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QE3 Is Stealing Your Money

September 14, 2012 | About:
The term "quantitative easing" has a pedantic ring to it. Few people who are not economists have any idea what it really represents.

Those who have invested in stocks over the years might see the cheers for QE3 as misplaced if they think of it as they do the stock dividends they may have received in the past. I’m not speaking about the quarterly or semi-annual cash payments many companies distribute.

Here is the way they are described by Investopedia:

useruploads1097249092.jpg

Here is my explanation using a theoretical example:

XYZ Corp has 1,000,000 shares outstanding.

XYZ trades for $10 per share.

XYZ’s market value equals $10,000,000.

Let’s assume no change in the actual total value of XYZ Corp over time.

XYZ declares and pays a 5% stock dividend [SD1].

XYZ now has 1,050,000 shares and would be worth $9.5238 per share.

XYZ declares and issues another 5% stock dividend [SD2].

XYZ now has 1,102,500 shares outstanding and is worth $9.0703 per share.

XYZ declares and pays a third 5% stock dividend [SD3].

XYZ now has 1,157,625 shares outstanding and is worth $8.6384 per share.

An original holder with a 1% position in XYZ owned 10,000 shares at $10 worth $100,000.

After SD1 they would have owned 1% of XYZ or 10,500 shares at $9.5238 worth $100,000.

After SD2 they would have owned 1% of XYZ or 11,025 shares at $9.0703 worth $100,000.

After SD3 they would have owned 1% of XYZ or 11,576 shares at $8.6384 worth $100,000

You might feel like a bigger player with more shares but your net worth and percentage of the company is unchanged from when you held just 10,000 shares.

The extra shares you received were offset by the smaller piece of the company that each new share represented.

The three stock dividends neither helped nor hurt shareholders of XYZ if you ignore the legal costs involved in the process.

198537995.jpg

The quantitative easing version of this would be stated this way:

An original holder with a 1% position in XYZ owned 10,000 shares at $10 worth $100,000.

After QE1 they would have owned 0.952% of XYZ or 10,000 shares at $9.5238 worth $95,238.

After QE2 they would have owned 0.907% of XYZ or 10,000 shares at $9.0703 worth $90,703.

After QE3 they would have owned 0.864% of XYZ or 10,000 shares at $8.6384 worth $86,384.

QE programs by the Fed are doing exactly this same thing to the value of all previously issued dollars.

The Fed is diluting out your ownership interest in the U.S. dollar but without giving you anything to compensate you for the smaller piece of the pie you now hold.

In the real world this is called theft.

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.gurufocus.com/peter_lynch.php
http://www.TalkMarkets.com
http://www.MutualFunds.com

Visit Dr. Paul Price's Website


Rating: 3.6/5 (30 votes)

Comments

LwC
LwC - 2 years ago
Yawn…More tripe from a guy who can't keep his extremist right wing opinions in his pants while in polite company.

Not that I consider myself to be polite company LOL, but presumably most of the readers here are polite.

Dr. Paul Price
Dr. Paul Price premium member - 2 years ago
LwC,

A quick glance at the falling worldwide value of the $US versus other currencies confirms that QE3 is stealing from all Americans by making everything imported cost more.

Gasoline set a new all-time high (for this calendar week) at over $4 gallon on average nationwide.

Food prices are shooting upwards sharply as well.

A weak $US is a bad thing for everybody but exporters and some multi-national companies with high percentages of non-US sales.

batbeer2
Batbeer2 premium member - 2 years ago
Technically, the government cannot steal from you by devaluating the currency. The cash was never yours to begin with.

You'll notice this when you try to burn a pile of what you consider to be "your" cash. The government won't allow it. Neither will they let you "make" money.

A banknote is nothing but an IOU from government that people pass around.

The good news: The government has no alternative but to accept their own IOUs when it is time to pay taxes. Hand them back their own (worth less?) IOUs and be content.

Just random thoughts.

vgm
Vgm - 2 years ago
Paul,

You're doing no more than repeating in simplistic form what Buffett has been preaching for a few years now, and which is explicitly detailed in his Aug 2009 NYT op-ed piece entitled 'The Greenback Effect'. It's worth re-reading in light of QE3.
HDeffebach
HDeffebach - 2 years ago
How can you say:

"A weak $US is a bad thing for everybody but exporters and some multi-national companies with high percentages of non-US sales."

Does not a strong export manufacturing base create jobs- so not just the export company but all those that work for that company will benefit? Has not China benefitted enormously by an artificially low currency supporting its export engine.

