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would frankly like to see the gov get it'self in the money making business.
The government already is in the money making business in two key ways: The Federal Reserve. There are also the government sponsored agencies: Fannie Mae and Freddie Mac.
The Federal Reserve initiated what many bears like myself was a very reckless policy at the end of the internet bubble of excessive liquidity in the form of very low interest rates. I read somewhere that historically interest rates have been something around 4 something percent and the Fed's current Fed funds rate isn't too far off from the historical rate. However I believe that our current high deficits create a situation where rates should be higher than 4% because massive deficit government spending tends to "crowd out" private investment.
Another problem we have now versus other periods in history is the collapse of the gold standard and the Bretton Woods agreement in 73. The Gold standard could create terrible economic booms and busts based on the movement of a country's gold supplies. If a country became flush with gold there was massive growth in the money supply; and flush times would follow. However if I'm not mistaken this would result in a huge appreciation of the country's currency, resulting in a export disadvantage.
If a country became loss competitive vis a vis trade deficits develop bye, bye gold and interest rates would increase and the country's entire economy would come to a grinding halt.
Although this system had certain very obvious limitations it had one advantage over our current global system: the system was self adjusting.
With the Americans triumphant at the end of the Second World War. A monetary agreement was signed at Bretton Woods that would last until 1973. This agreement limited the price of gold to $40 per ounce and fixed the other national currencies to the dollar. In affect what this meant was that the dollar would become the world's defacto currency. However Bretton Woods was also in effect a gold standard because the value of gold was held constant relative to the dollar.
Everything was going fine in the begining. The US expanded trade with its allies and America's allies used American dollars to help rebuild their economies. In fact in the begining the lack of US dollars in other countries was a problem because other countries needed US dollars in order to fund their own growth.
As we all know Germany and Japan built massive industries after WWII and expanded their trade with the US.
However in 1960's the US economy was overheating and America began to import larger and larger quantities of imports and in the process export dollars. We buy imports and give foreigners US dollars. As a result the world became inundated with US Dollars.
The French realized this and began trading gold for Dollars at one ounce of gold for $40. They believed that gold was worth more than $40 an ounce and soon brought the entire system to a standstill. In 1973 Nixon suspended convertability of the US dollar to gold and ended Bretton Woods by having the various national currencies "float" against one another.
However before all was said and done the US struck a major deal with the Saudis and persuaded OPEC to price oil in US Dollars. By pricing oil in US dollars OPEC forced countries to accumulate dollar reserves if they wanted to buy oil and created demand for the dollar. Most commodities are also priced in dollars, making the dollar an important currency for commerce and trade.
Since the breakup of Bretton Woods the "Asian Tigers" have been able to industrialize at an astounding rate as have China and India. The reason is this: their is no control or limit on the number of dollars that the US can export. If countries like Japan and China sell their dollars they increase the strength of their own currencies; hurting exports. If these countries allow investors to deposit dollars for their own currencies then they risk inflation because they have to generate more local currency. So Asian central banks "sterilize"
dollar reserves by selling bonds and attempt to take them out of their economy. However the bonds must be paid back with interest.
Or if they hold dollar reserves Asian Central banks they do so not as cash but as treasury bills or gse securities from Fannie Mae Freddie Mac.
By Treasury Bills foreign central banks help to keep the interest rate in the United States low. In addition by purchasing GSE securities they help overheat the housing market because the GSE's use this money to buy even more mortgages and help keep housing hot. Of course when the housing market is hot people refi buy more stuff (especially imports and commodities) and help widen the trade deficit.
These higher trade deficits result in Asian central banks holding even more dollars and buying ever larger quantities of GSE and Treasury securities. In many respects this cycle is self sustaining.
What we have right now is a system of runaway money creation with very few checks and balances. This effects of this system can be seen in two areas in particular:
1. Real Estate
2. Commodities
Real Estate the world over has undergone a tremendous boom as capital has floods into various real estate markets. In Southern California the mean home price is $400,000 .
Commodities. Have enjoyed absolutely explosive price growth. Copper is up 70% year to date and oil is also $18+ higher per barrel than over a year ago.
Of course the one achilles heel to the system is borrowing. In the UK and US consumer borrowing has reached mind boggling levels. I believe that consumer debt in the UK has exceeded the trillion pound mark and in the US bank.
According to the Federal Reserve US Consumer debt (not counting mortgages) has gone from
1.52 trillion in 1999 to 2.038 trillion today.
US Consumer DebtRapid Expansion of Consumer debtNote that this section also has the total mortgage debt.
So what I'm trying to say is this: our prosperity in these last few years has been based upon the consumer acquiring ever larger amounts of debt. What is the natural "carrying limit" of the consumers debt? I don't think its a matter of if this bubble will explode its simply a matter of when.
Of course when this bubble explodes will it have deflationary or inflationary consequences? If the consequences are deflation then sell your house now! However if the consequences are inflation then what asset class holds its value best during inflationary periods with high interest rates.
Real estate's one problem is that relies extensively on capital markets. If interest rates go too high the cost of buying even the cheapest home becomes prohibative.
Unfortunately no one knows exactly how this game will come to an end. What will bring the global money/real estate/ commodities machine to halt? Personally I think its going to be energy. When oil reaches $100 a barrel then its very difficult to see how the economy will continue growing and prospering.
Of course this brings us to our next question what assets will hold their value when all is said and done?
