Quantitative Easing – That You Should Know

Quantitative EasingQuantitative easing (QE) is a monetary policy of the Central Bank is used to stimulate the economy when monetary policy is no longer effective standards. Central bank implements quantitative easing by purchasing financial assets in the manner specified number of commercial banks or other private institutions, thus raising the price of financial assets and lower yield, and at the same time increase the monetary base (money supply).

This is different from the usual policy of buying or selling short-term government bonds that aim to establish the value of inter-bank lending rate at a specific target.

Expansionary monetary policy (easing) to stimulate the economy is usually carried out by the Central Bank by way of purchase of government bonds with the aim of lowering short-term interest rates in the short term. However, when short-term interest rates already close to or reaches zero, this method can not work anymore. QE can then be used by the authorities to stimulate the economy further by buying long-term assets, thereby decreasing long-term interest rates further.

Quantitative easing can be used to help keep inflation in order not to fall over again at the bottom of the target. This policy is often seen as the final step in an effort to stimulate the economy.

The purpose of QE is to increase the money supply rather than to lower the interest rate can not be lowered anymore. However, if the Central Bank also purchases financial assets are more risky than government bonds, it can cause a decrease in the yield of the asset.

QE will only be applied if the Central Bank has control over the currency used by the country concerned. Central banks in the euro zone countries as a whole cannot take action to increase the money supply so that the policy should be set by the European Central Bank (European Central Bank – ECB)

History of Quantitative Easing

before 2007

First implemented quantitative easing by the Bank of Japan (BOJ) to fight deflation in early 2000, began on March 19, 2001 Bank of Japan for several years, even until February 2001, states that “quantitative easing” was not effective, and refused to implement the monetary policy. The BOJ has set short-term interest rates at zero level since 1999.

With the QE, liquidity flooded commercial banks to support lending to the private sector, and lead to excessive reserves. BOJ achieve this by buying more government bonds than required for setting interest rates at the zero level. BOJ then do also purchase securities with collateral assets (asset-backed securities) and extend the term of the purchase program.

BOJ to raise commercial bank account balance of 5 trillion yen to 35 trillion yen (approximately $ 300 billion) over a period of four years starting in March 2001, the BOJ also increase the number of long-term Japanese bonds that can be purchased per month.

After 2007

After the events of the global economic crisis in 2007 – 2008, a similar policy has been adopted by the United States, United Kingdom, and the euro zone. Quantitative easing implemented by countries such as the short-term nominal interest rates are at or near zero. In the United States, this rate is called the federal funds rate, in the United Kingdom called the official bank rate.

At the height of the financial crisis of 2008, the Central Bank of the United States and United Kingdom implementing quantitative easing as a monetary policy that aims to get out of the financial crisis.

THE EFFECTIVENESS OF QE

According to the International Monetary Fund (IMF), the QE policy implemented by the Central Bank of developed countries since the financial crisis of 2008 contributed to the decrease in systematic risk (systemic risk) that occur after the bankruptcy of Lehman Brothers. The IMF also stated that these policies contribute to the restoration of market confidence and the release of the G7 economies from the lowest point in mid-late 2009.

Economist Martin Feldstein argues that QE2 (quantitative easing phase 2) the cause of the rise in the stock market in mid-2010, which resulted in economic growth in the United States in late 2010 Former Federal Reserve Chairman Alan Greenspan calculated that since July 2012 there has been little influence on the economy. Jeremy Stein Federal Reserve officials said that the policy of quantitative easing asset purchases massively large role in supporting economic activity.
Economic Impact of QE

Quantitative easing could lead to a rise in inflation is higher than the targeted amount of easing in the event of excessive and too much money is created by way of purchase of assets.

However, there is the possibility of failure in achieving the goal of QE if the banks remain tight in lending to consumers and businesses. However, QE can impact yields lower. However, there will be time lag between monetary growth and inflation; inflationary pressures with respect to monetary growth caused by QE may occur before the Fed acts to anticipate. Inflation risk will be reduced if the economic development of the system exceeds the speed of increase in money supply due to easing.

When the factors of production in the economy grew because of the increase in the money supply, the value of the currency unit can be increased, even though the currency is available in large quantities in the circulation. For example, if the economy of a state to output at a rate equivalent to the amount of debt, inflation pressure can be neutralized.

This will only happen when banks issue loans, rather than precipitating his money. In a period of high economic output, the Central Bank always has the option to restore the backup level to a higher level by increasing the interest rate or other means, thereby effectively reversing (neutralize) easing measures that have been taken.

Increasing the amount of money supply tends to weaken the exchange rate of the country’s currency relative to other countries, through the interest rate mechanism. Low interest rates led to a lack of foreign interest against the currency, resulting in a flow of capital out of the country, resulting in the weakening of the country’s currency.

