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Milton J. Madison - An American Refugee Now Living in China, Where Liberty is Ascending

Federalism, Free Markets and the Liberty To Let One's Mind Wander. I Am Very Worried About the Fate of Liberty in the USA, Where Government is Taking people's Lives ____________________________________________________________________________________________ "Extremism in defense of liberty is no vice. Tolerance in the face of tyranny is no virtue." -Barry Goldwater-

Thursday, May 21, 2009

The monetary policy rally.....

The stock market may hit new lows this year or the next as the current rally has been largely caused by the money printed by central banks and fundamental problems remain unsolved, legendary investor Jim Rogers told CNBC Wednesday.

His views echo those of renowned bear Marc Faber, who told CNBC last week that the rises in share prices did not mean the world was embarking on a path of sustainable economic growth.

"I'm not buying shares if that's what you mean. Not at all," Rogers told "Squawk Box Asia."

"The bottom will probably come later this year, next year, who knows when," he added.

Governments have not solved the essential problems that caused the crisis but instead they "flooded the world with money," according to Rogers. Trying to solve the problem of too much consumption and too much debt with more consumption "defies belief" and will not work, he said.
From here. Jim Rogers is not my favorite, I think that he is a blowhard. He yaps constantly about this and that but in this case, I think that he is onto something and this something is something that I have been very worried about.

I think that this market rally is more of monetary phenomenon than one based on fundamental turnaround of the economy. The market place is completely awash in liquidity that has been purposely pumped into the system. Some of this is finding its way into financial investments and is temporarily inflating some asset values. And it not just the US, since many global markets have been improving. The US is part of a global economy where everyone has been suffering. Economic declines as indicated by GDP declines and rising unemployment in many places where these falls have been even more severe in Korea, Japan, most sclerotic European economies and even vibrant Hong Kong.

The idea that the central government can borrow itself to national prosperity is opium for the masses and one that only delays the day of reckoning. Either the Fed withdraws the excess liquidity from the system leading to much higher interest rates now or it allows inflation to raise asset prices but with the inevitable increase, usually much higher, of interest rates in the future.

The big problem with the idea that a nation can tolerate a little inflation is that it is an insidious tax on people. It taxes wealth and it taxes value. It raises discount rates and lowers the value of future cash flow. Normal investment horizons shorten and money, on the margin, becomes fast money, seeking short-term profits at the expense of long-term investments. Inflation does not exist with out corresponding costs that cancel out any perceived 'benefit'.

And generally, the idea of a 'little inflation' is not one that will fool everyone. The currency will depreciate raising all import prices and lowering standards of living till finally the Fed is forced to do what it is supposed to do and that is to promote price stability.

There is no easy way out, and this one will be especially painful since the people in Washington are probably the most incapable people to ever be elected to office. Additionally, Americans are believing that government can solve these problems, when in-fact, government is complicit in creating these problems. Good luck, USA, you are in for a very very difficult time.


At 11:08 PM, Anonymous Anonymous said...

The wave is comming.


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