Why money printing does not lead to a debasement of currency

I just read a very interesting blog post by Dali on the debasement of currency caused by all the money printing. 

My initial conclusion back in 2010 at the inception of these printing was the same.. it's going to be as inflationary as in Germany post WW1. However 5 years following the first QE, there's still no inflation..  then I came across some smart economist pointing out that all these extra money is basically absorbed by the bank in increase reserve.. it make sense, if the money printing were to be inflationary - the effect should have been apparent almost immediately.

I put forward an alternate view to why money printing is not inflationary.

An alternate view

Econ 101 taught us printing of money lead to increase supply which will lead to a debasement of the currency.

HOWEVER

- Quantitative easing is merely a form of monetary policy that increases LIQUIDITY in the banking system.

- Liquidity of the banking system is separate and distinct from credit growth and availability. The monetary policy can only influence the PRICE of the lending.

How monetary transmission mechanism work in reality

- Despite the printing of money in the last few years by the treasury, money supply have been relatively stable and inflation in check.

- The main determinant of credit growth is RISK APPETITE: whether banks want to lend and whether companies/consumer want to borrow. Companies are hoarding a record amount of cash.

- According to Bernanke, the objective of QE is to maintain low long term interest rate

 

Bernanke August 2010 speech

- A byproduct of this low rate is a gradual healing of household balance sheet in the US and of the government itself

- Reality is that quantitative easing merely swaps bank reserves for US treasury

Interesting read:

1) http://www.voxeu.org/article/central-bank-reserve-creation-era-negative-money-multipliers
2) http://www.federalreserve.gov/pubs/feds/2010/201041/201041pap.pdf

Boustead REIT privatisation

Interesting news about the privatisation of Boustead REIT, I've written about it previously here.

Based on the announcement,Boustead Plantation Berhad had offered RM 2.1 for each unit of the REIT. This represent a premium over the NAV and the recent trading price.

Considering the direction of the CPO price going forward, it's not a bad deal for the unitholder. However - it's not easy to find a replacement for such a conservative dividend paymaster to replace Boustead Reit it one's portfolio.

The way the REIT is structured, there is minimal downside risk to the dividend due to the presence of the fixed rent portion in the rent formula.

I am guessing with the soft CPO price, the power to be in Boustead group figure it's costing them too much to be paying rent to the individual unitholder. They are better off terminating the lease agreement and taking the plantation asset in house, financed through debt alone.

Like I mentioned earlier in my last post - I don't have very much of these REIT left, yet I can't justify selling them as I am not too sure what to replace them with. Despite this, the premium proposed represent about 2 year's worth of dividend yield for the REIT, as such I MAY consider supporting the proposal. But I really should look harder at some replacement candidate.

To all other unitholder - what's your view? And if you accept the offer - what would you replace the REIT with?

Herbalife - closed my position with 86% gain in 7 months.

I went long on HLF on Dec 28th publicly in my 2nd blog post.

My entry price was below USD 28.

Last night I exited the counter at USD 52.09.

In less than 7 month the position was up USD 24.09 or 86%.

I think the stock still have upside to it, but I think there's alot of volatility to this counter. I may be looking to enter a trading position from time to time as it does not appear that FTC will be shutting them down anytime soon.