Noch etwas für die Deflationisten

verfasst von CRASH_GURU, 20.10.2004, 10:50

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Tuesday 19th October 2004

Historic bubbleology and the printing of money - My thanks to Ramesh Chandiramani for this item, written by Marc Faber just over a year ago and reprinted recently by The Daily Reckoning. It’s worth reviewing, and here is an important section:

From time to time, a wave of optimism spreads around the world like a bushfire. People believe they are seeing the dawn of a new era, which will bring unimaginable riches and prosperity to all. Waves of new-era thinking are usually associated with discoveries (the Americas, gold deposits in California), the opening up of new territories (the western territories of the United States, the opening of China in recent years), the application of new inventions (canals, railroads, the automobile, radio, PCs, the Internet, wireless communication, etc), the rise in the price of an important commodity (rubber at the beginning of the 20th century, oil in the 1970s), peace treaties (the breakdown of communism) or strong economic performances.

A typical feature of"new era" thinking is that it usually engulfs a country or the world not at the beginning of an era of prosperity, but toward the end of such a period and is associated with some sort of a"rush" or investment mania. Two of the most well known examples of this phenomenon are John Law’s Mississippi Scheme and the South Sea Bubble, which occurred almost simultaneously in the early 18th century. [Ed note: If you’d like to read Faber’s full account of these fascinating case studies in monetary mayhem, grab a cup of coffee and a cozy chair and sit down for an exciting read: ’The South Sea Bubble and Law’s Mississippi Scheme’]

"The Great Swindle" is an excellent account of the events that surrounded the South Sea Bubble and the Mississippi Scheme. Although over the following 300 or so years the stage of investment manias repeatedly changed, the script, the accessories and the nature of the actors participating in the bubble have largely remained the same.

The"bubble" model always involves a"displacement," which leads to extraordinary profit opportunities, overtrading, overborrowings, speculative excesses, swindles and catchpenny schemes, followed by a crisis during which fraud on a massive scale comes to light, then by the closing act, during which the outraged public calls for the culprits to be taken to account. In each case, excessive monetary stimulus and the use of credit fuel the flames of irrational speculation and public participation, which involve a larger and larger group of people seeking to become rich without any understanding of the object of speculation.

The sagas of the Mississippi Scheme and the South Sea Company are historically relevant, for example, because they contain all the major features of subsequent manias: shady characters; corruption; fraud; dubious practices; the creation of money and the extension of risky loans in order to keep the speculative orgy going; the catalyst, which leads to the initial collapse - usually the revelation of fraud, the inability of a large speculator to come up with the money to meet a margin call; the revelation that insiders cashed out; or some adverse economic or political news - and then the panic during which greed and euphoria are replaced by fear and the speculators’ desire to get out at any price.

What is also important to understand is that both the promoters of the South Sea Company and John Law attempted to support the market at any cost. At some point, however, market forces proved to be far more powerful than any price-supporting measures they could ever have taken. The Mississippi Scheme in particular provides a relevant example of the ineffectiveness of printing money to stimulate the economy and lighten its debt load. John Law’s policies of the day are reminiscent of those of the current U.S. central bank, the aim of which is to solve any problem the same way Law tried to solve the Mississippi Company’s problem - simply by increasing the money supply.

That such monetary policies will lead to the same price increases, which, at the time of Law’s Mississippi Scheme, destroyed people’s faith in paper money, ought to be clear. Whether, at that point, current central bankers and government officials will conspire to expropriate investors’ gold possessions, as Law did, remains to be seen. But we shouldn’t forget that in 1933, in the midst of the Depression, the U.S. government declared the possession of gold by individuals to be illegal.

My view - In recent years, I’ve written at length about how the Federal Reserve, the Bank of Japan and other central banks have sown the seeds of another generation-long inflationary cycle, mainly through credit creation (the electronic equivalent of printing money).

Central banks would deny this, needless to say. They would argue that their actions have saved us all, at least for now, from a potentially disastrous deflationary cycle. This may be true.

The central banks would also argue that once global GDP growth is well established, they will be able to gradually tighten monetary policy, checking incipient inflationary pressures. This thinking is behind the recent and small increases in short-term interest rates for many countries.

