We have heard about the Quantitative Easing 2 and the printing of money has began (thanks to wise guy for the correction). What are the reasons that the US government would want to do that? I rarely share my opinions on economic affairs and this is one of the rare moments. To put things into the right perspective, I am not trying to argue that my point of view is correct. In fact, I am okay if I am wrong. And to make things interesting, I called it my own conspiracy theory. Enjoy:
#1 – Boost liquidity to spur economic recovery
This is what most people would agree with. The reason for QE2 is to inject US$600 bn into the capital market and help ailing businesses with liquidity. Hopefully they can recover. In my opinion, I am not buying this reason as much as others.
#2 – Reduce Trade Deficit with China
[Free Ebook] How should you invest your first $20,000?
We asked 14 Singapore finance bloggers to share what they would do if they could go back in time and invest their first $20,000. They can no longer rewind time, but you can learn from their experience and hopefully start with a better footing.
US has been importing more than it exports to China. Hence, there is a widening trade deficit. US has added pressure on China to raise Renminbi to maintain a healthy balance on their exports. When RMB rises, the demand for Chinese goods would reduce, and hence, trade deficit can be kept under control. So far, China has refused to concede to the request and only allowed the RMB to rise slightly. With an uncooperative China, US can print more money and devalue the USD. In a way, this would make buying Chinese goods more expensive, and slow the imports to US.
#3 – Reduce Debt Obligation
China is the major holder of US Treasury Bonds in the world, about US$900 bn worth. With QE2 and devaluation of USD, it would be cheaper for US to redeem their bonds from China, Japan and other major holders of US bonds. A cheaper way to reduce the mounting US debts.
What may happen with QE2?
#1 – Inflation, prices of real assets would rise
With increased money supply, there will be more money chasing the same amount of goods. Hence, prices of real assets such as commodities and properties would rise. To prevent hot money from coming into China and Singapore, both government have introduced measures to cool the property market.
#2 – Rise in demand for gold and silver
When the world’s reserve currency devalues, many people would convert their dollars to gold or silver to preserve purchasing power. The increased demand will drive the price of these precious metals.
Above are just my conspiracy theory. But I do intend to position myself accordingly.