Fundamental on how money is created.Guide towards financial literacy

US politicians take financial markets back to the edge again

The battle royal between the Republicans and Democrats over the extension of the US debt ceiling above $14.3 trillion, or a historic 100 per cent of GDP, reaches its conclusion this week.

Markets will fall as the debate heats up and brinksmanship takes over. But equally predictable is the rally when the politicians make a deal, rather like the eurozone crisis of the past few weeks and months.

High stakes

However, what is at stake is far more than the need to secure enough funds to stop the US federal government running out of money and a debt default on August 2nd.

A government debt of more than 100 per cent is a classic alarm signal. It is only right that this is debated in a public forum and the issues aired now.

For above 100 per cent a country’s bond market will begin to raise interest rates to slow debt accumulation down. It does so for good reason.

The debt is now so big that servicing the interest starts to become impossible without borrowing even more. So borrowing is needed to finance borrowing and the debt starts to balloon.

As the debt inflates so does the money supply and consumer price inflation and the unit of currency devalues. That is why gold and silver priced in US dollars are jumping in price and gold is at another all-time high.

Importantly for investors there is no easy solution for politicians to vote a solution. Raising the debt ceiling gets us past August 2nd but it achieves little else.

1970s deja vu

The inevitable denouement remains. To ArabianMoney it looks like becoming a more intense version of the stagflation and dollar weakness of the 1970s.

You therefore have to position your asset allocation to profit from this and not in such a way as to lose from it as most investment classes that performed well in the past will undoubtedly do.

For legal reasons we cannot give specific investment advice on this website. We keep that for our monthly investment newsletter, the only independently produced one from Arabia, and not surprisingly the subscription levels are rising as this crisis develops 

NB : Directed from link : http://www.arabianmoney.net/gold-silver/2011/07/25/us-politicians-take-financial-markets-back-to-the-edge-again/

QE3 - What is it?

What is QE3? Quantitative Easing 3

What is QE3? A fair number of news organizations have been talking about QE3.  What is the possibility of QE3?  How will rating agencies react in the event of the QE3?  Will the value of the dollar decline if Congress approves a QE3?  Does Congress have to approve a QE3?  Is QE3 just an attempt to monetize our problems away?

Monetize is a catch all for adding money to the economy.  Contrary to popular opinion, the Fed does not create money out of thin air.  It is either printed on linen pulp paper or created with the aid of a very tangible  computer.  Somebody works very hard typing  $ and 0s, which creates value.

But what is QE3?  And for that matter what are QE1 and QE2?

The short answer is QE3 stands for Quantitative Easing (round) 3.   The Federal Reserve can stimulate the economy using any number of tools.  Quantitative easing is just one of them.

The Federal Reserve can  lower the interest rate.  If the rate is lower, then banks will be more eager to lend money to other banks.  If the rate is zero or .25% above zero then it is time dig a little deeper into the tool box.

What is QE1- the Wall Street Bailout.  The stock market is falling the stock market is falling.  Sometime during the summer and early fall of 2008 the free hand of the market got burned.  It stuck its hand into “complicated financial instruments that only a few people in the world understand” and got badly burned.  The Central Bank rushed in with socialized burn cream.

What is QE2- An ocean liner.  Which stands for Queen Elizabeth II.  (Oh, that’s the other QE2…)  Right after Halloween in 2010 the Federal Reserve decided that the US economy was not growing fast enough.  It was growing…but not fast enough.  Unemployment was hovering over 9%, a few hundred banks had failed since 2008, the price of gold had soared, homeowners were underwater.  Things were ok, but the Fed decided to give the recovery a little boost.  So, they  bought Treasury Bonds.  Lots of them.  And unlike QE1, QE2 didn’t have any specific goal in mind— So yes it was a success.

What is QE3- Well, nobody knows for sure yet.  Maybe the Federal Reserve will buy more Tbills. Or maybe they will bailout banks again.   Or maybe the Fed will, oh what the hell.  Nobody expects the US will ever pay back $14 trillion.  So, go ahead raise the debt ceiling. What’s another trillion or two?  Go ahead Moody — downgrade our credit rating.  QE3 will work, you’ll see!

NB : Directed from link : http://afreakshow.com/2011/06/what-is-qe3-quantitative-easing-3/