I hope they are right, but I am not willing to bet most of my limited financial assets on the belief that they will be right. Why? Because when GDP growth slows again, as we are already seeing, I suspect it won’t be too long before central banks increase the flow from monetary spigots once again.

And intense competition in global manufacturing - the area where we are likely to see the least inflation over the next ten to twenty years, will encourage central banks to continue erring on the side of monetary inflation, over and over again.

So how do we protect ourselves against future inflation? Just remember two words - supply inelasticity. By this I mean real assets, for which the supply cannot be increased anywhere near as quickly as the supply of paper money in circulation.

Precious metals are obvious candidates, as are most industrial commodities. Crops are more variable in terms of supply but can do spectacularly well for a while, when adverse weather conditions reduce yields significantly. Recently, crops have been abundant, so most agricultural commodities quoted in the US markets are dirt-cheap once again.

Many investors have done spectacularly well in domestic and/or commercial property. To Mrs Fuller’s dismay, I have never wanted to be an absentee landlord, and I also prefer assets that are more liquid than property.

Nevertheless property has unquestionably been the best inflation hedge for most people, provided they did not buy near the top of a boom. When the price of any asset becomes an endlessly repeated subject of conversation at cocktail and dinner parties, some contrarian thinking is usually prudent.

Collectables such as art and antiques have a generally good track record as hedges against inflation, despite the vagaries of fashion. However this is a very personal field, and I would not buy anything that did not provide a yield to the spirit. In that respect, I much prefer pictures and sculpture to antiques.

As a general rule, I would rather buy a major work by a lesser artist, than a minor work by a bigger name. There is no better supply inelasticity example than with deceased artists, fakes aside.

For personal reasons, the art I buy these days is almost entirely by living artists, and affordable, as I enjoy ’discovering’ artists. Having eclectic tastes, these will range from the exquisite still lifes of Andrew Hemingway, to the contemplative landscapes of Annabel Greenhalge or the whimsical and sometimes bizarre subjects of Rupert Gatfield, an artist I have only recently discovered.

Will they be good investments over time? No one knows, since this depends as much on geopolitical and economic events as art, but I enjoy backing my eye. Does supply inelasticity apply to living artists? Yes, since any artist’s output is finite, and works of the standard shown above are not produced easily or quickly.

What about government bond markets during inflationary eras? They do poorly, especially where yield is taxed, because governments are inflating away the cost of their debt, thus eroding the value of your fixed interest investments.

What about stock markets during inflationary periods? They outperform bonds, but stocks generally perform much more strongly during long disinflationary periods, as we saw throughout most of the 1980s and 1990s.

History’s lesson is that the purchasing power of cash on deposit is largely destroyed by inflation over time. Currency fluctuations offer some respite, but only for that small group of traders who can time moves from comparatively weak to strong exchange rates reasonably successfully. During inflationary eras, only gold and its closest proxies are hard money.


Capital Economics: Inflation yet to reflect full effect of run up in oil prices - Paul Ashworth assess the latest CPI data in this report. It is posted in the Subscriber’s Area, but here is a brief section:

Although annual headline inflation fell to 2.5% in September, from 2.7%, this is very much the calm before the storm. As higher oil prices translate into higher gasoline and heating fuel prices, we expect headline inflation to be close to 4.0% by year-end, before falling in 2005, as oil prices drop back to more normal levels.

My view - The current long-term inflationary cycle is still in its early stages, barely noticeable from the phoney government statistics, but already painful if you pay the household bills.

It will move in waves, so Paul Ashworth could be right in saying that inflation will dip in 2005. I maintain that the big trend is upwards, and that it will eventually take inflation to much higher levels than most people are forecasting today.

Thread gesperrt

 

gesamter Thread:

• Noch etwas für die Deflationisten - CRASH_GURU, 20.10.2004, 10:50
  • Re: Noch etwas für die Deflationisten / ist mir zu lang ;-( (o.Text) - - Elli -, 20.10.2004, 12:17
    • Re: Eins, zwei, drei - eilt doch Deflation herbei? - dottore, 20.10.2004, 14:39
      • Apropos F und GM: Die Bondholder werden nervös - Luigi, 20.10.2004, 17:33