Economic Crisis

A giant global fraud that could destroy your wealth (Part I of II)


Do you have any money saved in US dollars? Or euros, British pounds or Japanese yen? Or any currency at all? Do you own any developed country government bonds or bond funds, directly or in your pension fund? If the answer is yes, then you need to understand the giant global fraud that could destroy your wealth.

This fraud is official and out in the open. But it’s the way that it’s being perpetrated…and the dishonest way it’s explained to the public that is deeply misleading. To understand this fraud we have to venture into the dry and academic world of monetary policy and central banking.

Hello? Are you still there? (The wind whistles and a piece of tumble weed rolls across the article…)

Look I know “monetary policy” and “central banking” sound dull. I practically fell asleep at the keyboard when I was typing the words. But like a great many things in finance and investing they are meant to be dull and inaccessible. The less that ordinary people like you and me understand about them the easier it is for us to be ripped off by politicians and their central banker stooges.

Here at OfWealth our aim is to explain important but complicated things in and easy to understand way. So take a deep breath, gird your loins (whatever that means), and join me in unravelling the biggest lie of the modern age.

Oddly, this giant lie has been sitting in plain sight, figuratively speaking. It’s been a core policy across the USA, UK, Europe and Japan over the past four years.

But it’s wrapped up in such dry and confusing language that few people have the will or the ability to work out what it really means. Unless you understand it then the value of your savings and investments could be at serious risk.

I’m talking, of course, about “quantitative easing”, or “QE” for short. (Yawn, stretch…are you still with me?)

Wikipedia’s entry explaining QE begins like this:

Quantitative easing (QE) is an unconventional monetary policy used by central banks to stimulate the national economy when standard monetary policy has become ineffective. A central bank implements quantitative easing by buying financial assets from commercial banks and other private institutions, thus increasing the monetary base.

OfWealth translation (in plain English): When all else has failed, and the government of a bankrupt country is really desperate, it instructs the central bank to print money for the government to spend, so it can stay in power. The central bank does what it’s told, so that it doesn’t lose its “independence”, but comes up with a fancy name and a complex process to hide what is really going on. It then buys government bonds by the bucket load, which creates artificial demand and raises bond prices, which means bond yields are reduced. This means the government can borrow new money at lower interest rates than before. But the best part is that the huge amount of bonds owned by the central bank itself are effectively interest free loans, since interest received is paid back to the government.

Phew! Did you get that?

Of course QE isn’t presented to the public – you and me – in that way. We’re far too stupid to understand. We should just trust that the politicians and central bankers know what they are doing. We shouldn’t worry our little heads about the technical details.

The official line is that QE provides stimulus to the economy. There may even be some truth in that. When bond yields are forced lower the cost of borrowing is reduced across the whole economy. Many loans are priced using the “risk free rates” (ha!) of government bond yields for reference.

…countries that are already drowning in debt need more debt like a fat man needs another triple cheeseburger with bacon.

So the cost of mortgages falls, and corporate loans, and car loans and so on. People and corporations spend less on interest costs and have more to spend. Or they go even deeper into debt. But countries that are already drowning in debt need more debt like a fat man needs another triple cheeseburger with bacon. It’s unlikely to be good for their long term wellbeing.

With interest rates being manipulated downwards asset prices of all kinds tend to rise (or fall less than they would have done). House prices are supported. Share (stock) prices rise. This is supposed to create a “wealth effect” that also stimulates spending by the people, usually on things they don’t need.

But that’s unlikely to work. At a global level 82% of wealth is in the hands of just 8% of the population, according to the Credit Suisse Global Wealth Databook 2012. The distribution is similar at individual country levels, it’s just the average wealth goes up or down depending on the country.

In other words, QE benefits the rich, who see the prices of their assets rise. And yes, a few of them may go out and buy a new Ferrari or an even more tastelessly large house. (Why do so many rich people feel the need for so many bathrooms? Are they in a permanent state of excitement or something? But I digress…)

The fact is that once you take away all the smoke and mirrors QE is about printing money to fund government spending. Argentina is a country famous for its economic mismanagement. But at least the government there has a more transparent way of going about this. The central bank prints new money, hands it straight to the government, which then spends it on buying votes.

The giant global fraud that could destroy your wealth

QE is Argentine monetary policy put into a smart suit and shiny shoes and headed to a cocktail party. But no matter the clothes, it’s still the same crazy person wearing them. Mr. Money Printing.

And Mr. Money Printing always ends up in a drunken heap at the end of the night, which is thoroughly embarrassing for his hosts, Mr. and Mrs. Vote Buyer. In fact one of the other guests, Mrs. Burnt Fingers, has already sworn never to come to any more parties if she has to put up with Mr. Money Printing’s impolite behaviour.

Governments that use QE have created a highly dangerous set of circumstances which could tip them over the edge.

So why is QE dangerous for you? Because it exists, and because there may be no safe way to exit from it. Governments that use QE have created a highly dangerous set of circumstances which could tip them over the edge. I’m talking about the real possibility of debt defaults and currency collapses on a global scale that has never been seen before.

The ensuing chaos would destroy massive amounts of wealth. I’ll look at the problems of exiting QE in part II, and what you can do to protect yourself.

Stay tuned OfWealthers,

Rob Marstrand

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Rob is the founder of OfWealth, a service that aims to explain to private investors, in simple terms, how to maximise their investment success in world markets. Before that he spent 15 years working for investment bank UBS, the world’s largest wealth manager and stock trader with headquarters in Switzerland. During that time he was based in London, Zurich and Hong Kong and worked in many countries, especially throughout Asia. After that he was Chief Investment Strategist for the Bonner & Partners Family Office for four years, a project set up by Agora founder Bill Bonner that focuses on successful inter-generational wealth transfer and long term investment. Rob has lived in Buenos Aires, Argentina for the past eight years, which is the perfect place to learn about financial crises.