Quantitative Easing = Stock Splits without Price Adjustments
Courtesy of Dr. Paul Price
Originally published as Why QE Amounts to Theft, at Real Money Pro
Ben Bernanke would have us all believe that he can keep printing money (QE programs) while maintaining the value of the $US. If only this were true we could eliminate all taxes and just continuously run the presses to pay government employees, retirees, vendors etc.
Imagine you own shares of a company that has 1 million shares outstanding and issued. XYZ Corp was trading at $10 per share when it declared a 10% stock dividend to shareholders as of a future record date. A 10% stock dividend is equivalent, in every aspect, to an 11 for 10 stock split.
Before ex-dividend date XYZ had a market cap of $10 million (1 MM shares x $10). Immediately after the ex-date there would be 1.1 million shares which theoretically would be trading for about $9.09 each. Why? The extra shares were simply smaller slices of the same entity. The market cap would still remain at $10 million.
No sound thinking investor should be willing to pay the same $10 price for a lesser piece of the same total pie. Imagine if XYZ repeated this 10% stock dividend process again just a few months later. There would then be 1.21 million shares outstanding but the smaller pieces of the company’s equity would be worth only $8.26 or so if the overall worth of the firm was unchanged from the original value.
QE programs are the Fed’s version of stock dividends. They create new dollars, on paper or through book entry, diluting the value of all dollars that existed prior to the creation of this ‘new money’.
Holders of dollars, unlike owners of stock can’t easily see this process happening. There is no ‘quote’ for the $US for the average citizen to see. Sophisticated investors can keep track of trade weighted values and dollar/euro or dollar/yen ratios etcetera but with so many every changing variables, the average American has no idea that their life savings are being diluted away on a regular basis.
Monday’s hint of a QE3 program sent the DJIA up over 160 points. I believe it was because knowledgeable people are more afraid of the guaranteed devaluation of their dollars’ buying power than they are of the values of profitable companies going down on an inflation adjusted basis.
Problems elsewhere in the world have sent money into $US dollars as a ‘safe haven’ play but our fiat currency is anything but safe if the Fed continues its insane QE programs. Buyers of soft commodities, gold, silver, oil, real estate et al. are trying to protect their life savings from the dilutive effects of issuing money that was never earned.
You would not pay the same for $614 for AAPL shares if they had already split 10 for 1 and you shouldn’t put up with Uncle Ben’s slow motion and stealthy theft of your hard-earned savings.
Let your voices be heard before it’s too late.
Dr. Paul Price
