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Great Depression Online Archive Issue:

The Possibilities of Monetary Mischief

Great Depression Online
Long Beach, CA
September 28, 2010

Inside This Issue You Will Discover…

*** Betting on Liquidity
*** Idiot Economists
*** The Possibilities of Monetary Mischief
*** And More

Betting on Liquidity

What a month.  The DOW traded for 10,016 on September 1.  Last Friday it closed out the week at 10,860…an increase of 8.4 percent in just a little over three weeks.

Yes.  Stock market returns have been extraordinarily satisfyingly as of late.  In fact, if the rally holds for a few more days, this will be the best September since 1939. 

But what is it that the stock market’s so expectant of?  A booming economy or a booming money supply?

Nick Godt over at MarketWatch offers an answer…

“It might sound counterintuitive after the rally in stocks so far in September, not to mention in complete contradiction of the prediction of many Wall Street analysts, but the market is not betting on a U.S. or even a global recovery, for that matter.

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“In normal circumstances, this would be the type of rally that signals investors are betting the ‘all clear’ on stocks, given a bright outlook for economic growth and profits.

“But with retail investors mostly absent from the market, as they have been for the past two years, investment powerhouses are again relying on the same old trick that helped power stocks in March 2009.

“What the market is betting on is lots more liquidity coming its way.”

Idiot Economists

Nick Godt continues…

“Faced with increasing signs of economic weakness, central banks in the U.S., Japan, and the European Union are stopping plans to remove liquidity, signaling more liquidity is on the way, or already intervening.

“That’s a blessing for stocks, commodities, and gold.”

Maybe so, but under these circumstances we find rising stock, commodities, and gold prices to be nothing to cheer about.  Here’s why…

More liquidity means more funny money from the Federal Reserve. Each dollar borrowed into existence, of course, causes each dollar already in existence to lose value relative to everything else.  Financial assets, gold, oil, orange juice…you name it, in dollar terms, they all go up – which means, the dollar goes down.

But not only is the dollar losing value when priced in commodities, stocks, or gold, the dollar is also losing value when priced in other currencies.  Indeed, the U.S. Dollar Index, which measures the value of the dollar relative to a basket of foreign currencies, fell below 80 last week – a 6-month low.

Idiot economist, nonetheless, consider a loss of dollar value to be a big positive.  A cheaper dollar makes U.S. exports cheaper abroad, they say.  And if the U.S. can sell more exports, its huge trade deficit will narrow, jobs will be stimulated, and the whole economy will be back on its feet in no time.  But if only it were that simple…

The Possibilities of Monetary Mischief

Cheap money from the Federal Reserve has many side effects.  Most notably it sends false signals to investors and the public at large.  Just look around…markets have gone haywire…

Stocks are up.  Gold is up.  And Treasuries…they’re up too.  What’s a speculator, a conservative investor, or a thinking man to do?

The speculator and the thinking man may look around, squint their eyes, and come to the same conclusions for different reasons entirely.

The speculator may invest in stocks or gold for price movement alone.  Prices are going up.  We have a bull market on our hands, reasons the speculator.  You must buy now or you’ll miss out.

The thinking man, upon gritting his teeth, decides to buy stocks or gold for entirely different reasons.  The Federal Reserve’s overtly debauching the dollar.  All the liquidity has to go somewhere, reasons the thinking man.  You can already see it pouring into stocks and gold.  If I keep my money in Treasuries, it’ll be inflated away.

The conservative investor looks to Treasuries for safety and stability.  Treasuries are backed by the U.S. Government, they reason.  They will never be defaulted on and there’s hardly a sniff of inflation out there.

So who’s right?

They may all be.  That’s the sinister irony… 

With all the monetary mischief going on, anything’s possible.

Sincerely,

M.N. Gordon
Great Depression Online

P.S.  As deflation fears are back in the news and most likely also on your mind, it’s more important than ever to -- at very least -- give the deflationary scenario a serious look.  After all, deflation could pose a serious risk to your wealth if it occurs.

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