This brings advantages for exporters in the country, and low interest rates will also benefit the borrower, because less interest to be paid. But otherwise bring harm to the creditors as yields obtained from fewer loans because interest rates are low. Currency debasement is also bad for importers, as the cost of imported goods is higher due to the devaluation of the currency.

South East Asia’s Eye on African Investments

Asia was one of those regions that profited from the opportunities of investing in Africa. It’s countries took early leads of doing business from the emerging continent. The most notable Asian country was China. The Sleeping Giant is currently enjoying its affair with Africa. They are gaining while creating rooms for growth among Africans by creating jobs. They’ve got investments in several sectors, the largest is on infrastructure. Middle East countries and those from other corners of the world’s largest continent are also spiraling their way to the Black continent. They became aware of what African needs and what they will get from it. By now, Asian countries were the most informed of the investment opportunities in Africa.

South East Asia and Sub Saharan Africa were two regions being always compared when it comes to their economy. Now, both areas are showing eagerness to progress, and their efforts are being paid off. Each regions are supporting each other shoulder to shoulder. By making more investments, especially in Africa, they are both ahead of better days.

One of those South East Asian country that has prospects in Africa is Singapore. Just last month, 31 Singapore-based firms cooperated in a business affair in the said continent. $66 million worth of deals under negotiation is what they brought home. The country become envious of what China has become because of their investments in Africa. Asia’s Lion city is eying the oils and minerals in Nigeria and other business sectors in South Africa and Ghana.

Malaysia is also a South East Asian country that has established good business relationship with Africa since 1990s. In fact during that time, both parties showed end up with very notable increase on their trade and investment sectors. Now, they are reviving what has transpired between them before. Just like many other nations, they are investing in Nigeria. Several Malaysian plantation companies are thinking of investing in the Black continent of the similarity of its soil condition with Europe. The country is thinking of expanding their oil palm sector, through the help of Nigeria. Malaysia, Indonesia and Nigeria were the top three largest palm oil producer in the world.

And speaking of Indonesia, they also have an eye at Africa. Business organizations think that there is a similar climate conditions between them. And so, aside from oil palm, they will also try to develop their rubber plantation industry. They think they have the advantage on the said sector since only few economies have noticed the potential of the region (Africa). Indonesia’s prospect countries were Liberia and Ivory Coast.

Vietnam and Algeria also have a good connection. The two countries are cooperating to boost energy production. This is after they agreed in a partnership between the Vietnam National Oil and Gas Group (PetroVietnam) and Sonatrach, an Algerian state energy group.

Other countries with and will do investment in Africa are Laos, Brunei,and Thailand.

Gold Investments

European Central Banks renew sales pact and Boost Gold

Europe agreed to renew their pact to cap sales of gold for another five years causing gold prices to boost.

This reaffirmed gold’s status as a key reserve asset. Also, the new Central Bank Gold Agreement reduced the maximum amount of gold that can be sold by the signatories.

Under a new deal to replace the current five-year pact, the limit for sales has gone down to 2,000 tons from 2,500 tons. Annual sales are now capped at 400 tons, down 25% from 500 tons – a quota that was not reached in recent years.

Gold sales were first capped by European in 1999 in an attempt to reduce market volatility. Their agreement to prevent markets being flooded with the gold has been an important factor in its rally over recent years.

Because of the recent economic plummet, gold’s status as a safe-haven asset has also helped boost the price of gold.

The new deal and its tighter sales quotas help cement a view that the days are over of central banks’ anti-gold stance and the kind of big sales announcements – notably by the Bank of England at the end of the 1990s – that led to wild swings in prices.

The World Gold Council welcomed the new deal. “The announcement is a clear endorsement of gold’s role in today’s global economic and financial architecture and a reflection of the success of the previous Central Bank Gold Agreements,” said chief executive, Aram Shishmanian.

“The agreement to limit the sale of gold over the five-year period to 2,000 tons demonstrates that, at a time of continued market volatility and inflationary fears, gold’s unique investment qualities provide the necessary hedge and protection that central banks are seeking.

“The reduction in the annual ceiling on sales … reflects an acknowledgment of the fact that the central banks’ appetite for sales is diminishing.”

Investing in the US

In the worst financial crisis since the great depression, the U.S. government has responded with $13.5 trillion in pledged or potential outlays. Meanwhile, rising unemployment and slumping corporate profits are crimping the U. S. Treasury’s tax revenue.

Because the credit worthiness of the U. S. government is raising concern, it’s no surprise that the eagerness of foreign governments and investors for dollar-denominated investments has diminished.

The dollar’s standing as the world’s de facto reserve currency is impaired. Nations are looking to diversify their foreign exchange reserves away from the dollar and showing a liking for gold. The combination of liquidity circulating through the U. S. economy and a tanking dollar stokes inflation. Gold is being sought out as a safe-haven by investors who sense the threat of inflation.

