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Central Bankers Are Hazardous to Your Financial Health

By    |   Wednesday, 20 Oct 2010 09:33 AM

Most of the times, I can read a central banker. I am not saying that all central bankers are good. Some are just outright bad for the country (like our own Alan Greenspan and now Ben Bernanke). There are some good ones (in Australia and India) who help us build a good, long-term investment portfolio based on policies they run.

I have the utmost respect for the central banker in Australia, Governor Glenn Stevens. He has been a rock in the sea of financial uncertainty.

"Sensible policy frameworks - both macroeconomic and microeconomic - remain in place; the financial regulatory system is strong and tested," Stevens said when Australia entered the recession in 2009.

The recession lasted one quarter and then the nation’s economy rebounded.

Both the Australian stock markets and the Australian dollar have reflected strength throughout the downturn and are now very strong. The Australian dollar hit parity with the U.S. dollar this past week for the first time in its history.

Moving on, the Central Bank of India is also considered a prudent policy guardian and works for the best of the economy. It doesn’t march to the beat of the politicians in power and acts in an independent manner.

The Central Bank chief in India is Governor Duvvuri Subbarao, who has successfully helped India dodge the recession when the whole world was collapsing.

During the darkest days, India’s GDP growth fell to 5.5 percent. And there were no significant bank bailouts either.

The Reserve Bank of India keeps a close tab on the banks and restricts unfettered, unregulated growth. Hence the prudence across the entire banking sector in India.

As you can see, when you find a solid central banker and follow the policy decisions they make, it is fairly simple to anticipate what can be expected from that country. It makes sense to invest into the prudent sectors within the stock markets.

But one must also capitalize the gains in currency and round out the portfolio with the appropriate foreign bond to ensure that the investment portfolio fires on all cylinders.

And then there is the antithesis of a prudent central banker.

I could write volumes about the follies by Alan Greenspan and Ben Bernanke. But I am sure you are nauseous reading about them.

Instead, I will tell you about “The Mad Hatter.”

The Finance Minister of Brazil, Guido Mantega. While he isn’t a central banker, he certainly wants to act like one and pretends that he can take on the free market and win.

The Brazilian real has been soaring for the past few months. The strength of the economy, the rapidly growing internal consumption story and the soaring trade with China has led to the Brazilian economy surging forward. This has led to inflation in the country and that has led to rising interest rates within Brazil.

As a consequence of this move, Brazil’s currency, the real, has soared.

Mantega decided to curb the soaring Real by taxing capital inflows by 2 percent a few months ago. This stalled the real’s growth for a few weeks, and then it rose again. So he ordered the central bank to intervene in the markets and artificially crush the real.

When the $1 billion per day sale didn’t halt the rise of the real, he raised the taxes on inflowing capital to 4 percent from 2 percent. And when that had no effect, within a couple of days of the last inflow-tax hike, he has raised the inflow capital tax to 6 percent.

Sigh. When will he learn that you can’t fight the free market and win? The last two hikes have brought no respite to the real. And the misguided Mantega will continue to squander the capital of his country with nothing to show for it.

So once again, Brazil is a good investment destination. But the policies are perplexing at times and consternation to growth.

Message to Minister Mantega: Embrace growth and revel in the strength of the real.

Use it to the country’s advantage and help your country soar to greater heights.

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Advani
Most of the times, I can read a central banker. I am not saying that all central bankers are good. Some are just outright bad for the country (like our own Alan Greenspan and now Ben Bernanke). There are some good ones (in Australia and India) who help us build a good,...
ashish,advani,Central,Bankers,long,term,clues
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2010-33-20
Wednesday, 20 Oct 2010 09:33 AM
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