QE3 and its impact on the Education Industry

What is QE? QE stands for quantitative easing which in simple terms means increasing the money supply from the thin air. On the 13th September, Federal reserve (American central bank) announced the third QE. As per the announcement the Federal reserve will increase the unlimited money supply to reduce the unemployment and to boost the economy & growth.

How does this announcement affect the Education Industry ? Well let me share the simple economic data / mechanism under which the global economy operates.

  • US$ is termed as the worlds ‘reserve currency’ since 1944. It meant that US Govt guaranteeing other central banks that they could sell their US dollars reserves at a fixed rate of gold. As a result Japan and a few European countries devalued their currency in order to boost exports and development.
  • On the 15th Aug, 1971 President Nixon ended the direct convertibility of the dollar to Gold. As a result the US Govt could print as many US$ required to boost the economy.
  • In 1973 the US$ was also termed as ‘petrodollar’ meaning that all crude / oil transactions will be termed in US$ meaning ‘petro dollar’. This resulted increase in demand of the US$ in the world.

Let me also share the National statistical data of various countries as on today:

  Inflation Interest rate Population (million) GDP (billion US$) GDP growth Govt debt / GDP
USA 1.70% 0.25% 311 15,094 1.70% 103%
Australia 1.20% 3.50% 22.62 1,371.62 0.60% 22%
UK 2.60% 0.50% 62.64 2,431 -0.50% 85.70%
NZ 1.00% 2.50% 4.40 142.48 1.10% 37%
Canada 1.30% 1.00% 34.48 1,736.05 0.50% 85%
India 7.55% 8.00% 1,241 1,847 0.80% 68.05%

(source – trading economies)

As on today US$ is not backed by any security or the gold and hence any increase in supply of US$  has the following effects:

  • Increase in spending (short term)
  • Boost in the economy (short term)
  • Appreciation in the stock market (short term)
  • Increase in prices (long term). This results in higher inflation in the world.
  • Devaluation of dollar (both short and long term)
  • Increase in Gold prices (both short and long term)

I am of the very firm view that there needs to be a balance in printing more currency and reducing the unemployment. Based on the above inputs, my forecasts are:

  • UK pound, Canadian dollar, NZ dollar and the Australian dollar will appreciate against Indian rupee and the cost of Education will also increase in the U.K, Canada, NZ and Australia and it is due to increase in supply of US$.
  • Indian rupee will depreciate drastically and this is due to high inflation, low GDP growth, high fiscal deficit, high debt / GDP and increase in US$ supply.

Based on the above forecast the Indian students will find even more expensive to study overseas and there will be a point where the parents would prefer to invest the resources in Gold rather than Education.

 

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