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QE and how it effects YOU!

Discussion in 'Financial Cents' started by VisuTrac, Sep 15, 2012.

  1. VisuTrac

    VisuTrac Ваша мать носит военные ботинки Site Supporter+++

    I'm going to attempt to explain how all this nice Quantitative Easing (in the US and by the ECB in the Eurozone) in an easy to understand visual.

    Your favorite neighborhood bar serves 1 dollar 12 oz drafts. this bar is in the desert and there is no water nor beer available to anyone except at this bar.

    they order a Keg of Shiner Bock.
    after a few days about 1 gallon has been sold.
    The bar owner (the fed) announces that they are going to institute QE (qualitative easing ;) ) They add a gallon of water to the keg and still sell the drafts for a buck.
    they continue to sell the beer until another gallon is sold .
    They have another QE and add a gallon of water to the keg.
    and continue to sell the beer for a buck.
    The patron complains that the beer seems weak.
    the bar doesn't care, It's making more money and they are the only place to get it.
    After about a month the bar has added 5 additional gallons of water to the keg and continues to sell it by the glass at a buck a pour.

    So at the end of the month, the bar owner has sold 7 gallons of beer (diluted).
    The bar owner is raking in the profits.
    And the bar still has a full keg.
    The patrons are getting less beer and more water for the same price.

    How long can the bar owner (fed) keep this going?

    The answer is. Until there is no more water to add to the keg.
  2. Pyrrhus

    Pyrrhus Monkey++

    Really, the fed could keep creating an infinite amount of money. However, each dollar that is created (I say created instead of printed because most of it is electronic) that is created to buy bonds is worth less than the dollar created immediately prior to it. At some point, people would stop demanding dollars and they would be truly worthless. People would barter, use other countries' currencies, use PMs, etc. There is plenty of historical evidence to support this (see Wiemar Republic or more recently, Zimbabwe).

    The above scenario breaks down because there is more "beer" available in the form of other currencies and barter. It's not far off though.
  3. Pyrrhus

    Pyrrhus Monkey++

    One thing that everyone should be aware of is the M2 money stock and how it relates to (nominal) Gross Domestic Product. In economics, P=MV, where P is the nominal Gross Domestic Product, M is the M2 Money Stock, and V is the Velocity of money. During the last 5 quarters, ending Q2 of this year, GDP has gone up and the velocity of M2 has gone down. This means that the money stock (M2) has to have increased in each of those quarters, and increased enough to more than offset the decrease in velocity.

    Since 6 Aug 12, the M2 Money Stock has increased from $10,018.1 Billion to $10,089.1 Billion on 3 Sep 12, an increase of 71 Billion. Now QE3 enters the picture, with the announcement that the fed will buy $40 Billion/month of mortgage-backed securities bonds. I strongly suspect that the money created in order to purchase these bonds will be in addition to the money that is being poured into the economy already. Get ready for continued inflation.
    Cruisin Sloth and VisuTrac like this.
  4. VisuTrac

    VisuTrac Ваша мать носит военные ботинки Site Supporter+++

    Pyrrhus, I was going for an easy to comprehend, no math required example of How inflation of money (beer/water mix) effects the consumer.

  5. Pyrrhus

    Pyrrhus Monkey++

    Well, I totally screwed that up. Sorry.
    VisuTrac likes this.
  6. VisuTrac

    VisuTrac Ваша мать носит военные ботинки Site Supporter+++

    'tis all good. Maybe they'll get drawn in
    then research what the heck M2 is (hint it's not an automatic version of the M1 carbine in this case)
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