What Happens When Money’s Too Easy

My favorite investment analyst must be ready to have kittens. Of course, Jim Rogers has advocated the abolition of the Federal Reserve for a number of years, and this latest government bailout must have him steaming.

He argues that it was the central bank that helped create (but not exclusively) the housing crisis that we’re experiencing now. This precipitated the credit crunch and, subsequently, the financial crisis on Wall Street.

Commodity prices were then hit hard, as Wall Street investment banks sold everything in order to cover their losses from failed mortgages. It’s a vicious cycle, there’s no doubt about it. The fact of the matter is that the market must be allowed to correct itself, especially since the marketplace created the problem in the first place.

Rogers is buying airline stocks now and he likes the yen, the Swiss franc and agricultural commodities. He is very bearish on the U.S. dollar, and the $700-billion Wall Street bailout package must be the icing on the cake.

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One thing I’m really starting to realize is that the monetary policy cycle is much longer in duration than most people give it credit for. While former Fed Chairman Greenspan was hailed as a great steward of the economy and Wall Street capital markets, that whole picture is now being unwound.

All the years of exceptionally reduced interest rates and easy money have now come to a head. Now we have a hungover real estate market, growing inflation, and a weak Main Street economy.

There really is a long-term, cumulative effect to monetary policy and, although it takes a long time to develop, the consequences of too-easy money can lead to significant problems, as we’re now seeing. We’ll be very lucky if we get out of this mess without a major, long-winded recession.