The Architects of Re-Inflation
March 5, 2009 by Vagabond Investors
It has become a somewhat popular sport to bash the European Central Bank for not acting fast enough to save the system. Many say that the ECB should take similar actions as the Fed has. That, at least, is the common viewpoint.
What Caused the Crisis?
The widespread view is that the cause of the current crisis is this. The people and the government do not borrow and spend enough on consumer goods. Therefore the government must force us all to borrow and spend more. This is as ridiculous as it sounds. It seems that today’s best comedians are not found in the theaters anymore. They are in the economic and financial arena and, for some logic that evades me, are taken as honest people. After all, a smiling central banker should scare you at least a little.
Let us not forget that it was exactly the government and their agencies around the world who constructed the crisis in the first place. It is these people that did not know how to prevent the current crisis. Instead they provided a massive credit bubble and allowed the asset bubble to get out of hand. Now we advocate the same people who caused this mess to fix it - with the same tools they created the mess!
The Free Market Did Not Fail
It is important to recognize that it wasn’t the free market that failed. The root cause of the current crisis is the same as it has been for decades: massive credit creation and government intervention. The architects of the current crisis are found where political and monetary powers bind together today. That is in the Treasury and the Federal Reserve. I should like to point out that central bankers aren’t completely useless people. Especially in times like this, we require what only they can provide: their absence.
The Fed and the US government seem to think that the way to solve the problem, which was caused by printing too much money, is to print more money. In case it should not work out as planned, their backup plan is to print even more money.
The point is, while money creation may help on the short term, they will indisputably overdo it. While many economists see light at the end of the tunnel, it may only be the headlamp of the upcoming train.
Even every ordinary person could immediately see that when debt growth enormously exceeds nominal GDP growth, sooner or later the party will come to an end. Yet even more massive money creation is the road the government and central banks have taken to combat the problem. I suspect that it will lead to even greater problems in the future.
The Road to Ruin
I believe that most people, including Mr. Bernanke and Mr. Geithner, do not fully realize what gigantic money printing will cause. The problem will be especially acute and severe in the US because of its colossal debt burden. Since half of US federal debt is held by foreigners, what happens when they realize that the US government has no intention to pay back? You see, the US is about to repay debt with the issuance of new debt. I suppose these gentlemen do not suffer from insanity, but enjoy every minute of it.
This is as hilarious and as frightful as it sounds. I would like to stress that now is the time to take care of proper asset allocation in your portfolio. Personally I continue to like gold as Mr. Bernanke is flooding the system with money (Mr. Geithner is doing his share by using taxpayers’ money to help out his friends on Wall Street). It could be wise to protect oneself from these financial predators. To do that, it is best to keep an eye on the macro data.
You Have To Do Your Share
I am doing my best to provide you occasional insights and investment considerations. Despite that, you have to make your own financial decisions. Instead of waiting for anybody to save you, I suggest you get educated and leave gentlemen like Mr. Bernanke and Mr. Geithner do their tricks. Luckily, it is easier to adapt to and take advantage from the circumstances than it is to change the whole world.
Jaakko
(C) Copyright Vagabond Investors 2009
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Great post Jaakko! Keep up with the good work. I have looked at your previous videos on YouTube and it seems that you have been right most of the time. Pack your bags and come over. I’ll provide you a stay in Portland.