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Bernanke’s new-found love for asset markets will erode the value of US dollar
I was about to write that in a ‘normal’ economic system, the least risky asset is cash parked in short term government paper or cash on deposit. Low risk and high liquidity also means that the return on cash tends to be lower than the returns on equities, bonds and real estate. However, since I am no longer sure what ‘normal’ is, I decided to amend the above truism to ‘in a balanced and non-inflationary economic system’ cash is the safest asset. Clearly, this does no longer seem to be the case. Cash is losing its purchasing power – it would seem – at an accelerating rate against other assets because of the Federal Reserve’s expansionary monetary policies.
Precious metals have, as has been the case since 2000, significantly out-performed US financial assets. So, what we are faced with is the following: The worse the economic and financial conditions of the US become, the more ‘cash’ will lose its value against assets, which have now become the world’s monetary system’s ‘new money’, courtesy of irresponsible central bankers under the leadership of the US Federal Reserve. The reason for this sad state of affairs is that the Fed, after having created a ‘monstrous’ financial sector, through expansionary monetary policies over the last 25 years or so, does not have the will to tackle the ‘causes’ of the current financial mess it created, but is perfectly happy to treat the symptoms of the problem by printing paper money at an accelerating rate (in the third quarter, MZM grew at an annual rate of more than 18%). Mind you, the symptoms of the Fed’s total incompetence became already evident with the NASDAQ bubble in 1999/2000, the fraudulent credit erected housing and sub-prime lending bubble from 1999 to 2006, and more recently with the ‘Structured Investment Vehicles’ of financial institutions (which were - simply put - designed to bypass reserve requirements) as well as with the collapse of Mortgage Insurance Companies’ stock prices.
But now, with additional fed funds rate cuts the Fed is adding to the symptoms of its incompetence symptoms of its ‘irresponsibility’ and its well-deserved ‘mockery’. How can a responsible central bank cut interest rates and pursue an expansionary monetary policy when the stock market is close to an all time high and when it is faced with a weak currency and soaring food and commodity prices? ‘Only in America’ one should say because the US-infected IMF & World Bank would advise any country under these conditions to ‘tighten’ monetary policies and to raise interest rates. But since the Fed’s only objective today is to ‘inflate’ asset markets, further at the expense of totally debasing the currency, we need to look at a new currency as a ‘unit of account’ and as a ‘store of value’. In my opinion, the world’s new currency with the qualities of being a ‘unit of account’ and ‘store of value’ will be gold and to a lesser extent, other precious metals.
For more articles, Click on IIPM Article.
Source : IIPM Editorial, 2008
An Initiative of IIPM, Malay Chaudhuri and Arindam Chaudhuri (Renowned Management Guru and Economist).
Read these article :-
B-schooled in India, Placed Abroad (Print Version)
IIPM in Financial times (Print Version)
IIPM makes business education truly global (Print Version)
The Indian Institute of Planning and Management (IIPM)
IIPM Campus
ZEE BUSINESS BEST B SCHOOL SURVEY
For More IIPM Info, Visit below mentioned IIPM articles.
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Bernanke’s new-found love for asset markets will erode the value of US dollarI was about to write that in a ‘normal’ economic system, the least risky asset is cash parked in short term government paper or cash on deposit. Low risk and high liquidity also means that the return on cash tends to be lower than the returns on equities, bonds and real estate. However, since I am no longer sure what ‘normal’ is, I decided to amend the above truism to ‘in a balanced and non-inflationary economic system’ cash is the safest asset. Clearly, this does no longer seem to be the case. Cash is losing its purchasing power – it would seem – at an accelerating rate against other assets because of the Federal Reserve’s expansionary monetary policies.
Precious metals have, as has been the case since 2000, significantly out-performed US financial assets. So, what we are faced with is the following: The worse the economic and financial conditions of the US become, the more ‘cash’ will lose its value against assets, which have now become the world’s monetary system’s ‘new money’, courtesy of irresponsible central bankers under the leadership of the US Federal Reserve. The reason for this sad state of affairs is that the Fed, after having created a ‘monstrous’ financial sector, through expansionary monetary policies over the last 25 years or so, does not have the will to tackle the ‘causes’ of the current financial mess it created, but is perfectly happy to treat the symptoms of the problem by printing paper money at an accelerating rate (in the third quarter, MZM grew at an annual rate of more than 18%). Mind you, the symptoms of the Fed’s total incompetence became already evident with the NASDAQ bubble in 1999/2000, the fraudulent credit erected housing and sub-prime lending bubble from 1999 to 2006, and more recently with the ‘Structured Investment Vehicles’ of financial institutions (which were - simply put - designed to bypass reserve requirements) as well as with the collapse of Mortgage Insurance Companies’ stock prices.
But now, with additional fed funds rate cuts the Fed is adding to the symptoms of its incompetence symptoms of its ‘irresponsibility’ and its well-deserved ‘mockery’. How can a responsible central bank cut interest rates and pursue an expansionary monetary policy when the stock market is close to an all time high and when it is faced with a weak currency and soaring food and commodity prices? ‘Only in America’ one should say because the US-infected IMF & World Bank would advise any country under these conditions to ‘tighten’ monetary policies and to raise interest rates. But since the Fed’s only objective today is to ‘inflate’ asset markets, further at the expense of totally debasing the currency, we need to look at a new currency as a ‘unit of account’ and as a ‘store of value’. In my opinion, the world’s new currency with the qualities of being a ‘unit of account’ and ‘store of value’ will be gold and to a lesser extent, other precious metals.
For more articles, Click on IIPM Article.
Source : IIPM Editorial, 2008
An Initiative of IIPM, Malay Chaudhuri and Arindam Chaudhuri (Renowned Management Guru and Economist).
Read these article :-
B-schooled in India, Placed Abroad (Print Version)
IIPM in Financial times (Print Version)
IIPM makes business education truly global (Print Version)
The Indian Institute of Planning and Management (IIPM)
IIPM Campus
ZEE BUSINESS BEST B SCHOOL SURVEY
For More IIPM Info, Visit below mentioned IIPM articles.
1500-plus IIPM students placed across the country with 44 bagging international offers
IIPM set to beat economic slowdown
IIPM, GURGAON
IIPM - Admission Procedure
IIPM awards four Bengali novelists
The Hindu : Education Plus : Honour for IIPM
IIPM ranked No.1 B-School in India, Management News - By ...
IIPM Ranked No1 B-School in India
Moneycontrol >> News >> Press- News >> IIPM ranked No1 B-School in ...
» IIPM ranked No1 B-School in India :: Education, Careers ...
The Hindu Business Line : IIPM placements hit a high of over 2000 jobs
Deccan Herald - IIPM ranked as top B-School in India
India eNews - IIPM Ranked No1 B-School in India
IIPM Delhi - Indian Institute of Planning and Management New Delhi ...
domain-b.com : IIPM ranked ahead of IIMs
IIPM makes business education truly global-Education-The Times of ...
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