With Bernanke and the FOMC announcing QE3, we will see much more monetary inflation in the next year. Quantitative easing is money creation. It is as simple as that. There are many negative consequences that occur because of monetary inflation, which include the boom/ bust cycle, rising prices, and the misallocation of resources. Another characteristic of monetary inflation is that it is a redistribution of wealth.
Obama and the Democrats like to talk a good game about helping the poor, but their words are meaningless, except in pandering to ignorant people. If they really cared so much about helping the poor, then they would be opposed to continued monetary inflation. They should really be opposed to the whole idea of the Federal Reserve and a central bank.
QE3 will primarily benefit the big banks. Is this what those caring Democratic politicians in DC support? In other words, the Fed’s policies will actually redistribute wealth from the poor and middle class to the rich.
While those who are wealthy and more connected will generally benefit from QE3 at the expense of the lower and middle classes, it doesn’t mean we all have to take it on the chin. With QE3, almost everyone will be worse off because of the misallocation of resources. But some will lose more than others.
If you don’t want to be one of the bigger losers with QE3, then I have two main suggestions for you. First, you need to be out of dollar-denominated assets. In other words, if you have a whole bunch of money sitting in a checking account, savings account, money market fund, etc., then your money will continually lose purchasing power. It will not earn enough interest to offset price inflation. Real interest rates (inflation adjusted) are actually negative right now. The same goes for government bonds and treasuries. Any investment that repays you in dollars will be a loser.
Just to be clear, I think it is important to maintain something of a cash position (or equivalent), but it should not make up a big percentage of your overall net worth.
My second suggestion, which is really similar to the first, is to take advantage of the cheap money. Monetary inflation redistributes wealth from creditors to debtors. This is a hard one though, because I don’t recommend being in debt, unless it is for something like a house or car. I am against credit card debt, except for cases of emergency. Even student loan debt can be quite burdensome, as we hear many horror stories of college graduates who can’t find jobs and owe tens of thousands of dollars or more.
I do recommend taking advantage of the low mortgage rates. If you can refinance your home loan to a fixed-rate mortgage and lower your rate significantly, then you should do so. You will be paying back the loan in depreciating money.
Of course, if you have the means to do so, you can also take advantage of low rates by buying investment real estate. Since the popping of the bubble, this is actually a fairly sound strategy in most areas of the United States.
In conclusion, we will all be worse off from QE3, but some will be more worse off than others. Try to protect yourself in any way you can. I recommend hard assets and a low fixed-rate mortgage.