Deep thoughts here from Richard Russell:
Fed Chairman Benjamin S. Bernanke is like a madman during a hurricane. He’s shaking his fist at the sky and vowing to stop the wind. The wind he’s dealing with is deflation, and it’s a primary force. For the first time in modern history, China and India, together one-fourth of the world’s population, have joined the world economic community. Each nation has a population of over a billion, and these populations will work longer hours, for less money, and without medical insurance, without old-age insurance and without any other kind of insurance. For the most part they will work for less than a few dollars a day, and they’re happy to have a job — any lousy job.
These people have been working and scraping to stay alive for centuries. And suddenly, they have entered the world economy. They are thrifty and they are savers.
Do you know the “why” of the Chinese wok? Fuel is scarce in China, and if food is diced and sliced and placed in a wok with a bit of oil, it will cook in a minute or so over a small fire. As soon as the food is cooked, the fire is put out and the remains of the fuel are saved for the next meal. Talk about fast food, wok-cooked food is the original fast food. Wok food is cooked as quickly and as inexpensively as possible.
These are the billions of people we are dealing with. They live to work hard, and save — and to sell to the West, specifically to US consumers. And we wonder why there is world deflation.
In the meantime, the US is losing its manufacturing base. I remember when Alan Greenspan (‘member him?) said we don’t need manufacturing, if we lose our manufacturing we’ll find some other way to make money. You have to love Alan — never has one man held a job for so long (18 years) and at the same time been so wrong.
At any rate, that’s the way I see the world deflation story.
But there’s a Princeton Professor (now Fed Chairman) who is convinced that he knows how to hold back the wind and turn the deflationary tide. A bubble (housing) has burst and Ben Bernanke knows how to put that bubble back together again (“Humpty, Dumpty fell off the wall”). Bernanke is willing to create a flood-tide of trillions of Federal reserve notes in an attempt to smother deflation. But Bennie has a problem. In order to defeat deflation, he has to convince a frightened American public to loosen their purse strings and buy.
There is one difficult problem — the Fed may be pushing on a string. Bernanke’s premise — create the liquidity, create the money, and they will spend it, they will buy. But today there’s a villain out there, and it’s frustrating the Fed Chairman. The villain is called unemployment or the fear of not having a job. Or to put it another way, the real fear is that you may soon be losing your own job.
This fear has created two major reactions. One is called “saving.” The other reaction is called “thrift.” Personally, I’m rather familiar with both reactions. I’m familiar with them because I grew up during the Great Depression, during the 1930s. In those days, for a family to eat out in a restaurant was a big deal. In those days, the word “mortgage” was a dirty word. In those days, a subway trip all over Manhattan and Brooklyn and the Bronx and Queens cost a nickel. And if you wanted to transfer to a Madison Avenue bus that cost an extra two cents. In those days, kids hated fish, but families ate a lot of fish, not because fish was healthful, but because fish was dirt-cheap compared with steak or a leg of lamb.
So I have to wonder — will Ben Bernanke’s battle against deflation be successful or is he pushing on a string? I think we’ll know the answer before the year is out. I mean, is this a fascinating business or what!
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Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.