Why printing money is a fool's paradise

11/04/2013

Policymakers around the world risk catastrophe unless they turn off the electronic printing presses and accept the pain of rebalancing their budgets, investor and author Jim Rogers has warned.

What Rogers sees as a competitive devaluation of currencies runs the risk of turning into trade protectionism and even armed conflict – unless central banks and politicians change tack or the markets force the issue. The latter, Rogers believes, will happen by the end of 2015.

“For the first time in recorded history, every major central bank is devaluing their currency by printing an unlimited amount of money,” said Rogers after addressing the audience at the RBS Macro Conference in London. “It is a fools’ paradise; they are living in Neverland.”

Rogers co-founded the Quantum Fund with George Soros in 1973 before leaving in 1980 to travel the world on a motorcycle. Since then, he has been a guest professor of finance at Columbia University.

To illustrate the potential harm involved in loosening monetary policy, Rogers points to the radical measures recently advocated by Japanese prime minister Shinzo Abe. They include turning on the printing presses in what Rogers sees as a calculated move to import inflation and finally break the shackles of 20 years of stagnant growth.

“It’s going to be extremely painful for everyone else,” said Rogers. If the yen depreciates to 110 or 120 against the dollar, then you get huge ramifications in the real world.

“There is always somebody on the wrong side of the trade. Potentially, other companies are not going to be able to compete with the Japanese. It might be great news for Toyota, but General Motors and Chevrolet are going to have a lot of problems.”

The other people who will suffer are savers, he said, who will see the value of their savings eroded by inflation. “They are being wiped out for doing the right thing to help the people who have done what is traditionally seen to be the wrong thing – borrow too much money.

“Successful countries and societies are built on savings and investments.”

Policymakers should have taken tough action at the start of the crisis, Rogers said. He believes they have drawn lessons from the wrong period of history.

Instead of looking at the Great Depression in the decade following the Wall Street Crash of 1929, they should have gone back a further 10 years to look at the US response to the recession of the early 1920s. “They had those problems, but they balanced the budget and raised interest rates,” said Rogers. He added the US then went on to enjoy a prosperous decade. The 1930s ended in war. In the run up to 1939, the world fractured into a series of trading blocs after a string of currency devaluations.

Rogers cites more recent examples: Scandinavia swallowed bitter medicine in the early 1990s and has prospered since an initial two to three years of pain. “Japan, on the other hand, has refused to let its zombie banks and zombie companies fall, resulting in two lost decades and a stock market down 75 per cent from where it was in 1990,” he said.

“Dealing with reality works; denying reality does not and leads to more problems.”

He is not confident modern policymakers are prepared to deal with reality. “What is more likely to happen is that the market is going to force the issue. By 2015, or even later this year, something will happen, he said, although maybe not before the German elections in September, when chancellor Angela Merkel will seek to retain power.

“Mrs Merkel is going to do everything she can to keep Europe and the world calm until after the election so she can win” he said. “I have no idea if she will succeed at either, but we can expect more good news, artificial or not, until then.

“The market may not let the world get away with it until the autumn, but she controls one of the world’s largest economies so has some clout.”

Europe will try to hold things together for as long as possible. “Kicking the can down the road is to the benefit of many in power,” Rogers said, “although not for the rest of us.”

The causes of the current malaise can be dated back 50 years to when America’s involvement in the Vietnam War started escalating and the country started running a deficit. Many other countries followed suit, adding to the global problems: “The world has had decades of excesses. It’s not just the US, although the US has been on the wrong path the longest,” he said. “The US is now the largest debtor in the history of the world, and its debt continues to rise steadily. We cannot solve decades of worldwide excess with a few aspirin. It is going to be painful whether we bite the bullet or whether the markets shoot us with the bullet.”

If the markets – or indeed the policymakers – fail to tackle the problems, then Rogers has a bleak prognosis. He sees enough tensions across the world to see any number of potential flashpoints: “Asia looks a lot like Europe in 1910,” he said. “There are a lot of regional spats, a lot of sparring over nothing. But then something could happen in the Middle East.”

In the meantime, he said investors should focus on the fundamentals of food, water and commodities. “Any corporate or institution with cash should invest in farmland,” he said. “Everybody else should become a farmer.”

Rogers has written a string of books, including ‘Investment Biker: Around the World With Jim Rogers’ and the latest, ‘Street Smarts: Adventures on the Road and in the Markets’, published this year.

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