to pay the repayments on the existing debt? They’re borrowing to pay a debt? Yes, it’s that bad and if you don’t believe me then read this on the BBC website or this on the Daily Telegraph website. There is actually a website dedicated to the amount of US debt!
Moody’s, the credit rating agency has said that as average spending (minus interest) outpaces the US income by about $118 billion a month and as it won’t be able to pay all the country’s bills, the USA will lose their AAA credit rating. And that’s when the dominoes start to fall.
So how can you defend yourself from the fall out and how could you possibly profit from this situation? By taking yourself out of the credit loop and buying the oldest safe haven there is – Physical Gold and Silver. It was money far before paper money came along and will be the traditional store of value far after any particular paper currency has collasped.
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