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Bailouts, Stimulus and Money Printing Won't Stop

Wednesday, 11 Nov 2009 11:36 AM

It is evident by now that most governments and politicians are not concerned with sound economic principles, are not interested in maintaining the value of their currencies, and don’t consider the indirect consequences of their intervention.

Their policies are mostly focused on short term results that will generate “positive” numbers or temporarily alleviate the affects of an economic downturn.

The consequences of these actions often lead to diverting and spending capital for unproductive purposes (growing government) or to support and bail out failed companies or bad investments.

This Monday the market rallied on news that the G20 pledged continuous aid to the economy until recovery is assured. Help was promised until the economy and the financial system returns to health. Fiscal stimulus and loose monetary policies are to be maintained for an extended period of time.

In plain English the statement should read: “We will continue to debase our currency through low interest rates or quantitative easing. This will help big banks to borrow at near zero percent and then charge 30 percent interest to their credit card customers. Also these policies will help sustain rising equity and commodity prices. After the price of oil sky rockets once again due to our policies, we will blame the ‘evil speculators’ as the culprits and push new taxes and regulations to control them.

We will return the world economy to “prosperity” by growing our governments and burdening our citizens with more debt to fund our plans. Our actions will crowd out the private sector, will raise the borrowing cost of productive private businesses, which won’t be able to expand their operations and hire new employees. That’s ok, though, because we have plenty of new bureaucrat job openings thanks to our stimulus packages.”

In the United States, President Obama signed a bill for to ease unemployment and increase stimulus. One of the measures is a $33 billion tax credit to money-losing home builders, which is basically a hidden bailout.

At the same time, Fannie Mae, which has received $45 billion in bailout money, is asking the Treasury for an extra $15 billion. Not only has this company has benefitted from massive handouts but also the Fed has repurchased billions of agency debt with freshly printed money.

This has artificially lowered the yield of Fannie Mae’s 10-year bonds, allowing it to borrow money at rates that certainly don’t match the risk.

All these measures maintain failed companies and attempt to re-inflate the housing bubble. This encourages bad investment and creates a moral hazard by eliminating risk for private companies. It also drains capital that could be used in productive ways by successful companies and unjustly favors one sector of the economy over other. Adam Smith’s invisible hand is currently handcuffed to the politicians’ will.

What should you do in this environment?

The stimulus, bailouts, and loose monetary policies favor an uptrend in equity and commodity markets. To profit from this situation, focus on the assets with greater relative strength, such as gold, commodities, and oil. These hard assets are the main targets of the liquidity generated by the central banks and government stimulus.

While intermittent corrections will occur, these assets should continue to gradually climb higher and protect your wealth. Until interest rates hikes occur, bailouts stop, and stimulus ends, which won’t occur in the foreseeable future, the trend in stocks and commodities should maintain its upward course.

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VictorRiesco
It is evident by now that most governments and politicians are not concerned with sound economic principles, are not interested in maintaining the value of their currencies, and don’t consider the indirect consequences of their intervention. Their policies are mostly...
victor,riesco,markets
564
2009-36-11
Wednesday, 11 Nov 2009 11:36 AM
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