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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: elmatador who wrote (69942)	10/4/2007 8:56:12 AM
From: Chispas	Respond to of 116555

Marc Faber, "Paper Currencies Have Become Confetti" - .......................................................... From Monopoly money-isation the dollar is now suffering “confetti-isation”, according to Mark Faber, aka Dr Doom. And, in the circumstances, gold is glistening. In the latest issue of his (lengthy) subscriber monthly commentary on gloomboomdoom.com, Faber says that while he was never a particularly dedicated economics student, “one of the first economic laws I learned was that countries which have a relatively high inflation rate have weakening currencies”. Considering the dollar’s sharp loss of value over the last few years, it would seem that US “inflation” is far higher than the “clowns at the Bureau of Labor Statistics would have us believe”, he notes. US policymakers have had two options: a strong dollar because of tight monetary policies but weakening asset markets, or strengthening asset markets because of easy money and a weak dollar. Not surprisingly, on September 18, the Fed clearly showed the world upon which option it had decided… Stocks rallied, the dollar fell and gold soared. So, whereas it is possible for US equities to make new highs in dollar terms, measured against a hard currency such as gold, stocks are likely to continue to drift. Indeed, Faber argues, “because of artificially low interest rates around the world, paper currencies have lost one of their principal functions, which is to be a store of value. Paper currencies have become confetti.” Once people realise that these confetti, deposited in a bank or lent out at low interest, do not adequately protect them from the ongoing monetary depreciation (inflation), they exchange them for all kinds of assets such as equities, real estate, art, collectibles, commodities and foreign confetti of better quality in order to protect the purchasing power of their savings. The exchange of cash into assets then leads to rising prices, which does not escape the attention of speculators who then acquire assets and foreign currencies with borrowed funds at the prevailing artificially low interest rates. In turn, the increase in leverage drives asset prices even higher. Of course it is fine if asset prices increase because of favourable fundamental factors. But when asset prices are driven by excessive liquidity, asset bubbles develop - and eventually burst. Thereafter the object of speculation changes and a new leadership emerges, with the result that deflated bubbles stay down for a very long time. Faber says we need to consider here how to measure economic growth. “If low-quality confetti are no longer a store of value, they are also useless as a unit of accounting. We therefore need to measure economic growth in either ‘higher-quality confetti’ such as the euro, or in gold. And in both euro and gold terms, the US economy has been contracting since 2000.” Investors, Faber says, have “reached a crossroad”: Either you believe that the expansionary monetary policies of central banks will lift asset prices further or you take the strongly contrarian view that they will not work and that the world will sink into a deflationary recession.He states that “money printing will work for some assets (precious metals and commodities in general) but not for others (housing, US equities measured in gold terms) and not for the economy”. This does not suggest that commodities cannot also decline but it should be clear that the supply of “confetti, equities and bonds can be increased ad infinitum whereas the supply of precious metals in particular is extremely limited,” he concludes. In a deflationary global recession gold could initially come under some pressure also, “but once the realisation sinks in how messy deflation would be for over-indebted countries and households, its price would likely soar”. This entry was posted by Gwen Robinson on Thursday, October 4th, 2007 at 8:18 and is filed under Capital markets, People. Tagged with Dr Doom. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site. ...................................................... ftalphaville.ft.com