Gold Price Outlook

Gold is once again approaching the psychologically important $1,000 per ounce mark. Rallies in the price of gold have peaked in the $900-1,000 per ounce range three times since the start of 2008. I believe gold will crack the four-figure mark in 2009 and move on to exceed its 2008 highs. Given the state of the U. S. economy and the monumental challenges ahead, the $1,000 per ounce figure can well become a support or floor for a long time to come.

TFSA vs. RRSP

The Federal Government introduced the tax free savings account in their last budget. Basically any Canadian citizen over the age of 18 can open an account and is allowed to deposit $5,000 per year. Any unused portion of the $5,000 in a given year can be carried forward. The account has no impact on RRSP yearly contribution eligibility. All income earned by the funds in the account are tax free and can be taken from the account at any time.

RRSPs have been the most widely used form of saving for retirement. People like you and I blindly scramble towards the end of February each year to purchase RRSPs from our bank or financial planner so that we can get a small tax break. The majority of people investing this way do not have any idea what their RRSPs are actually being invested in. In many cases when the funds actually do show a return, that return sits idly in the RRSP account and is not put back to work earning more dollars for the investor. Many people are in for a shock when they retire as taxes can reduce the face value of the RRSP account by as much as 39%. Imagine planning to have a million dollars to carry you through your retirement years only to find out that after taxes you actually have $610,000. The other consideration that one must look at is the fact that the RRSPs are usually purchased with after tax dollars and those same dollars are taxed again when the account is liquidated.

Bankers are programmed to sell RRSPs and are generally quite good at it. They however, have failed miserably in selling the tax free savings account product. The returns offered on tax free savings accounts by the banks are nominal at best and in many cases just cover the bank fees on the account. A number of investment companies offer products with higher yields and should be considered as a legitimate alternative.

The best way to compare RRSPs to the tax free savings account is by way of an example:

The client has decided to invest $5,000 per year for the next 5 years at which point the investment will be cashed in. The rate of return for both products is 7.0%. The example assumes that the client will reinvest yearly earnings. The tax rate used is 39%.

RRSP TFSA
Year 1 $5,350 $5,350
Year 2 $11,075 $11,075
Year 3 $17,200 $17,200
Year 4 $23,754 $23,754
Year 5 $30,767 $30,767

Taxes on the RRSP balance will be $11,999 leaving the client with $18,760 for his 5 year investment of $25,000. As there is no tax on the tax free savings account the ivnestor will have $30,767 from his $25,000 investment. One might argue that the tax deduction created by purchasing an RRSP should be part of this equation. However, then one would have to calculate the initial income tax paid to earn the investment funds. These numbers basically cancel each other out.

The bottom line is that the federal government has provided Canadians with a way to accumulate tax free dollars. In order to take full advantage of this product the general public will have to consider alternative investments offered by private investment companies.

Tips For Investing in Silver

Investing in silver is popular way chosen by many people to hedge against inflation and build up a strong portfolio. However, there are several things to know about investing in silver. Though it is a precious metal like gold, the market characteristics are very different. It is best to do your homework thoroughly before entering the market.

Different forms of silver investments

Silver bullion is the most traditional way of investing. If you want to physically own the silver, you can opt to buy silver bars or coins. The bars are flat rectangular pieces of the metal which come in different sizes ranging from 1 troy oz bars to 1000 troy oz bars. You can store these bars in the safe of your home or at the banks. These are far easier to buy than gold bars.

Another type of silver investment is coins. You can purchase the Canadian Maple Leaf or the American Eagle coins as a part of your investments. But it is better not to aim at old and rare collector’s coins because you will find it difficult to both buy and sell. The value of a coin is determined by the value of the intrinsic amount of silver in it.

It is much more convenient to buy silver exchange traded fund or ETF. The largest silver ETF is the iShare silver trust.

Silver Certificates show how much silver you own on a paper. They are easy to store, buy and sell.

Swiss banks allow you to have silver accounts. You can buy and sell silver on these accounts rather like foreign exchange.

ETF and Silver bullion are the best options for silver investments, but you should know that in the USA, if you own a silver item for over a year, it is considered to be collectible. So, any gains that you make from selling it will be taxed at a far higher rate. So, bullion may not be suitable for the long-term investment if you are looking to invest in silver over a long period of time then silver ETF would be the better option.

Facts about investing in silver

Silver prices are much lower. So, they are far more accessible to the ordinary investors than gold.

The amount of silver bullion actually traded in the market is far less than gold. This increases the risks of investing in silver.

The price of silver is far more volatile than gold and it changes quite drastically in response to demand and supply. So, the silver market is less stable than gold.

In many countries, gold enjoys a special tax status but silver does not. For example, in the European Union, trading in gold bullion is exempt from VAT but not silver.

Though the price of silver generally follows that of gold, it is regarded as a less effective protection against inflation than gold.

Silver investments may be quite suitable for people with limited funds who are looking for an assured profit, provided you follow the standard safeguards in buying and selling.