Thursday, 4 March 2010

Jim Chanos and a Word on Expansive Monetary Policy

Another Hedge Fund Manager, with some wise words.

Government is the Problem

Avoid Fancy Money Managers

China Bubble

A Word on Expansive Monetary Policy

There have been rumblings from the IMF that central banks should raise their inflation targets to try and combat the crisis, with a doubling of the current targets put forward. Why stop there, why not three times, or four times, or lets ask what a bunch of infants what they think the 'target' should be set at? Governments always bend the rules, trying to patch up the mess they create. I took the title of this blog from Alan Greenspan's book 'The Age of Turbulence' in which he details the various events throughout his life, along with his view of what was to come in the future. What I did find interesting was his awareness of the 'deflation' factor that has afflicted the West for the past 20 years or so. As he describes, with the opening of Asia, the collapse of Communism and the rise of Global Communications, the free market kept lowing the costs of goods and services at an ever frantic rate. As Governments and Central Banks look to a positive CPI measure of inflation they had to expand the money supply at a very brisk rate in order to compensate the efficiency of the marketplace.

What Greenspan also recognises, when explaining what is to come, is what happens if these very same 'deflationary' forces are subdued in the years to come? In such an environment the same expansive monetary policy would show up as much higher prices for goods and services.

This is what 99% of people forget, the China factor, the cheap labour, the telecommunications savings, these are all a one time hit. As time passes these forces subdue. We are not going to find another China. We are not going to find another telecommunications revolution. All these factors are a once in a lifetime phenomenon. This is another problem (add it to the list) policymakers will face. At the first sight of financial problems a knee jerk reaction is to expand the money supply, but in the future this will cause much greater problems and Governments will not have a clue how to fix them.

Inflation will become more embedded in the system, 5, 10, 15 years from now. Much more than people think. This in turn will drive Interest Rates up, as market forces force these prices towards a real rate of return. Greece has this problem already along with other Med nations. Here in the UK our Government Bonds are rising just as bad. We even have higher rates on our 10-year bonds than Italy and Spain. While the rating agencies keep us at an AAA rating the market is already ahead of the regulators, asleep on the job once more. But hey Sub-Prime was once AAA. Beware of people who prescribe the cure is more unwarranted inflation. The future will not be as accommodating for such policies.

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