QE

The hottest words on the planet at the moment - Quantitative Easing. For a novice like myself, it means printing money. For experts in our Government, it means re-capitalization of our failing banks in a less than direct way - the Central Bank (Bank of England or ECB or Fed depending on where you are living) will purchase gilts (government IOUs) and commercial papers (private IOUs) from the failing banks. The sellers can then use the extra fund to strengthen their balance sheets and therefore enable them to lend again. The Central Bank can generate the fund needed for the purchases either from foreign investors (called borrowing) or by pressing a button on the computer (called QE).

No one can be sure if QE will work to save an economy deep in recession as it is not anything new but had been tried many times in the past, most notably by Japan in the 90s and Zimbabwe since Mugabe.

The argument for QE is that it will inflate away the huge amount of debts we have accumulated. As we are unable to repay the debts, inflation becomes the only viable option to get rid of them. Furthermore, we are a lot smarter than Mugabe. We will constrain the inflation to 2% and won't allow it to run wild by increasing the interest rates once it gets any near to our 2% target.

Smarter or just fanciful, I'm not sure. By keeping the inflation to below 2% simply won't be enough to inflate away the debts. We will be carrying not only the same amount of old debts but also new additional debts created as a result of QE. We would need double digits inflation if we were to inflate away our debts. Obviously, if this is to happen, you can safely throw away your leather wallet and buy a few of these bags instead.

One analogy comes to mind is this:

We have maxed out our credit cards. The standard of living we are used to cannot be sustained through borrowing anymore.

Option 1: Work harder. Get 2 or 3 jobs if necessary. Forget the overseas holidays. Dine out in McDonald instead of the fancy Japanese restaurant. Forget the nightclubbing, watch TV at home with your kids. If we can do that, we will be gradually repaying our debts. It's not easy and it is extremely politically unpopular to the point that no politicians will have the gut or will to push through a policy like this. It calls for massive increase in productivity while at the same time administrating a substantial pay cut in order to regain our competitiveness globally. It will also mean higher taxes so that we have enough to maintain the essential public services.

Option 2: Apply for another credit card. In normal circumstances, the application will be turned down because our existing credit cards are already maxed out. But this is exceptional time and the Banks are under enormous pressure to lend, to issue another credit card to us. Without the new credit facilities, we won't be able to spend. And if we don't spend, the economy will go into a downward spiral.

In order to encourage the banks to issue another credit card to us, the Government has injected fresh capital into the banks in the form of bail-out money and lowered the cost of money through numerous interest rate cuts.

But the Government soon found out that these actions weren't enough to convince the banks. As a last resort, the Government turn to "inflation". Inflation is a powerful tool to vaporize money, whether it's debts or savings or pensions. The Government doesn't give a damn to you savers & pensioners out there. If you save your money in a bank and don't spend it, it's bad for the economy and therefore should be penalized. If you have debts, whether as a result of gambling or stupidity, you should be rewarded or at least saved.

DOW was making new lows today. Plenty of trading opportunities. I'm not trading as often as before. FTSE needs to go above 3,730 before it has a chance to recover.

Ending Balance: €103,000