Quantative Easing- Europe Fires The Big Bazooka

[sound 25]

In the rarified world of numismatics this may seem unimportant. However the U.S. & UK response to the Great Depression led to an increase in asset prices in the emerging acconomies as well as hard assets such as coins and stamps, throw in commodities as well.

In fact, generalising, high grade British coins shot up in value by 75% to more between 1998 to 2014.

Now Europe has surprised on the upside with its contribution to head off inflation. Just as the coin market was starting to look a little tired will this provide the next leg up in prices?

Thoughts?

Mark

[Rob 3,152]

Probably, but for all the wrong reasons.

[hazelman 44]

I get really concerned with Quantative Easing - I see it as another way of telling me everything I own has been devalued

[sound 25]

I get really concerned with Quantative Easing - I see it as another way of telling me everything I own has been devalued

True, but look at it another way, everything you owned was deflated, QE just reflated it. A bit like the emperors new clothes, as long as no one is looking it's ok.

Rob your right in one sense, but if it caused new money to chase prices, it must be a genuine increase. Work that out.

Mark

[Rob 3,152]

Not so much that what you own is devalued, rather that the going rate for it should increase in price - only if it doesn't increase has it been devalued. If the physical assets remain constant and the money equating to those assets becomes a bigger number, then it follows that the prices of those items should increase to take account of the additional money in circulation. If the money supply has been expanded and some prices don't increase, then prices of other assets must rise proprtionally more to compensate. Cue an above average increase in the price of 'safe' assets. People involved in areas of the economy which see no upward movement in prices are effectively being devalued.

The idea of increasing the money supply to kick-start the economy is a red herring. Even if banks aren't willing to lend to smaller businesses, there are sufficient numbers of individuals with large amounts of capital sitting there doing little and looking for a greater return. Those assets are held by business savvy people who would provide some capital if the idea was a good one. The lack of dynamism in the economies of the world is not due to a shortage of capital, more the reduced returns available due to the internet and global economy. It is very difficult to set up a business providing a premium product generating above average returns because business models can be easily copied, and there is sufficient manufacturing capacity installed for a competitor to rapidly nullify any first mover advantage. The modern world is too efficient to provide the large returns necessary for wholesale private investment, despite interest rates being at or around all time lows.

So in answer to the OP, I think that money injected into the economies of Europe is likely to result in an increase in the price of assets that provide diversification, just as it has in the US over the past few years. Coins amongst other things would come into this category.

Edited January 22, 2015 by Rob

[hazelman 44]

Perhaps having a lovely home in Southern Africa whose value keeps reducing in real terms has had a nasty impact on my psych.

[Peckris 579]

I get really concerned with Quantative Easing - I see it as another way of telling me everything I own has been devalued

True, but look at it another way, everything you owned was deflated, QE just reflated it. A bit like the emperors new clothes, as long as no one is looking it's ok.

Rob your right in one sense, but if it caused new money to chase prices, it must be a genuine increase. Work that out.

Mark

They say that without Quantitative Easing, we're heading for deflation. Not a good thought...

[Peter 615]

Jordon (Katie Price) thought deflation is a smart idea.

[Rob 3,152]

Depends on where the inflation lies though. Could be smoke and mirrors. The price of a burger hasn't gone up, if anything it's the opposite. The price of electronic gadgets is constantly reducing even though you are getting more for your money. Thirty years ago, a 286 computer system would cost over £1K. Think what you can get today for £1K. Your phone is more powerful than a 30 year old PC. Adjust for inflation and you really get a lot more for your money. The thing is that there will always be someone ready to undercut another in order to take the business. It's a double edged sword. Too much competition with reduced prices and the wheels come off the bus, leaving you with a couple of major players who had sufficient financial reserves to see them through, plus an awful lot of collateral damage along the way. That isn't good for any economy because in the west, the resulting unemployed are maintained in that position at large and unsustainable expense to the remainder of the workforce. If this was only temporary it would be bearable, but as a permanent fixture it makes the future untenable. There is no exit strategy to this problem from any western politician.

So, it all depends on where the inflation is to compensate and more for the many consumer items which are seeing a drop in prices. Witness the huge number of pound shops in this country. They supply items that used to be a couple of pounds to buy. Houses are increasing ever more beyond the reach of many people - boooooooooooo I hear you say. Energy prices until recently were increasing way ahead of inflation - booo. Prices in general increased for anything that was energy intensive such as transport - booo. The exchange rate worked to cause both inflation and deflation depending on which way it was moving. As ever it will be a case of lies, damned lies and statistics. People want things to become more and more affordable, but that's called deflation. People today want instant gratification, so they buy things using finance plans rather than saving up (which is an option in the current benign inflationary environment). That increases GDP but does nothing for their financial security as they are paying more than inflation for the pleasure. We have to be very careful when saying inflation/deflation is dangerous, and as always, a degree of qualification is required.

Edited January 22, 2015 by Rob

[sound 25]

Rob, with the recession prices did 'devalue'. Stocks, currencies, bonds, house prices, oil, and more reduced in value. About the only thing that increased was the dollar.

The smart money was sitting on its hands waiting for the dust to settle. QE did work, and I hate the idea, but as Chris suggests deflation was not a good idea.

I just wonder whether it increased the number of collectors/investors looking for a place to put their cash. Think it might again.

M

[Paulus 1,975]

I have a mint, genuine, 50 Trillion Dollar bank note - any offers?

[azda 979]

50 cent (euro cent)

[Rob 3,152]

Gold went up - the traditional safe asset in times of trouble. Other collectables went up. If the money wasn't safe potentially in a bank, then it got re-allocated to diverse assets in order to spread the risk.

Money is not in short supply and never really has been, just that it has concentrated in fewer hands. You can have as much or as little of it as you like. Print a load and prices rise to accommodate the extra, withdraw money from circulation and prices will fall, or more likely people will return to bartering the assets they already have.

A difficult problem in modern economies is that they are perceived to be buoyant when a lot of people are buying things that they quite patently don't need, and in many instances can't afford. When these buyers stay away, the economy is said to be down in the dumps, but as one who buys things as required assuming I can afford it and is not particularly materialistic, I don't view it as a problem.

[Rob 3,152]

And another consideration is that money is not restricted in movement within most world economies. If this country is posing a relatively large risk to an individual's wealth, you can always sell pounds and buy Swiss francs which a lot of people did to the extent that the Swiss currency rose too high too quickly, thus endangering their otherwise sensible and stable economy. Switzerland's borders are also now quite intensely policed to ensure that individuals are not carrying more than 10000 (?) euros out of the EU to hide away.

There are usually many reasons why an economy is either inflating or deflating, but those wishing to make a political point tend to oversimplify things and just use the crude average to say the economy is either doing well or in trouble. This isn't helpful.

[Peckris 579]

"In the IS/LM model (Investment and Saving equilibrium/ Liquidity Preference and Money Supply equilibrium model), deflation is caused by a shift in the supply and demand curve for goods and services, particularly a fall in the aggregate level of demand. That is, there is a fall in how much the whole economy is willing to buy, and the going price for goods. Because the price of goods is falling, consumers have an incentive to delay purchases and consumption until prices fall further, which in turn reduces overall economic activity. Since this idles the productive capacity, investment also falls, leading to further reductions in aggregate demand. This is the deflationary spiral. An answer to falling aggregate demand is stimulus, either from the central bank, by expanding the money supply, or by the fiscal authority to increase demand, and to borrow at interest rates which are below those available to private entities."

I don't see much about that that is positive, Rob. But go on, be Devil's Advocate again!