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wanaquant
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Joined: May 12th, 2012, 1:19 pm

The risks of quantitative easing

May 27th, 2012, 8:23 pm

Today, the Head Director of the Tunisian Central bank was replaced for not accepting to follow the government plan. The new government wants to make use of quantitative easing to boost the economy. However, we are already running a 6% inflation and food prices had almost doubled comparing to the last year.I watched a short 5-min video of the new Central Bank director, and he said nothing technical. He also seemed to me a jerk, and the gov. advertised him as a very savvy and high profile economist. The gov. also replaced the statistics bureau director, and after 2 weeks that new director came up with a 4% GDP growth and a decrease in unemployment (although as someone running a business, things look otherwise).Is it time to run for the bank? Can I expect hyper-inflation? What should I do to prevent damage on my property? What are the possible consequences?Edit: In the last few months, the USD jumped from 1.4 to 1.6 against the local currency.
Last edited by wanaquant on May 26th, 2012, 10:00 pm, edited 1 time in total.
 
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McWulf
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The risks of quantitative easing

May 28th, 2012, 6:42 am

In theory at least, if you fear QE then you move your savings into a non-QE currency which will be stronger as with the USD example you show. But life is never that simple. In the UK, there is little evidence of QE leading to inflation. But what has happened is that interest rates and bond yields have fallen substantially, and the victims have been people retiring and buying annuities at vastly reduced ratios. So the government had been blamed for taking money from pensioners to prop up banks (from whom the new money was ued to buy government debt).Not sure what you should do about your property. Again, the hedge against falling currency would be to sell it, put the money into a USD account and use the interest to pay for rent. Then buy it back again when the trend reverses at a fraction of the value you sold it for!
 
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MattF
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The risks of quantitative easing

May 29th, 2012, 2:41 pm

You should take on debts (mortgages, bank loans) in Tunisian Dinars then watch them get inflated away. Remove all your savings and convert to some other asset.
 
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Edgey
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The risks of quantitative easing

May 29th, 2012, 3:52 pm

Is the quantitative easing used to buy government debt or non-government debt? If the former then QE is just an accounting trick. If the QE is used to buy non-government assets then as long as the previous owners of the assets do not try to withdraw their money from the central bank then there is no inflation. As soon as someone tries to claim some of the money then it has to be printed, and you get inflation.
 
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wanaquant
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The risks of quantitative easing

May 29th, 2012, 5:32 pm

QuoteOriginally posted by: EdgeyIs the quantitative easing used to buy government debt or non-government debt? If the former then QE is just an accounting trick. If the QE is used to buy non-government assets then as long as the previous owners of the assets do not try to withdraw their money from the central bank then there is no inflation. As soon as someone tries to claim some of the money then it has to be printed, and you get inflation.I think it's the worse of it all. They'll be financing social projects (houses/pensions for the poor).
 
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Anthis
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The risks of quantitative easing

May 29th, 2012, 7:43 pm

QuoteOriginally posted by: wanaquantQuoteOriginally posted by: EdgeyIs the quantitative easing used to buy government debt or non-government debt? If the former then QE is just an accounting trick. If the QE is used to buy non-government assets then as long as the previous owners of the assets do not try to withdraw their money from the central bank then there is no inflation. As soon as someone tries to claim some of the money then it has to be printed, and you get inflation.I think it's the worse of it all. They'll be financing social projects (houses/pensions for the poor).I dont find it really bad. Whats the marginal propensity to save and consumptions for the poor? Whats the money velocity in the economy?
 
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yugmorf2
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The risks of quantitative easing

May 30th, 2012, 12:09 am

For QE to really be a motor for generating inflation one also needs a fair dose of low central banking credibility. Non-independence of the central bank is probably a minimum condition, along with clear intent to fund government budget deficits with created money. Low monetary depth (in poorer countries, the ratio of broad to narrow money is much lower), might also aid the inflation process (relates to Anthis' point on velocity). QE hasn't delivered high inflation in the like of the UK and US because in such countries they have some 30 years of inflation fighting credibility up their sleeves that they justifiably don't want to throw away (unless things get considerably worse on the ground - such as a larger breakdown of financial system than we've seen to date).Any of this apply to Tunisia?
 
