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Strategies & Market Trends : Booms, Busts, and Recoveries -- Ignore unavailable to you. Want to Upgrade?

To: sciAticA errAticA who wrote (33043)	5/5/2003 10:40:43 AM
From: sciAticA errAticA	Respond to of 74559

CHAOS-ONOMICS: Strangely Attracted to the Truth May 5: chaos-onomics.com We have come a long way from the days when central bankers relied primarily on obfuscation and mystique, claiming that even accurate information could be misinterpreted and result in undesirable financial market volatility. - Stephen Cecchitti John Zogby, of Zogby International, argues that US politics in the 2004 election might be driven by the rise of the new "investor class" in today's FT . It is an argument with which I agree although I think identification with the investor class has been conditioning public perception of US policy for some time now. Indeed, the public faith in the ability of the state to guarantee their retirement lies at the heart of my economic forecast of rising inflation. The rise in stock investment via 401K accounts, a direct effect of tax policy, coupled with the expanded reach of financial propaganda via CNBC and the like has led many to assume an alignment of interests that may not prove lasting. The now ubiquitous "bug" on most news networks proclaiming the current level of the major equity indices speaks to this notion of a shared alignment of interests. Thus, perhaps, the need to retain the Greenspan mystique despite his failure to endorse the Bush administration tax policy. Winning the next election may require continued faith in the Greenspan put or floor under the market. From time to time, long time readers ask me why I have shifted my focus from declining equity indices to a rising Gold price. This shift took place gradually over the past year as my sense of the current administrations unwillingness to allow markets to trade at clearing prices grew. Also informing the shift is the recent history of US economic policy in the 70s, which in effect, if not by intent, kept nominal equity indices from falling. Milton Friedman argued that one can deal with the political problem of sticky wages, the reluctance of people to accept lower paying jobs, by debasing the currency in which people are paid. One corollary effect of this policy is to also assist in dealing with the political problem of sticky equity indices via the same method. To the extent that both American political parties share the views of Zogby and believe in the efficacy of Friedman's inflationist methods, I think the bulk of the necessary rationalization of common stock value to future economic conditions will come via a debased currency. That is, contrary to the deflationary Nasdaq bubble bursting, which in the main directly hurt those with tech exposure, the economic effects of the next few rounds of adjustment will be spread to all users of US$. Given the growing competition for reserve currency status from the Euro, the number of transactions on which the effects of this adjustment can be imposed will be shrinking, rather than growing, as was the case during the 90s with the increased use of the US$ in, among other places, Russia and China, which tended to reduce the inflationary effect of rising US money supply. All of which is to argue that the DJIA may well be nominally higher a decade from now than it currently stands but the dollars received in returns will be worth much less. Ah, the benefits of "elastic money." This sense of worry over the direction of Central Bank policy seems to inform this article by John Blundell in today's Scotsman, Inflation is 'exclusively caused by governments'. Mr. Blundell touches on the perception, with which I agree, of an anomaly in Friedman's faith in markets, the lack of a free market in money. If, as seems central to the Chicago School of Monetarism, that markets and not governments should set prices, why do we need Central Banks setting the price of money? Rather, he argues, taking a page from Hayek, we should allow competition into the business of seignorage. I believe this approach will eventually be adopted although not until the pain of the current policy choice of national monopolies on money leads the general populace to get over their sense of alignment with the investor class. Just as uniformity in use of language improves communication, so too, I believe, will uniform value of money, such as flows from an explicit gold standard, lead to improved commercial relations. It is this expected process of growing economic pain via debased currencies and consequent rising political support for an end to the money monopoly of the Central Banks which informs my view of the benefits of investments in precious metals over the next few years. These investments not only offer protection from the currency debasing policies of the world's Central Banks, they will also gain in the event of a return to hard money standards.