Monday, September 17, 2012

Quantitative Easing – What it Means For Us?

By Jordan Eliseo

LJ Financial Group
17th September 2012

The share market in Australia closed at a 3 week high on Friday, buoyed by news from the USA where Federal Reserve President Ben Bernanke kicked off another round of money printing (called quantitative easing). Whilst the market anticipated more stimulus, the announcement was nonetheless extraordinary in that it put neither a time limit on how long they will print money for, nor how many dollars they will eventually print. In essence, he opened the door for perpetual money printing. In this article, we look at whether or not this announcement really is good news for the economy, for the markets, and for us?

In terms of exactly what policy actions were enacted last week, the Federal Reserve committed to purchasing $40 Billion worth of mortgage backed securities every month (i.e. debt backed by houses) until at least the end of the year. Relative to previous versions of Quantitative Easing, this amount of money is actually quite small, but it was the following statement which was of most importance. Bernanke stated:

“The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved.”

Essentially, this statement opens the door to perpetual money printing, as unlike the first 2 versions of quantitative easing, this announcement has neither an end date nor a fixed dollar amount.

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