What is Quantitative Easing?
Today's entry is simply a look at a term...QE, or Quantitative Easing. We keep hearing the financial whiz’s on TV speak of this process by our government so it led me to ask… What the hell does that mean? In simple terms...once you get to the end of the rope on lowering interest rates (can't go past zero percent of course) you are left with Quantitative Easing. This is an action taken by a government to manipulate the monetary supply by crediting itself "extra" money or, in essence, they "print more money" (these days it's just done electronically). They then take those funds and buy government bonds, mortgage-backed securities, corporate bonds, etc. This adds liquidity to those markets and takes those assets off the hands of the banks and turns them into cash for them to loan out to stimulate the economy...hopefully. Unfortunately, so far banks have been hoarding cash to offset the massive defaults in their loan portfolios. What's the opportunity here? Well, the negative effect of increasing the monetary supply too much can be inflation or hyperinflation. Right now we are deflationary so it seems unlikely in the short-term but if the long-term effect is inflation you would look to hedge against it with... real estate of course! Wouldn’t you want a fixed 30 year mortgage at 4% when inflation hits? Your payments are FIXED while your rental income is rising with the rise in goods and services.
