Are you paying attention to the Federal Reserve?
Realtors, be warned. The Federal Reserve announced that it will begin drawing back the bond purchasing program called Quantitative Easing. This is extremely important for us Realtors to know and understand because; this will have a dramatic impact on buyers or those considering buying a home. Let me explain.
In the past few years, we have seen traditionally third world countries see a huge growth in development. For example, did you know that Mexico is now one of the worlds largest producers of aircraft? Yeah, I didn’t know that either but, it’s true. In fact, countries Africa may be one of the continents with the largest expansion of unprecedented wealth. South Africa, Nigeria, Angola, Ghana and Ethiopia were all named 2013’s countries to watch and invest money in due to rapid expansive growth. So, you may be setting back and wondering, what does these countries have to do with Mr. Jones’s property down the street….well, just keep reading.
The growth these countries have been seeing has been unprecedented and I wanted to know how this was all happening so, I did some research and found that it’s in large part due to the US Federal Reserve. The Quantitative Easing policy of the Federal Reserve has been blazing a trail for the other central banks across the world by essentially manufacturing trillions of US Dollars to buy bonds and drop interest rates around the world. By doing this, the US Federal Reserve has made it easier and more attractive with larger returns to allow investors to move money into third world countries. Investors like those large retirement firms that hold the cash of American retirees. Ok…..so, are you seeing it now, are you starting to understand where I am going? If not, no worries, just keep reading.
So this week, the Federal Reserve announced it was going to draw back and end Quantitative Easing in 2014. It will taper off the amount of purchasing it does monthly and in effect, buying less and less bonds. So, in other words, you are going to see less developed countries that saw huge developments in the past two years begin to have much less cash flow coming in. You will even see Investors pulling out of these countries because, instead of developing more sound political and economic infrastructures with governmental policies, these countries did what any other country would do when they all of a sudden were rich from a windfall, they partied like it was 1999. In short, these countries will not be prepared for the withdrawal of funds and will do one of two likely scenarios. Either they will simply watch their country “ease” back into third world status or the will put in place protectionism policies that will strangle further growth and severely limit investors from moving cash out of the country. In essence, locking up American retiree cash in a third world abyss. I predict that the first two quarters of 2014 will see dramatic cash pull out of third world countries, currencies and, bonds. This will be the start of a mini global recession due to a lack of demand for goods and services.
If that isn’t enough, let’s not forget about inflation. Oh yes, the big bad “I” word. Inflation is the elephant in the room that most people are trying to desperately ignore. Even the Federal Reserve stated that the QE (Quantitative Easing) drawback would have to be timed perfectly to negate the real risk of inflation. In fact, the Federal Reserve said that the reason it’s thinking of doing this drawback now is because, they believe the timing is correct. Now, how they come to that decision, I don’t really understand but, it’s primarily based on the ideology that our economy is growing and the country if financially doing better as a whole. Well, try telling that to the 53% of Americans who are on some form of government assistance right now.
So, just a quick note on inflation, we get inflation when we have too much money in the system. In short, when everyone has a tone of dollars, how much is a dollar really worth? Well, it’s not worth much if everyone has them. So, it takes more dollars to make a gallon of milk or loaf of bread and thus you have inflation. Remember me talking earlier about all those trillions of dollars that the fed has been pumping out into buying bonds….well, those trillions of dollars have got to go somewhere and guess where they are likely to go, right back home, here in the good ole USA. In fact, we are already seeing it happen. Why do you think the stock market has been on FIRE, lately. Those dollars are coming home to roost. When all that cash starts looking to escape Mexico, Rwanda, Honduras, South Africa, Angola, etc… it’s going to all come here and the value of the US Dollar will start falling. In fact, the dollar has seen some of the most recognizable loss of value against the Euro since 2011. Back then, 1 Euro was worth 1.29 dollars, in August of this year, it was worth 1.33 dollars and right now, as of today, it’s worth .73cents. Are you stumped? It took years for the euro to rise .04 cents from 2011to 2013 but, it only took months for it to lose almost half its value…wonder why? You know why, I just told you, all of those dollars….those trillions of dollars through the Federal Reserve QE program is coming home and like any bubble, it’s got to bust at some point. The Federal Reserve is gambling that our economy will be strong enough to handle it when it does but, I am not so sure.
When this bubble burst, it will mean run away inflation and we as a country aren’t ready for that. 2007 will pale in comparison and in fact, I have read many analysis say The Great Depression will pale in comparison. Unfortunately, it isn’t like we are navigating uncharted water here. This has happened before around the world just ask the Weimar Republic….or what used to be the Weimar Republic.
Go visit this wiki site, http://en.wikipedia.org/wiki/Weimar_Republic about the Weimar Republic and then ask yourself, do you now understand how this will impact Mr. Jones’s house down the street?
