Saturday, January 24, 2015

Grasping QE

This week has probably been one of the most dramatic episodes in EU history (note, the EU hasn't been around that long, so don't get excited).

The EU banking arm finally came out and said that it's up for Quantitative Easing (QE).  Explaining QE?  Well....this central banking structure of the EU makes a decision to get all central banks across the EU (each country has them) to invent money (it's best not to ask how this will occur), then turn around and buy bank bonds across the European landscape.  By buying the bonds.....the banks who originated the have free loan out.  Then people have a chance to buy into this free money via credit.  The idea would be that a company could broaden itself by asking for a 500-million Euro loan to buy another company.  Or at the personal could find a housing loan at a much better rate.

The end-result?  It basically pushes the dollar back toward the original parity that existed upon to one.  It hasn't been that way for over ten years.  At one point....the weak dollar was .63 to one Euro.  In effect.....if you found a great twenty-thousand Euro car, and had a chance to buy it while an'd be talking about over thirty-thousand dollars to buy the car.

The better way?  The McDonald's menu dinner.  For what you'd buy in the would have been roughly $4.99.  Getting the same deal in Frankfurt?  Roughly $5.90 if you bought the Euro to purchase the same dinner.

Yesterday, the rate slide to .86.....a shocking change for an American who got used to the lower rates of .70 for a number of years.

Now, what does it do for Americans?  It means European items start to get cheaper.  At the parity of one to one?  A guy might find an interesting hotel in Wiesbaden  that is suddenly affordable to buy. A guy might find a steel industry worth investing into.  A guy might find property in Hamburg worth investing into.  It opens big doors.  It also closes big doors.....with cheaper American products now NOT so cheap.  A German used to take 1,500 Euro and do a major vacation in the US.  To do the same type vacation now?  He'd have to pull out 2000 Euro.

Yeah, in a couple of ways, it hurts the US.  We got used to the slanted deal and standard policy for the Bush administration.

Does it invent problems down the line?'ll mean some Americans showing up and buying businesses....which some Germans might not be happy about.  Will too many bonds be bought?  No one can say.  Will too much credit be pushed around society in Europe and invent a new bubble?  No one can say.

For now, I'd say QE will be around for the next ten years, and we will see the Euro move by the end of 2015 to one-to-one.....with it possibly even going to 1.1 or 1.2 by the end of 2016.  In effect, a real shocker for Americans who've messed with the Euro for the past decade.  You might actually be able to buy that $4.99 McDonalds menu dinner for $4.60 eventually here in Frankfurt.

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