1. QE2
Ben Bernanke has said that he will do all he can to create inflation out of deflation. He has already dropped the Fed rate, or the cost it charges for banks to borrow money to 0.25%, which is essentially free…
Ben now plans to credit its own account with money it creates ex nihilo.
The Fed will then buy assets such as government bonds, mortgage-backed securities, and corporate bonds from banks and other large financial institutions. This will fill bank deposits to the brim with money; in addition to holding up real estate prices in the Hamptons, it is hoped it will spur investments in new business, and thus create jobs.
Many people think that this policy will destroy the dollar and spur inflation.
Because there is already a surplus in idle manufacturing capacity and large personal and private debt and a great deal of surplus cash at the large banks, very few people or corporations are willing to take out new loans.
Bernanke is, in essence, pushing on the proverbial string.
On the flip side, it’s argued that shrinking credit, in addition to robust a trade war, is what created the Great Depression.
2. Currency war as a trade war
As the G20 starts in South Korea, the biggest threat to the global economy is a trade war in the form of currency devaluation.
While Bernanke is saying he will go large on the second round of quantitative easing, the Treasury Secretary Tim Geithner is setting out to convince the rest of the world not to devalue its currency, despite the fact that the US is actively doing so.
A cheap currency and high inflation deflates debts and increases exports. And that is what a strong dollar ultimately is. Japan, Israel, South Korea, Brazil, and others have already admitted to selling their currency in order to depress its value.
This is a race to the bottom that is good for no one. It is the first step to tariffs.
Brazil has seen its currency rise abruptly, and has been the first to issue rules against foreign inflows of fast cash.
These currency games are a classic prisoners’ dilemma. Unless all agree to free trade of currency, the one who moves first and hardest will be the winner.
As the US is by far the world’s largest economy and prints the world’s most-used currency, it will be able to slash its value. Thus, it will “win.”
However, in terms of international corporate planning and profits, inflation, free trade, and long-term trust in American style capitalism, Uncle Sam will “lose.”
One might think you can’t solve a debt crisis by going into more debt, but here we are.
The neo-Keynesians who have been in power since Greenspan believe that you spend in bad times “to prime the pump.” The problem is that the politicians being people like You and me and the people themselves, don’t save during the good times. It is a natural economy of the party times. Instead they try to save when the going gets rough. A real impossibility and an economic connundrum.
That is the real dilemma.
How to act counter intuitively…
So you have a situation in which with each recession, instead of paying down debt and balancing the budget, the government goes into more debt. Each recession begets a boom and a larger debt. At some point, the debt becomes too large… and you have a credit crisis.
This leads you to Europe: Iceland, France, Greece, Spain, Hungary and Italy are now on fire because the politicians made promises during the good times that they can no longer keep. They are attempting to tighten their belts and pay down debt in order to get to return to the good times. Only old Blightey is holding firm with 20% cuts in all Ministries and realistic budgets that will draw down the deficits and boost the value of the pound.
In the United States, we are expanding the promises and going into more and more debt with the belief we can grow our way out of it simply by priming the pump and stimulating new development
I could point to the last four bubble-bust cycles during the past 15 -20 years and say, “Ben, my friend, look – it doesn’t work.”
All that spending simply created false profits in dot-com, housing, oil, and sundry, smaller bubbles from uranium to potash.
But then again…
Maybe, I’m not that smart…
Clever Ben sees some different data streams than the plebeians like us, are allowed to see.
Or maybe, he isn’t that smart and he smokes some of that happy weed that makes everything look rosy in the future
4. Global growth vs national growth
Can we grow our way out?
Nouriel Roubini, the man who made his bones by calling the last bust, recently gave a talk in Istanbul… saying: “The relatively fast growth in world economies in the first half of 2010 has started slowing down in the year’s second half.”
“Some factors that contributed the growth performances of developed economies in the first half of 2010 will not continue to exist in the second half, slowing the growth. The growth of the U.S. economy will drop to nearly 1 percent and create a recession-like effect.”
The problem with Roubini is he is always looking for bubbles in need of a pin, and of course, he is right. Sometimes. It’s a no-risk trade.
The IMF calls for U.S. GDP growth to be 2.3%, and world GDP growth to be 4.6% for 2011.
The IMF is notoriously wrong. And naturally these guesses will be way off base. One can benefit simply going against those numbers…
5. Winners and losers of the next two years
But they can count on the intelligence of the FED, because there is one thing the Fed is good at, and that is creating bubbles. They have been in the process of creating the next bubble for the past two years.
Yours,
Pano
PS:
The only question you need to ask in order to profit is:
Where will all the new money go?
So far, it’s been in the Chinese and Canadian property markets, metals, and fungible commodities like agriculture.
In the past fifteen years, we’ve made a lot of money by betting on the Fed’s ability to create bubbles. Every asset class, with the exception of the last bubble – subprime & housing, will go up. The question is which asset class will be the best performer.
For the quarters forward and the two next years, I recommend buying coal busting renewable companies and investing in Green Capital.
Invest in the Green Capital indexes globally and in GREEN BONDS. Green Capital Index in China and India will outperform the indices of the US and UK easily.
Stay out of investments that might be subject to harsh currency liabilities, like Toyota Motors, due to the strong yen and Bank of China, due to undervalued yuan, and also BoA due to the same reasons…
The trends are clear.
You want to be out of the dollar, out of multinationals, and into undervalued renewable energies, undervalued Green Capital indices of countries with rising currencies and in the currency of the future and the renewable energies: GREEN BONDS
The Green Bonds Ministerial Summit – London May 11th 2011- is the best and most important Environmental Finance Summit in the world.
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GREEN BONDS (Tm) are not your fathers bonds.
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The Green Bonds Ministerial Summit in London is May 11th and the registration is open now.
All meetings will be held at the London Stock Exchange and the deal maker positions are two dozen.
If you have Green Projects in need of finance and especially Green Energy and Renewables, bring them on.
To sponsor, participate, speak, attend, or simply join us – just – let me know.
