The term Quantitative Easing refers to a government’s ability to create currency with the touch of a keystroke and is commonly called Money Printing.
This ability to create something for free while the rest of us have to work for it is deemed necessary order for the powers at be (The Federal Reserve) to control the economy. That the economy can be controlled by a central body is a subject for another day but the issue of money creation brings into play many market dynamics.
On my last Money Matters show entitled “You Print, I Print”, I detailed that when governments print dollars, it causes the number of dollars in the economy to increase. Much like a bumper crop of bananas, increasing the number of bananas causes the price of bananas to fall. The same goes for dollars. Increase the number of dollars and the price of each dollar falls. This “fall” in the price of the dollar is exhibited thru its loss of purchasing power and we know that as inflation.
This inflation is currency specific however and means that more US dollars cause the price of something to go up only in US Dollars.
But what happens to the price of goods when measured in other currencies?
Since currencies can be arbitrarily created by willing governments, the measuring stick for the value of each currency is essentially other currencies. They are, for the most part, measured against each other. Hence when the US dollar goes down in value, the Swiss Franc most likely goes up.
A product bought using US dollars may rise in price while the same product purchased in Swiss Francs may fall.
This inverse relationship of currencies has a unique effect when it comes to exports (what we sell to foreigners) and imports (what we buy from foreigners).
If the US prints more dollars and thus causes inflation HERE, our currency gets weaker, making our imports more expensive. But conversely, it makes our exports cheaper to foreigners.
By printing more dollars, our corporations make more money because they sell more overseas but it also causes you and me to pay more for everything we buy.
For you conspiracy buffs out there, if the government was for the corporations, by the corporation, and of the corporations, a money printing propensity would seem to confirm this and this is what our government seems to be hell-bent on doing, printing money like there’s no tomorrow.
By printing more dollars, our corporations do sell more, but since this inverse relationship works against a foreign currency as well, their goods then get more expensive causing foreign corporations to sell less to us.
These foreign corporations then go to their governments and demand they print their currency as well, to keep up with our printing. They, in turn, weaken their currency by printing so their goods get cheaper again, and grand “tit for tat” encompasses monetary policymakers worldwide.
It all adds up to a grand money-printing race, with the US being the leader as it is the largest consumer of goods in the world.
In essence, when the US embarks on massive money printing to fund itself, it forces the rest of the world to do the same. In a grand race to devalue each other’s currency against the others so everyone’s corporations sell more, the populace of each nation is doomed to higher prices caused by all those created dollars.
In conclusion, the US is the biggest importer in the world but is also the biggest exporter by exporting its inflation through its massive money printing machine. The result of all this is everyone on the planet ends up paying higher and higher prices while the corporations make out like bandits.
“Watching the markets so you don’t have to”
(As mentioned please use the below disclaimer exactly) THANKS (Regulations)
This article expresses the opinion of Marc Cuniberti and is not meant as investment advice, or a recommendation to buy or sell any securities, nor represents the opinion of any bank, investment firm or RIA, nor this media outlet, its staff, members or underwriters. Mr. Cuniberti holds a B.A. in Economics with honors, 1979, and California Insurance License #0L34249. His website is moneymanagementradio.com, and was recently voted Best Financial Advisor in Nevada County. 530-559-1214.