Cost of The Wealth Effect
With Quantitative Easing Round 3, the Federal Reserve has said it will continue to indefinitely buy mortgage securities to drive down interest rates. The intent is to accelerate our economic recovery by making cash cheaper and more readily available for people and business to spend.
While I think these significant actions are probably necessarily to get our economy growing again based on where it has been at, this is no freebie. There are hidden costs that all of us will be paying for for a long time to come and I think its important to recognize them.
Federal Reserve Actions are Not Cost Free
These actions are essentially devaluing the dollar in the long run. Folks can now borrow money at ridiculously low levels; for example I just locked into a refinance on a mortgage for a 3.5% 30 year fixed loan with no closing costs. That is almost a free loan and think in th elong run this will prove to be cheaper than near risk free investments. I can recall only 5 years ago that my online savings account was paying 4+% interest. Who knows what interest rates will be in 10 or 20 years from now.
The cost of these actions is that the value of the US dollar will be less long term. Ultimately that means the amount we need to spend for basic commodities and other goods will rise. It could mean our $2million financial freedom goal might not allow us to maintain our standard of living in the long run. Its pretty scary to me primarily because its so hard to quantify the long term effects.
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