In this Barron's article, Hugh Hendry briefly explains what happens when you print too much currency. He uses the classic example -- John Law's French fiat currency disaster.
He pulls no punches:
The response to the crash since March 2000 has been to create even more money. Just as it was 300 years ago. We've created a tidal wave of liquidity, with the Dow back at 10,000. But in doing so, strange things have happened. Gold has broken its 25-year downtrend and has now established an uptrend. The CRB index is at a nine-year high. Oil prices didn't come down after the Iraq war concluded. Strange things are going on in the world at large. But not strange to a citizen of Paris in 1720.
He feels that our government has "broken it's trust" with us and that this unnaturally easy monetary policy will eventually destroy all the assets of the middle class. "Middle-class society preserves its wealth in paper assets and the honesty of the paper asset is that the central banks will not dilute your financial assets by printing too much money." I tend to agree.
No matter how smart Greenspan is, our continuation of the ludicrously low interest rates amid such incredible inflation in asset prices is, at best, a wild experiment involving the fortunes of 250 million Americans.
Hendry also has some interesting things to say about the effect of GSE's like Freddie Mac and Fannie Mae. The interesting part about that is that his description of the effect matches that of an abstract of a Federal Reserve Board paper that came out this week. That can be found here
Posted by nicole at January 02, 2004 08:47 AM