Finally, as noted above, the dollar is fiat currency. Its easing may be bad policy (which I think, if controlled, will not be destructive), but to call it theft is hyperbole. If you don't like the actions of the fed, you are perfectly free to own other currencies.
Dr. Paul Price
Dr. Paul Price premium member - 2 years ago


HDeffebach,

Unfortunately, pretty much all major central banks are now printing. All fiat currencies are facing a dire fate.

U.S. exports are just a fraction of imports. That's why America always runs trade deficits. Helping exports will provide less help than the harm that the extra cost of imports imposes on the overall population.

superguru
Superguru - 2 years ago
thats why smart investors are in gold. :-)
HDeffebach
HDeffebach - 2 years ago
If "pretty much all major central banks are now printing" then how can you argue any net change to the value of the dollar? The devaluations will net across currencies. Further, if all currencies are devaluing, then a "dire fate" is unlikely as the marketplace of available currencies is entirely polluted.

You conclude, without support, that increasing exports is negated by imports and that easing policy is more destructive than helpful. We will see. I tend to think that we are buying time until we can (hopefully) fix the idiotic stalemate in washington and address our deficit in a fashion that does not destroy growth.

As to gold as a smart investment, why did gold go up on QE3? If major currencies fail, good luck carrying that gold down to the local bakery to buy some bread (read Lords of Finance for the last gold induced panic). Gold is not a bad place to store value during instability, but it is no panacea either as it is not immune to inflationary bubbles or devaluation due to more attractive assets.
LwC
LwC - 2 years ago
Dr. Price,

Alan Abelson, in his column in this week's Barron's, expresses my sentiment quite nicely:

"Perhaps the biggest thing the Fed's new approach has going for it is that a sizable number of Wall Street's most celebrated strategists, and Dr. Paul Price, have given it thumbs down. Rumor has it that some of these critics may even have pondered the new easing wrinkle for more than two seconds."

Well, I added the "Dr. Paul Price" part for comedic effect. I couldn't resist the dig.

But more seriously, I was going to point out your apparently contradictory statements in this thread about the relative value of currencies but HDeffebach beat me to it. And did it in a more articulate and polite manner than I might of BTW.

And yes you are correct that the dollar over time has been going down relative to a basket of other currencies. Here's an interesting graph that illustrates it quite nicely:

http://en.wikipedia.org/wiki/File:U.S._Dollar_Index.png

But, so what? During the period shown in the graph the US economy on average has functioned quite nicely and a lot of people, including yourself, have done quite well. The fact is that inflation and monetary "debasement" have almost forever been a fact of life. They have occurred in the good ole USA since even before the Republic was established, during periods of central banking, no central banking, silver standards, gold standards, no standards, Republican controlled government, Democratic controlled government, mixed party controlled government, set exchange rates and flexible exchange rates, and on and on.

Instead of whining about it, why not just invest accordingly? After all, it really isn't difficult to generate investment gains that meet or exceed the average inflation rate over time, is it?. Surely that's been your own experience.

Good luck.

Dr. Paul Price
Dr. Paul Price premium member - 2 years ago
You probably will not still be singing that same tune when gasoline costs you $15 - $20 /gallon and your grocery bill doubles.

Those who have things of real value will stop trading them for fiat money.

Re: Other currencies are also devaluing...

It's all relative. The now unlimited duration, $85 billion per month (total), QE program will push the US dollar down faster than it would have been sinking without Bernanke's insane and ineffective new program.
LwC
LwC - 2 years ago
LOL, did you even look at the graph linked to that URL I posted?At the very least you would have noticed the…

Oh what the heck. Forget it.

But, true to form, you've ducked another question: Have you generated investment gains that on average meet or exceed the average inflation rate over time?

"Bullshit is unavoidable whenever circumstances requires someone to talk without knowing what he is talking about. Thus the production of bullshit is stimulated whenever a person's obligations to opportunities to speak about some topic exceed his knowledge of the facts that are relevant to that topic." - On Bullshit, by Harry Frankfurt

paulwitt
Paulwitt - 2 years ago
"Bullshit is unavoidable whenever circumstances requires someone to talk without knowing what he is talking about. Thus the production of bullshit is stimulated whenever a person's obligations to opportunities to speak about some topic exceed his knowledge of the facts that are relevant to that topic." - On Bullshit, by Harry Frankfurt

The above quote reminds me of the controversy over TARP

So the President, Vice-President, Congressional Senate and House Leaders, Fed Chairman, and Treasury Secretary all come out and say we have an emergency and we need to pass TARP. Some members of Congress disagree - so it takes two votes to pass TARP.

Looking back, who was right about TARP? And on what basis were they right?


BTW I supported TARP

LwC
LwC - 2 years ago
AFAIK most economists on both the right and the left agree that without the bailouts things would have been a lot worse. But I don't consider myself knowledgable enough about the issue to opine any further, except to point out the obvious fact that it's not possible to turn back the clock and do a rerun without the bailouts and compare the two outcomes.

