Saving Is Good, Just Not In Dollars

David Merkel Aleph Blog June 7, 2011

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Rapid money supply growth with no consumer price inflation can only really occur within the confines of an asset price bubble, or else, where does the money go? Interest rates are low at such a time because of the incredible liquidity, and complacency of lenders that they will get an equal amount of purchasing power back. Perhaps another possibility is when a country's currency is being used more and more as a shadow currency, like the US in the Third World. But even that will come home someday.

I wrote this sometime prior to 2003. But can it be more relevant than today, aside from my comment about being a shadow currency? Alas, the US Dollar is not a store of value anymore. It is only a unit of exchange, like trading cigarettes in a prison camp.

The Federal Reserve may pretend that it is the guardian of stability, but it is not so with respect to asset values. The Fed stays within its mandates: labor unemployment and goods price inflation. Those are not much affected by Fed policy at present. But asset values are inflated.

What should we expect of monetary policy? Additional creation of money or credit should affect the prices of something. If the Fed does not intend on affecting a price somewhere, what is it up to? The economy is prices. What is the Fed if it does not affect prices? Next press conference, ask Ben what set of prices he is trying to affect. If he mumbles, as he usually does, you can know that he is without knowledge, or lying. All monetary policy affects prices, and it is either dishonest or stupid to say otherwise.

Thatâ??s all for now. We are in a rough situation because of errors in government and central bank policy, as well as cultural errors that have favored spending over saving. Ignore the idiots who talk of the paradox of thrift. They rely on short-term models which are not relevant in the real economy. Saving is a good thing, but maybe save in currencies that are not subject to government discretion, like gold.

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(Note: I am a math undergrad who never studied economics after the 200-level classes needed for a finance minor. I donâ??t claim to know enough to make assertions.)

Monetary policy is supposed to be a balance between inflation and stagnant growth â?? the issue is that I think there is a hidden ditch that was created by the banks leverage.

The fed has been pumping in liquidity, the banks have been increasing reserves and not lending. Isnâ??t this simply de-leveraging? If the banks donâ??t re-lever themselves, and use this additional cash to support their still-massive balance sheets in a slightly less precarious position, isnâ??t that going to support home prices from collapsing back to their â??trueâ? values pre-asset bubble, and leave the economy fairly stable?

>>Saving is a good thing, but maybe save in currencies that are not subject to government discretion, like gold.

Gold or a gold miner? Actually my preference in todayâ??s economics is (A) copper â?? actually the best copper miner I can find (in my view FCX) and (B) A solid company making the pick and axe sold to the miner (JOYG or CAT). Remember who made money in the CA gold rush it was the store keeper selling supplies to the miners. To juice up the return I periodically sell near OTM calls. If I were going to buy either, I would likely sell near OTM puts over and over again and hope it gets put to me.

[...] David Merkel, â??The Federal Reserve may pretend that it is the guardian of stability, but it is not so with respect to asset values.â? (Aleph Blog) [...]

There is some evidence (http://www.newyorkfed.org/research/staff_reports/sr497.pdf) that the recent bout of quantitative easing has not been inflationary because almost all of the new money is sitting at the Fed in the form of excess reserves.

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blog advertising is good for you Disclaimer David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures. Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business though it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions. Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of. 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JoshK: Hi, I always enjoy your posts. Didnâ??t read the book, but just one comment. The Jewish idea of â??a... cold.as.ice: >>Saving is a good thing, but maybe save in currencies that are not subject to government... davidmanheim: (Note: I am a math undergrad who never studied economics after the 200-level classes needed for a... ljoneill: Good stuff, Davidâ?¦as always. Hereâ??s the thing with momentum. I donâ??t believe it will EVER... Recent Trackbacks buyback | Abnormal Returns: Tuesday links: buyout Abnormal Returns: Sunday links: market mastery The Aleph Blog: How to Make More Returns on REITs Abnormal Returns: Friday links: spread trading Abnormal Returns: Thursday links: having it all

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Copyright David Merkel (c) 2007-2011 Disclaimer: David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures. Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business though it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions. Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of. _qacct="p-37GEOW7Y76-VY";quantserve(); var sc_project=2500170; var sc_invisible=0; var sc_partition=23; var sc_security="aacd9be3"; View My Stats _uacct = "UA-1957608-1"; urchinTracker();

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Saving Is Good, Just Not In Dollars

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