Page 12 - Exposed Final

One of the primary reasons I think this could end badly is the direct

connection of the rising stock market to Quantitative Easing. Let me take a

moment to explain Quantitative Easing (QE).

The Federal Reserve's primary tool to influence the economy is to adjust

interest rates. When the country dropped into a recession back in 2008, the

Federal Reserve lowered interest rates to almost zero. The economy did

not respond as expected, and because the Federal Reserve could not drop

interest rates below zero, they implemented a plan known as Quantitative

Easing. Through this program, the Federal Reserve attempts to stimulate

the economy by printing money out of thin air and using the money to buy

bonds from the large financial institutions, thus flooding the institutions with

cash.

The side effect of buying billions of dollars in bonds is that it drives down

the interest rate on your CDs and bonds to almost nothing! What are you to

do? Leave your money in low interest bearing CDs earning virtually a zero

rate of return or redeploy the money into the stock market? You're left with

choosing the lesser of two evils; the problem is that you don't know which is

which. Keep earning virtually zero interest or attempt to earn better rates of

return in the stock market.