Can You Avoid the Consequences of QE3?

There was an article recently on Bloomberg.  The title of the article is: “How to avoid the consequences of QE3”.  While it is nice to see this topic discussed on something other than a libertarian/ hard money website, I also have a problem with the premise.

Parts of the article really are good.  It points out that QE3 debases the dollar.  Then it points out that the low interest rates make it hard for senior citizens and others trying to live from their savings.

The article then goes on to discuss ways to invest.  This includes foreign stocks, foreign bonds, and certain individual sectors.  While the author warns of potential problems in China, he still basically recommends buying Chinese stocks.

Unfortunately, in an article about QE3 and investing, the author doesn’t come out and recommend investing in gold or gold related stocks.  He does mention gold, but only to compare it to foreign bonds.  He says that “Foreign bonds are like gold with yield.”  This is a ridiculous statement and I won’t waste the taps on my keyboard to refute it.

So the author identifies some of the problems with QE3 and is basically correct about them.  Unfortunately, I’m not a big fan of his remedies, especially in leaving out gold.  However, my major disagreement is with the premise of the whole article.  It is really in the title.

I don’t believe it is possible to avoid the consequences of QE3.  I think the best you can hope for is to minimize the consequences as best as possible.  QE3 will negatively impact virtually everyone.  It isn’t just a matter of inflation and low interest rates.

QE3 is massive monetary inflation.  It is a bank bailout.  It also allows the federal government to continue spending money it doesn’t have.  If the Fed would stop with all of its quantitative easing sessions, then interest rates would rise and Congress would have to cut spending.

Whenever there is monetary inflation, particularly on such a massive scale, it leads to a misallocation of resources.  This can be called malinvestment.  It is directing resources to uses that wouldn’t have been preferred by consumers in a free market.  Monetary inflation is a hindrance to our standard of living.  It makes the general population poorer (or less rich) than it would have otherwise been.

So, yes, you can and should invest to protect yourself from the harmful effects of massive monetary inflation.  This would include gold, silver, oil, some stocks, real estate, and many other hard assets.  You may or may not gain in real terms from these investments, but at least you will lose less than the guy who has his investments and savings denominated in dollars (such as bonds and savings accounts).

But while you can somewhat protect yourself with your investments, you will be worse off from QE3.  There is no way to avoid all of the consequences.  You may not ever directly see the consequences, but being a good economist means seeing the long-term unseen consequences.  There will be less production.  There will be less capital investment.  There will be less in the way of technological advances and new product development.  Just for example, if there were no QE3, maybe we would have seen an iPhone that could drive your car for you.  Maybe we would have seen a robot that could do your laundry and dishes for you, including putting them away.  But instead, resources were wasted or put to less productive uses as deemed by politicians in DC.

In conclusion, you should be aware of QE3 and the potential bad effects.  You should try to hedge against it with your investments in any way you can.  But don’t think that you can avoid the bad consequences of it.  We will all pay for these mistakes.