QE3 Is Stealing Your Money

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:





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.





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.