Quantitative easing. Using politics to buy the World.

I recently read this on a financial advisory post:
Eoin Treacy’s view:

Simplistic economic models like to imagine that an economy is an island and that all of the money created within it stays within the domestic system. The global economy just does not function that way. Money created by one central bank is globally mobile and will seek the most attractive assets and/or highest yields. The Fed might be tapering the size of its purchases but the ECB has stopped sanitising its purchases and the Bank of Japan is still printing. The next result is that liquidity remains abundant which continues to act as a tailwind for asset price inflation.

This says, to me, that quantitative easing means devaluing your currency by issuing more banknotes; basically iou’s. This means house prices will rise and everything on the domestic market will cost more, as each iou represents a share of that country’s assets, which are fixed.

Put another way, if I have 10 sheep and sell 10 shares in them, then those shares are worth 1 sheep each. If I then sell another 10 shares (essentially fraud), then those shares now become worth half a sheep, so buyers would need to have two share certificates to buy a sheep.

The warning being given is that this only applies to those dealing with my iou’s. If my neighbour had sold shares in his sheep and they were still each worth one of his sheep, then owner’s of his iou’s would not see my sheep as being more expensive.

It means that financially my currency is weaker and his is stronger.

If your Gov’t has been printing money then prices of some goods may have risen out of your reach but the rise will not be as much as if the only people buying the goods were also from your country.
In terms of businesses, it means that your costs will rise but your sales will fall and you may have to sell your business more cheaply than you’d have done so, before your Government had cheated everyone.

In such a situation, a foreign company, with surplus cash, might see your selling price as dirt cheap, compared to what he could buy at home. So foreign companies buy into businesses in countries with a weaker economy, knowing that their own politician’s will eventually also start printing money, making those foreign assets more valuable.

That’s why several year’s back, British companies were gobbling up American companies and now American companies are gobbling up British companies and why everyone (notably Germany and Russia)  is gobbling up Greece, Italy, Spain etc.


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