Thursday, 19 January 2012

Rainstorms and sandstorms

Business Mirror

ECONOMIC “experts” like me have never had it any better. It seems like we have waited our whole lives for a situation to happen like the world has experienced in the last few years. It gives us the opportunity to talk and talk and talk.

Understand that for us, it is like watching a chess match, making comments on every move and giving our “expert” opinion of what should have been played and what will happen next. However, we do serve a useful and maybe even important purpose by hopefully getting people to think about what is happening even if their final comment is that we do not know what we are talking about.

The one thing we “experts” do know is that the situation globally is very unique. There have been many other times that there has been major, even global economic turmoil but it has never been like this for two serious reasons.

I know I have spoken of this many, many times before, but the economic world changed when all nations no longer backed their currencies with any hard asset in 1971.

Currency debasement has occurred for thousands of years when governments reduced the gold or silver content of coins. But people easily understood that. If the new coin contained half as much gold as the old coin, the seller simply charged twice as much. That’s currency induced inflation. But by the same token, eventually wages doubled the same way.

The German Weimar Republic printed trillions of pieces of currency to pay their foreign debt causing hyperinflation. Yet they still had gold in the vault. What they were doing was protecting their hard assets.

The second factor now is the overwhelming influence of the global central banks to influence and actually make monetary policy. And much of that policy is based on what the governments see as good politics rather than good economics.

There are two thoughts about where all this bad government policy is leading. One is super high inflation as trillions upon trillions of dollars, euros and other currencies are poured into the system. That on paper will avoid a global recession as this money should create economic output even if it does not create any real wealth. I like to think of that as a rainstorm.

Rainstorms are hard because you have to fight your way through the tempest to get any place. And you get wet, meaning there is damage. It takes longer to drive somewhere. Accidents happen more frequently. You need to buy wiper blades more often. You do not make as much money, your wealth cannot grow because it costs more to do your business.

Prices go much higher but income stays the same or goes down. You just cannot make any real economic headway.

The other idea is that the government policy to allow debt defaults and bank and company failures will create deflation as economic activity greatly slows down. Standards of living are reduced. More unemployment combined with a fall in both production and prices as people simply do not have the money to buy goods and services to create any significant economic growth.

I think of that as a sandstorm. Traveling during a sandstorm is not that difficult. But finding your way can be almost impossible. You think you are going the right way and suddenly you find that you have been going in the opposite direction. And when you get someplace, there is nothing there.

Companies cut costs to make profits and prices to attract customers and yet there are still no buyers. Companies and people reach a point where they have no idea how to cut back any more. It is an economic desert.

The worst case is what happened in the 1970s, a combination of both rain and sand. And what do you get? A mudstorm. High inflation caused by too much money in the system and very little economic activity. Another term is stagflation.

Stagflation is likely as governments swing between more money in the system and trying to deal with rising inflation.

Why do you think you have seen so many recent studies about how great countries like the Philippines are? Global money knows what the prospects are in the West and the new sweetheart economies like China and Brazil.

The Philippines has a large enough domestic economy to support economic activity and is not burdened with large amounts of public and private debt. It’s all sunshine in the Philippines.

On a personal note, I will be holding a one-day seminar on stock market trading in Cebu at the end of February. I will discuss trading techniques, stock selection, and practical technical analysis. E-mail me at and I will keep you informed.


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