IMO those who did and still do dispute the benefits of the bailouts have the advantage because there's no way to prove to them that it would have been worse.

Anyway, since you found some applicability of the quote that I excerpted from On Bullshit, you might be interested in the rest of that paragraph:

"Bullshit is unavoidable whenever circumstances requires someone to talk without knowing what he is talking about. Thus the production of bullshit is stimulated whenever a person's obligations or opportunities to speak about some topic exceed his knowledge of the facts that are relevant to that topic. This discrepancy is common in public life, where people are frequently impelled--whether by their own propensities or by the demands of others--to speak extensively about matters of which they are to some degree ignorant Closely related instances arise from the widespread conviction that it is the responsibility of a citizen in a democracy to have opinions about everything, or at least everything that pertains to the conduct of this country's affairs. The lack of any significant connection between a person's opinions and his apprehension of reality will be even more severe, needless to say, for someone who believes it his responsibility, as a conscientious moral agent, to evaluate events and conditions in all parts of the world."

paulwitt
Paulwitt - 2 years ago
LwC: Here's a hypothetical. Let's say you are a congressman from district 4444. You sit on the agriculture subcommittee. You must vote on TARP in 3 days. How would you have voted and what is your reasoning?

LwC
LwC - 2 years ago
Sorry Paulwitt, but I'm not going to take the bait. I really don't know enough about it and frankly I just don't care at this point since the bailout is a fact of life. As I pointed out above, we'll never know what the outcome would have been in a different scenario.

Good luck.

"Quid, Me Anxius Sum?" - Alfred E. Neuman

shb600
Shb600 premium member - 2 years ago
Amazing that you can be so against having a dollar that actually holds its value. Why should someone be forced into risky investments just to hold their purchasing power? As far as measuring the dollar against a basket of other currencies, the dollar can hold it's value against other currencies and still lose purchasing power because of inflation. Btw there were long periods of time when the dollar was not debased. As Charlie Munger once said about investing "It's not supposed to be easy. Anyone who finds it easy is stupid." If you bought the S&P 500 in 2000 you are down after inflation even at record or near record highs. Always seems easy at the highs, not so easy when the market is down 50%.
LwC
LwC - 2 years ago
You're quoting Munger. I'm quoting my experience. You like to cherry pick Munger quotes; well I can do that too:

“I remember the $0.05 hamburger and a $0.40-per-hour minimum wage, so I’ve seen a tremendous amount of inflation in my lifetime. Did it ruin the investment climate? I think not.”

Please follow this link and scroll down to the graph labeled Inflation-Adjust Data (for the S&P500) and the table labeled Annual Averages per Decade.

http://www.simplestockinvesting.com/SP500-historical-real-total-returns.htm

Note that the average Real Total Return for the 60 years from 1950 to 2009 was 7%. hint: Real Total Return means the return achieved after adjusting for inflation.

In the table, note the average inflation for each decade. See how low that hurdle is? if you don't think you can generate investment returns that equal or exceed the average inflation as shown in the table without taking on outsize risk, maybe you should reconsider your investment strategies.

Since you like Munger quotes, you might consider taking these to heart:

"Acknowledging what you don't know is the dawning of wisdom."

"Recognize reality even when you don't like it - especially when you don't like it."

"I'm not entitled to have an opinion unless I can state the arguments against my position better than the people who are in opposition. I think that I am qualified to speak only when I've reached that state."

”I try to get rid of people who always confidently answer questions about which they don’t have any real knowledge.

”You want to be very careful with intense ideology. It presents a big danger for the only mind you’re ever going to get.”

Good luck.

shb600
Shb600 premium member - 2 years ago
The chart from simpleinvesting.com was good. Apparently you didn't look at it because it showed investors have no return for the last 12 years after inflation. Most investors do far worse because they by into fads and hot sectors and sell at the bottom. People shouldn't be forced to take risk in order to retain their purchasing power. They've already earned that money once. Why should they be forced to take additional risk that they may not understand or want just to retain what they've already earned? Because politicians run trillion dollar deficits every year and promise things to people that we can not possibly afford just to get elected? If you believe the government's official inflation rate...good luck.
jrj90620
Jrj90620 - 2 years ago
Shb600 is correct.Inflation is much higher than govt admits.It's a fact that govt has changed the way it calculates inflation to show lower inflation.This allows the Fed to keep interest rates much lower than actual inflation.So we pay for this Fed stimulus by paying more for everything and receiving almost zero yield on Dollars held.So many Americans worship govt,believing it's actions can get them something for nothing.That's not possible.

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