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If asset prices soar because of excessive liquidity, asset bubbles can cause problem
Although I was not 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 steep loss of value of the US dollar over the last few years, it would seem that ‘inflation’ in the US was far higher than what the clowns at the Bureau of Labour Statistics would have us believe.
I have maintained times and again that the US policy makers 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, 2007, the Fed clearly showed the world upon which option it had decided! Stocks rallied, the US 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.
A few observations: It is well-known that US equities have underperformed gold and other commodities badly since 2000. Even strong stock markets such as the Hang Seng Index in Hong Kong have also significantly underperformed gold. Moreover, whereas the Dow Jones marginally outperformed gold between May 2006 and July 2007, the easing moves by the Fed – first the discount rate cut and then the September 18 Federal fund rate cut – have again strengthened gold against equities.
In fact, I would argue that 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! The confetti manufactured by a subsidiary of General Motors in the US are inevitably of poorer quality than the ones produced by BMW in Germany and the ones made in Chinese sweatshops, and so their values fluctuate against each other to reflect the difference in quality. But, they are all confetti nevertheless. And once people realize that these confetti, deposited in a bank or lent out at a 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. Now, someone could argue that there is nothing wrong with asset prices appreciating. Correct, if asset prices increase because of favourable fundamental factors. However, if asset prices soar because of excessive liquidity (money supply and debt growth), asset bubbles develop which cause considerable economic pain.
Marc Faber
If asset prices soar because of excessive liquidity, asset bubbles can cause problem
Although I was not 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 steep loss of value of the US dollar over the last few years, it would seem that ‘inflation’ in the US was far higher than what the clowns at the Bureau of Labour Statistics would have us believe.I have maintained times and again that the US policy makers 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, 2007, the Fed clearly showed the world upon which option it had decided! Stocks rallied, the US 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.
A few observations: It is well-known that US equities have underperformed gold and other commodities badly since 2000. Even strong stock markets such as the Hang Seng Index in Hong Kong have also significantly underperformed gold. Moreover, whereas the Dow Jones marginally outperformed gold between May 2006 and July 2007, the easing moves by the Fed – first the discount rate cut and then the September 18 Federal fund rate cut – have again strengthened gold against equities.
In fact, I would argue that 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! The confetti manufactured by a subsidiary of General Motors in the US are inevitably of poorer quality than the ones produced by BMW in Germany and the ones made in Chinese sweatshops, and so their values fluctuate against each other to reflect the difference in quality. But, they are all confetti nevertheless. And once people realize that these confetti, deposited in a bank or lent out at a 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. Now, someone could argue that there is nothing wrong with asset prices appreciating. Correct, if asset prices increase because of favourable fundamental factors. However, if asset prices soar because of excessive liquidity (money supply and debt growth), asset bubbles develop which cause considerable economic pain.
Marc Faber
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Source : IIPM Editorial, 2008
An Initiative of IIPM, Malay Chaudhuri and Arindam Chaudhuri (Renowned Management Guru and Economist).
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Source : IIPM Editorial, 2008
An Initiative of IIPM, Malay Chaudhuri and Arindam Chaudhuri (Renowned Management Guru and Economist).
Read these article :-
B-schooled in India, Placed Abroad (Print Version)
IIPM in Financial times (Print Version)
IIPM makes business education truly global (Print Version)
The Indian Institute of Planning and Management (IIPM)
IIPM Campus
ZEE BUSINESS BEST B SCHOOL SURVEY
For More IIPM Info, Visit below mentioned IIPM articles.
1500-plus IIPM students placed across the country with 44 bagging international offers
IIPM set to beat economic slowdown
IIPM, GURGAON
IIPM - Admission Procedure
IIPM awards four Bengali novelists
The Hindu : Education Plus : Honour for IIPM
IIPM ranked No.1 B-School in India, Management News - By ...
IIPM Ranked No1 B-School in India
Moneycontrol >> News >> Press- News >> IIPM ranked No1 B-School in ...
» IIPM ranked No1 B-School in India :: Education, Careers ...
The Hindu Business Line : IIPM placements hit a high of over 2000 jobs
Deccan Herald - IIPM ranked as top B-School in India
India eNews - IIPM Ranked No1 B-School in India
IIPM Delhi - Indian Institute of Planning and Management New Delhi ...
domain-b.com : IIPM ranked ahead of IIMs
IIPM makes business education truly global-Education-The Times of ...
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