Hi JamesTai,jamestai wrote: Hi Dennis,
Thanks for the explanation. Just to make sure my understanding is correct, that mean now USA is using QE2 to buy the bonds from the open market the main objective is to keep the bond yield (interest rate) low. Therefore this help the stock market to go up because since the investing in bond would give lower return than stock so most investor will invest in share.
To attract people to invest in bond, the bond yield will need to go up but this would be bad news for business and economy because that's mean interest rate will go up. When this happen, USA might want to come out with QE3 to try to buy more bonds from the open market to keep the bond yield low, but by that time people may already lost confident in USA and QE3 will not help to achieve it's objective. So bond yield may continue to go up and this is bad news for stock market.
James Tai
nope, I don't think you got it right.
QE 2 is 2nd round of printing money, U.S. print money by issuing Bonds, (borrowing money). However, the problem with QE 1 and QE 2 (last 2 years sales of bonds) as PIMCO's Bill Gross has pointed out, is that now only 30% of the bonds are sold to investors and foreign countries and Fed was "forced" to buy 70% of the bonds themselves.
Currently, bond yield on 10 year U.S. bonds is only about 3%.
Imagine if inflation goes up to say, 5%, would people be willing to buy (invest) into bonds (or in other words, lend money to U.S. government) for 3%?
So the saving grace for U.S. currently is that inflation is still low, less than 2%, which is why bond yield (interest rates) can be kept low.
However, I expect inflation rate in U.S. to go up and when that happens, when U.S. launches QE3 (3rd round of printing money or borrowing money since year 2008), with more supply of Bonds coming out, and with less demand (China and Japan may buy less or may even sell bonds)....that is why U.S. government bond market might crash.
When bond prices Crash (fall), becos interest rates on bonds were fixed at time of issuance, what it means is that the Yield to Maturity will shoot up....it also mean that any New bonds to be issued need to offer much higher interest rates....
Of course higher interest rates on Fed and U.S. government bonds is bad news becos the interest rates are used as benchmark, U.S. companies and consumers cannot be borrowing at lower interest rates than U.S. government, thus interest rates on Corporate Loans and Housing Loans (Mortgages) would also increase.
Of course this is bad news as higher interest to companies is higher costs, and if they don't have higher sales or cannot pass on the cost increase as higher prices charged to customers, their profits would drop. Higher interest rates on Mortgages (Housing Loans) also mean consumers have less disposable money to spend, and this will slow down U.S. economy further since U.S. (american's consumption) constitutes 70% of U.S. economy.
Thus, this is why the U.S. stock market is likely to Crash as well...
So U.S. economy is expected to slow down and inflation might go up...and a possible Stagflation Scenario might then happens...
In 1980, inflation in U.S. shot up to 13%, and Fed rate was 15% and Prime rate was as high as 20%...
Many people forget that in Year 2000, Fed interest rates were as high as 6.25%, and in year 2007, it was 5.25%...while now is HISTORICAL Low of 0.25%. So in all likelihood, interest rates would go up, not down, or remain low, just a question of WHEN will this happen.
If interest rates stay low at current level also "die" (means U.S. would go through zombie years like Japan after their Asset Bubble Crash in 1989...
So no matter what happens, looks like it's Bad News for U.S. economy.
Based on demographics, the Baby Boomer Generation in U.S. is born between 1945 to 1962, so the youngest Baby Boomer in U.S. is already 49...passed the peak of consumption which is estimated at age 48....so from demographic point of view, U.S. has passed its Peak and unlikely to recover to its previous Glory days...unless there is a Huge increase in population through immigration, which is unlikely, given the already high Unemployment rate in U.S. (Official figure is 8.9%, which include those that work part-time, unofficial figures is about double, or 16%).
Singapore Baby Boomer generation is those born between 1945 to 1968 (before launch of 2 is enough policy in 1969)...so Singapore if we do not import people (let in Foreigners) we will also go the way of Japan....declining population, coupled with Aging Population.....so in a way, it is inevitable that we need to "import" people...just that the HDB, Transport did a bad job of anticipating and planning for the huge increase in population in last few years, leading to steep rise in HDB flats' prices and Packed like Sardine MRTs and Buses and finally led to the "retirement" of the Ministers in Charge.
Furthermore, last 3 years, they were so "lax" in letting in foreigners that cause the irk of Singaporeans.
So do not expect the government can deliver its promise to increase income (in real terms after adjusting for inflation) of Singaporeans in next 10 years. The only way forward is for all of us to increase our Financial Knowledge so that you can reach Financial Freedom and you don't mind whether your income increase or not, since you don't really need the income anymore once you reach Financial Freedom. (continuous Active income is just a bonus, not NEEDED once you reach Financial Freedom).
Hope this explanation is clear.
