Enough with the Quantitative Easing (QE) thingy! We get it, we get it, QE bad, printing bad, Central Banks bad. Get over it!!! Well… at least that’s what we have been told. Unfortunately, we can’t. At least not without a final explanation. We fully understand that you probably do not live in US, EU or Japan and therefore you are not concerned by QE because your Central Bank is not using QE. Unfortunately, this is not good enough and that’s the crux of the matter (so to speak).
Take a second look at the countries / boondoggle we mentioned above:
Notice any similarity? These countries print the three primary currencies the world over regarded as “reserve currencies”. What does this mean? It means that when the Central Bank of Swaziland prints Swazi Lilangenis (yes, that’s the name of their currency), the SZL (as it is abbreviated) is used in the country as a “floating” fiat currency. This means that the SZL is not “linked” to anything other than the say-so of the Swaziland government. However, when a person wishes to exchange SZL for, let’s say USD, then the ratio of SZL to USD will be determined (mostly) by the “reserves” of the Swaziland Central Bank. And what are those mystical “reserves”? the amount of USD, the EUR and the JPY. That’s right. The three usual currency suspects printed by the thee biggest QE players.
And why should you care about this? Because every country needs to import stuff. In order to do so, sellers will demand payment in a currency that it is easy to exchange and more-or-less stable. Chances are excellent they won’t take SZL but they will take USD or EUR. Which means that importers will have to exchange SZLs for USDs in order to import anything. And, as we have seen above, this ratio is controlled by the “reserves” in the Swaziland Central Bank. But these reserves are heavily affected by QE. Now you see the link?
This is but one of the mechanism through which your life is affected by those three happy printing Central Banks.
As the “reserve” currencies are heavily QE’d, this means that every single country in the world is affected by QE. We insist in QE not because it is a local process implemented by local Central Banks, but because their effects are global in nature. Regardless of where you live.
If QE would only affect the countries that practice it, such as high-flying economic mumbo-jumbo and fairy-tale processes going on in Argentina, this would not be a problem…unless you happen to live in Argentina. As most people do not do so, you would be relatively “safe”. However, as this is not the case, you are not safe. You are in danger. As a matter of fact, you are being harmed as we speak.
At an even higher economic level, we can see the feedback loops (positive) that QE creates. These feedback loops are self-reinforcing processes that cannot continue forever. Problem is, these processes are again, global in nature. You must keep in mind that money moves throughout the world quite easily, particularly for the big players. JPY today and USD tomorrow… or the next second. The place where that QE money originated is irrelevant once it crosses the border of origin. Once the money enters the international circuit it is, by definition, international and as such it will affect all global processes.
Sure, the intensity of this effect will vary from country to country, but what are you going to do when faced with 2008 version 2.0? Can you spell cross-cascading defaults? When every bank and financial institution in the world owes something to somebody else and one of them fails, they all fall like dominos. There truly is no place to hide.
And when we say “place” we mean currency. All currencies will be hard hit. What are you going to do when your SZL is not worth the paper used to print it? Or when the Swaziland Central Bank decrees that you cannot take your money out of the bank? Can’t happen? Dream on. It already did. Several times over. The last time was in 2001 in Argentina (if you are interested, search for “Corralito” in Wikipedia).
The problem with QE is that it is toxic waste from few governments being channeled right into your savings. You are already financially dead but you don’t know it yet. Now, this is not to say that should those three countries would to disappear by some sort of miracle you would be better off. You wouldn’t be. Why? Because the next three or four or two will fill the void. You see, international trade is the lifeline of the planet. Stop international trade and what do you have? Argentina. Don’t believe us? Go see yet another politician’s paradise at work.
But international trade requires lubrication and this lubrication is some sort of international currency that all nations can agree upon. Without this currency, trade slows down. Slow trade down and you get stagnation followed by slow death. Don’t believe us? Check what happened to the USSR and its policy of isolationism.
The bottom line is that QE is important because it was, is and will continue to make your life miserable. QE is important because it is practiced by “reserve currency” Central Banks. QE is important because it demonstrates the arrogance of politicians and their democratic systems which would rather sink the entire world in economic stagnation, quagmire and destruction before acknowledging that they have failed and lose their cushy jobs.
That is, unless you are one of such politicians. Then congratulations!!! Just one thing… when the mob comes to hang you from the tallest tree, don’t count on use to protect you. You are on your own.
Note: please see the Glossary if you are unfamiliar with certain words.