I´m feeling a bit sick after watching the news, seeing Hurricane Mathew crossing Haiti making a huge mess, killing lots of people, then heading on towards Florida. The reporter saying...
Now we have seen 8 years of zero interest rates and QE that didn´t really solve anything but instead just created more and bigger economic problems. We have seen fake economic recoveries due to the fact that they are manipulated with the help of these different stimulations made by the central banks. When some of the central banks saw that their stimulus didn´t work they took it one step further and went to negative interest rates. Now the negative interest rates have been a fact for over one year and that didn´t help, one can only wonder what the next step will be. Of course they will try a little bit more and powerful versions of what has been tried in the past years, perhaps pushing the negative interest rates even further down and make a bit larger QE programs will help?
After all, there has only been “created” around 12.000.000.000.000 $US in the world since 2008, perhaps that’s not enough. Maybe there needs to be added a Zero or two…
Once it goes up to the people running the economies that this wasn´t the correct medicine for the disease, new “medicines” will be tested.
What will be the next monetary stimulation program?
What the central banks will choose to be the next try in their crazy experiment to keep the economy alive can only be speculated in. There is one interesting idea that I heard about for the first time a year ago or so called “helicopter money” or “helicopter drops”. Compared to real helicopter drops where the helicopter come and deliver necessities for survival the idea here is to deliver money to households so the economy can survive. I have a hard time believing this will be the step to be taken, but it is certainly an interesting idea.
How does the stimulations work?
So the idea for lower interest rates is that it will be cheaper to borrow money and therefore more people will borrow greater amounts of money. Since it is so cheap to borrow, people will borrow to buy things that they can´t afford today and then pay for them later often divided over many months or even years. Things like cars, vacations, TVs, furniture, clothes or anything that we might want right now instead of waiting until we can actually afford it.
The idea with QE is to give banks the ability to lend out more money by increasing their liquidity.
The idea for negative interest rates is to force the banks to lend out more money since they will have a negative interest rate on their accounts at the central banks.
This forces banks go out and lend out more money to more people and also place more money in markets and eventually create bubbles.
All these stimulations haven´t helped and only made the problems worse than they were from the start, but maybe the next stimulation will work better?
The idea of helicopter money
So the idea helicopter money is a bit interesting, and in the first stage similar to QE but instead of “giving” the newly created money to banks it would be given to the households. This sounds crazy but it would be a better alternative than what has been done previously, giving the money to the banks have only created asset bubbles in sizes never seen before. So imagine that the central bank would print money and then give every adult in the country say the equivalent of 10.000€. What would happen next is up for guesses but one thing is pretty sure, more money would be spent in the economy. It will cause boosts in sales in most sectors I guess and that would make businesses to hire more people. Inflation would rise since there are now a lot more cash in circulation and people feel they can afford to spend more so the velocity of money transactions will go up, causing more inflation. Asset prices will most likely rise since some people would use the money to invest with instead of just spending it.
Then at some point it will come to an end because sooner or later people will have spent all the free money. Perhaps some have gotten used to “the good life” and over spent a bit with credit cards and new bank loans.
And so we´re back where we started, with the economy in even deeper shit than it is in today.
Stimulations = Manipulation?
To me all this stimulations that is going on feels more like manipulations. The central banks are the ones that control the money of a country and if they can print as much as they want of it trying to prevent the markets from going down, isn´t that manipulation?
Interfering with the natural cycles that has been going on for thousands of years. Eventually this will end in some way.
All this “Stimulations” sounds totally crazy to me, if we just take some steps back and look at the bigger picture I think most people would agree that it looks and sounds insane.
How the economic machine works
One of the worlds greatest investors Ray Dalio have made an animation video to explain how the economic machine works. I really recommend you to watch it because it is a very important thing to atleast undestand to some extent.
Passive income together