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gardener3
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The risks of quantitative easing

May 30th, 2012, 3:03 pm

The point of QE is to raise inflationary expectations.
 
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wanaquant
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The risks of quantitative easing

May 31st, 2012, 12:01 pm

QuoteOriginally posted by: AnthisQuoteOriginally posted by: wanaquantQuoteOriginally posted by: EdgeyIs the quantitative easing used to buy government debt or non-government debt? If the former then QE is just an accounting trick. If the QE is used to buy non-government assets then as long as the previous owners of the assets do not try to withdraw their money from the central bank then there is no inflation. As soon as someone tries to claim some of the money then it has to be printed, and you get inflation.I think it's the worse of it all. They'll be financing social projects (houses/pensions for the poor).I dont find it really bad. Whats the marginal propensity to save and consumptions for the poor? Whats the money velocity in the economy?It's very small amounts of money (think $60/$40) so they are probably going to spend them all on basic utilities.
 
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wanaquant
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The risks of quantitative easing

May 31st, 2012, 12:12 pm

QuoteOriginally posted by: yugmorf2For QE to really be a motor for generating inflation one also needs a fair dose of low central banking credibility. Non-independence of the central bank is probably a minimum condition, along with clear intent to fund government budget deficits with created money. Low monetary depth (in poorer countries, the ratio of broad to narrow money is much lower), might also aid the inflation process (relates to Anthis' point on velocity). QE hasn't delivered high inflation in the like of the UK and US because in such countries they have some 30 years of inflation fighting credibility up their sleeves that they justifiably don't want to throw away (unless things get considerably worse on the ground - such as a larger breakdown of financial system than we've seen to date).Any of this apply to Tunisia?Well, the thing is Tunisia can't finance its imports. There is a very serious trade deficit, and the abroad currency reserves ($6bn) are depleting fast. If the trade deficit (around $0.5bn/month) carry on, then we'll run out of cash in a year or so. Worse, there is debt that needs repayment and one can't know which bond will mature and what's its size; also some investors have the right to withdraw cash and their assets is around $2.5bn.So if a snowball effect began, everything could collapse faster than anyone could thing. S&P downgraded us recently to non-investment grade and also downgraded several Tunisian banks.Regarding your question, credit cards are barely used and accepted. Business trust and use cash a lot more. Checks are being rejected by many businesses due to fraud.
 
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Traden4Alpha
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The risks of quantitative easing

May 31st, 2012, 12:32 pm

If Tunisia's debts and import contracts are denominated in TND, then QE's inflation will help. To the extent that Tunisias debt's and import contracts are denominated in foreign currencies, then QE's inflation will hurt. QE seems more likely to trigger those callable bonds, too. But if Tunisia's economic situation worsens, then those bonds might get called anyway.
 
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wanaquant
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The risks of quantitative easing

May 31st, 2012, 1:40 pm

QuoteOriginally posted by: Traden4AlphaIf Tunisia's debts and import contracts are denominated in TND, then QE's inflation will help. To the extent that Tunisias debt's and import contracts are denominated in foreign currencies, then QE's inflation will hurt. QE seems more likely to trigger those callable bonds, too. But if Tunisia's economic situation worsens, then those bonds might get called anyway.We have a good amount of foreign debt in foreign currencies. Callable bonds might still be triggered for flattening foreign currency reserves and S&P downgrading. I'll be managing things locally to avoid possible wealth destruction, but I'm now thinking if I can leverage the situation to make money instead.
 
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Edgey
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The risks of quantitative easing

June 1st, 2012, 3:21 pm

QuoteI'm now thinking if I can leverage the situation to make money instead. Then follow MattF's advice
 
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spacemonkey
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The risks of quantitative easing

July 6th, 2012, 5:53 am

QuoteOriginally posted by: McWulf...But life is never that simple. In the UK, there is little evidence of QE leading to inflation. ...Is this some kind of a joke?
 
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McWulf
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The risks of quantitative easing

July 10th, 2012, 12:51 pm

QuoteOriginally posted by: spacemonkeyQuoteOriginally posted by: McWulf...But life is never that simple. In the UK, there is little evidence of QE leading to inflation. ...Is this some kind of a joke?Wasn't meant to be. I'm talking about the current programme of QE, which may or may not be causing inflation.