Posts Tagged ‘monetary policy’

In Zimbabwe, where money has been reduced to worthless paper due to hyperinflation, citizens are forced to panning for gold to pay for bread to stave off hunger.

Hyperinflation is an economic phenomenon, the root of which can be complex–but generally blamed on an increase in money supply, which consequently reduces the value of the money in stock. In Zimbabwe, as of 2008, the inflation rate is estimated at 516,000,000,000,000,000,000% (516 quintillion).

The sordid history of how great increases in money supply led to hyperinflation is chronicled in the wiki entry for Hyperinflation In Zimbabwe, which started with the government printing new currency to pay off international debts in 2006.

We previously featured Glenn Beck’s hockey stick presentation of potential US inflation. Are the US and European bailouts simply another Zimbabwe?

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Doing his impression of Al Gore’s Inconvenient Truth, journalist Glenn Beck illustrates the looming danger of hyperinflation due to the ongoing government bailouts:

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This Bloomberg interview last November 2008 of notorious bearish commentator Marc Faber shares his thoughts on the recent recovery of global stock markets . Faber reveals some of the dynamics between the U.S. Dollar and asset markets, and how they move in opposite directions.

Faber also shares his criticism of monetary and fiscal policy in reaction to the financial crisis–which are all geared towards consumption, when he mentions the solution is to improve savings rates and production rates, similar to Peter Schiff’s comments. He also criticizes the bailouts of banks financial institutions which practically exonorate their bad investment and lending practices which created originally the housing bubble and the subprime mortgage bubble and subsequent crash.

He also expects the current rally to go a little further, as far as January to March of 2009 as Global Central Banks inject liquidity which will prop up asset markets. Afterwards, the recessionary pressures begin to reassert themselves. Faber is still in favor of acquiring assets that are outside the U.S. Dollar, especially precious metals such as gold to weather the crisis.

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From a client folio prepared by Morgan Stanley. Very illuminating analysis on the USD trends:


The Fed’s QE Operations and the Dollar
November 28, 2008

Summary and Conclusions

The Fed has commenced QE (quantitative easing). In this note, we review the concept of QE and analyse the likely impact of this extraordinary operation on the dollar. The upshot is that, since monetary policy, including QE, is a ‘nominal’ operation, the operation itself should not have significant implications for the real value of the dollar. The nominal dollar value should, thus, only be affected if QE alters the outlook of inflation in the US over the medium term. Also, whether QE by the Fed should erode the value of the dollar should be assessed relative to what other central banks do. To the extent that the ECB and the BoE also conduct QE – which is the case – the impact of QE on the dollar is not necessarily negative.

Having said this, though QE per se should affect the dollar through relative inflation as well as inflation expectations, the underlying structural problems that forced the Fed to conduct QE in the first place should alter the fundamental value of the dollar, relative to those of other currencies. The parlous state of the US financial system should, in theory, be reflected in a lower value of the dollar, had it not been for its hegemonic reserve currency status propping the dollar up during this deleveraging phase. The bloated fiscal deficits (which we assume will exceed those of the G7 countries) will further weigh on the intrinsic value of the dollar.

In sum, whether QE by the Fed is negative for the dollar depends on the inflation outlook of the US and the resulting inflation expectations. But at a fundamental level, the dollar’s intrinsic value has indeed deteriorated with its severely weakened financial sector. We maintain our core view that the dollar should continue to appreciate as the world slows – which we assume will last until next summer – but could give back some of the gains when deleveraging stops and the recovery phase for the US economy proves to be more protracted and treacherous than for other economies. The size and vigour of the dollar rally against the majors in the next six months or so are also likely to be more tempered than we have had in mind, in light of the deteriorating fundamentals in the US. Our call on EM currencies remains unchanged.

See the rest of the analysis here.

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It’s often said that Money Is the root of all evil. Why is this so, and more to the point: what is the root of all money? Is it Gold? Is it the sum of all goods and services in an economy?

Paul Grignon produced an animated documentary about money and banking in the modern society which is a must see for everyone who is trying to make sense of why financial crises happen with ever greater scale and frequency, and the intentions and motives behind the money system–most of which will shock those who have never encountered these concepts before.

Check out this fascinating documentary here.

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