(Article for the Jakarta Globe – 1st October 2012 issue)
MONEY WISEHOW QE3 CAN AFFECT YOUR SAVINGS
For several decades the QE2 for many of us was a proud ocean liner.
Today people are more likely to associate QE2 with the second round ofquantative easing (read for that ‘printing money’) by the US Federal Reserve.
You may wonder why this should be our concern.
QE3 is the third attempt by the ‘Fed’ to stimulate the US economy and reduce
the high rate of unemployment. This round is different from QE1 and QE2 inthat it is intended to continue indefinitely until unemployment falls to anacceptable level. It consists of the purchase from banks of mortgage securities
to the value of $40 billion a month.
Will the move be successful or is it just a political ploy? The immediate reactionof stock markets on September 13, the day of the announcement, waspositive. On the surface! But many analysts saw things differently. Forbes forexample pointed out that the ‘Real Dow’ actually fell in reaction to theannouncement. The ‘Real Dow’, which is the Dow Jones Industrial Average
divided by the price of gold, fell by 0.65% on September 13, the day that QE3
was announced. While the Dow gained 1.6% on the day, gold went up by2.2%.
How money can fall in value
Marc Faber, publisher of the Gloom, Boom & Doom Report, told Bloombergthat "the fallacy of monetary policy in the U.S. is to believe this money will goto the man on the street. It won't. Mr. Bernanke is a money printer and, believeme, if Mr. Romney wins the election the next Fed chairman will also be a moneyprinter. And so it will go on. The Europeans will print money. The Chinese will
print money. Everybody will print money and the purchasing power of paper
money will go down”.
It is interesting to note that since Bernanke was appointed in early 2006, theprice of gold has increased from $570 an ounce to more than $1,700 an ounce.
In the same period, the price of silver has surged from $9.70 an ounce to over

$34 an ounce. After QE3 was announced, gold quickly increased by $38, whilesilver jumped more than $1.
The US Dollar has fallen against most currencies, but not against the Rupiah.
The US debt now stands at over $16 trillion. Check out
http://www.usdebtclock.org/ for a fascinating display showing the latest
figures in real time.
How politics impede progress
What we are seeing throughout the world are policies that are driven bypolitics, rather than by commonsense. Politicians seeking popular support will
always resist austerity plans or measures that would help the economy andeventually the people. The fuel subsidy in Indonesia is an example. The
reluctance of the US to tackle their debt problem is another. Europe’s woes
today are also due to excessive borrowing and spending. If we handled ourfinances the same way we would be leaving a terrible legacy of debt to ourgrandchildren.
So what should we, as investors, be doing?
We don’t need to make the same mistakes as governments. We can avoid
getting into debt and if we are in debt we can make an effort to get out of it.
Politics should not come into it – unless there are similar issues within thefamily!
Assuming there are no debts, other than perhaps a manageable house loan,
the challenge is how to make the best of disposable income.
Cash reserves are essential but beyond that cash is a poor long term
investment. For real long term growth it must be put to work. A regular savingsor pension plan is one way. The performance of these plans has not been
inspiring over the past decade but it is still a good way to build up wealthgradually from spare income. Larger sums of money could go into a portfolio ofdiverse assets, the bulk of which should consist of traditional stocks and bonds.
‘Real assets’ will hold their valuePrinting money does not create wealth. It may provide a temporary stimulus
but it is not adding real value. To protect ourselves against the ravages ofinflation, which will surely return, we should look to real assets. Land andproperty is an obvious one for the long term. Investments in gold and precious
metals will also give protection against the fall in value of money. You don’tnecessarily have to buy the physical products but can invest via bullion ormining funds. The same applies to oil which you can access via energy funds.
Diversification, as always, is the key to managing risk.
‘Collectibles’ such as stamps, works of art, fine wines and vintage cars offer
further possibilities but that is another story……
Colin Bloodworth, director of PPI Indonesia, has spent over 20 years inIndonesia. If you have any questions on this or a related subject you cancontact the writer at indonesia@ppi-advisory.com

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