What is QE2 or even QE1?

QE or Quantitative Easing is our Federal Reserve current monetary policy. What it amounts to in it’s very simplest form is The Federal Reserve printing money and getting it out into the economy “Flooding” the economy with cheap money. To understand it in simple economic terms is as basic as this. If the Economy is growing to fast and interest rates are to low it is possible that inflation will raise product prices. The FED will slow down the money supply and increase money rates, making money hard to get. In our current economic time we have very slow growth and businesses are not able to get money to expand. Without expansion our economy cannot expand, hire workers and the economy cannot grow. The FED is making it easy for businesses to get money to expand. An easy metaphor would be a car, you want to go faster and you press on the gas, you want to go slower you take your foot off the gas a press on the brake.

How does the FED do this? They simply print it. Yes the FED has the power to just print dollars. If low interest rates are not enough to get business to take out lines of credit or loans, then the FED can just print more money and auction it off. Sounds simple enough but there are many negative things that can happen when the FED takes this extreme approach. One of the things that happens is that every dollar you have in your pocket has a value. If the FED keeps pumping money into the economy your dollar in your pocket become less in value because it’s easier to get. It’s simple supply and demand. Another negative by product is inflation.

As your dollar becomes less valuable it purchases less and less. Some times, in extreme situations countries have had to devalue their currency. When a country devalues their currency the old money is worthless and a new currency is put into circulation. We are not there yet. A falling dollar is very bad. The decreasing value of the dollar is bad because it purchases less and creates fabricated inflation.

The FED controls inflation by controlling the money supply. But wait, Currently the FED policy is QE which means increasing cheap money supply. If you have been at the supper market lately you know food prices are going up. So inflation should be creeping up too. The FED by using huge amounts of QE is possibly going to create a giant inflation problem at some point. We know this is happening because we can monitor it by looking at commodities. DBC, is the commodity ETF and has been raising. BAL is the cotton ETF it has been spiking. Clothes prices are heading higher! GLD, SLV the gold and silver ETF these two have been increasing for the past 2 years. People use gold and silver to off set inflation and keep it for safety. This trade has been going on for two years!

Hyperinflation is on it’s way because of FED policy how do we play this and make money off of it? Commodities, Countries and farmers will be trying to buy fertilizers at a lower cost so DBC, POT, AGU, MOO, MON and IPI are great fertilizer plays. DE and CAT make the farming equipment that plows the fields to make more crops. GLD, SLV, X, FCX and AKS are the metal plays. Transportation, IYT is the transportation ETF, CSX, KSU and UNP are the product movers. Finally, if the recovery is for real financials will have to be prosperous. JPM, MS, GS, BAC and C are the banks to follow.