For our clients and readers, I have linked an article by Jon Hilsenrath, Chief Economics Correspondent for the Wall Street Journal.  His article presents a good summary of the macro monetary debate occurring in the country.  Concerns about the Fed, the financial sector and their, allegedly, dubious relationship with our politicians are already part of the Presidential campaign rhetoric.  Occupy Wall Street and the Tea Party are the manifestations of electoral discontent.

At Alhambra Investments we are proponents of sound money.  A stable measure of value would decrease the uncertainty in the pricing mechanism for risk and make the investing landscape more lucid.  We do acknowledge the benefit of some amount of nominal growth.  Our friend, Steve, at Gavekal describes it as “grease in the engine,” an economic friction reducing lubricant.  But the record is clear, there have been abuses.  Yes, monetary policy has been used ex post to smooth headwinds caused by wasteful politics and greedy banks.  Our country, fortunately, has been a robust economic machine and, thus, able to tow dead weight and bail out greed.  The consequences are and continue to be:

  • the unnecessary depletion of savings and investment
  • increased uncertainty and volatility for investors
  • most concerning, the incentive for it all to continue

Money creation has 2 effects: the dilution or leverage of savings.   If the economy does not demand dollars, they become over supplied and will merely slosh around in the system, ie stagflation.  But if the economy demands these dollars it will grab them, churn them and unleash economic value.

Remember that value and money are not the same.  Value is created by a brain and by shear sweat; in some cases it requires a raw material input.  Value is the integration of physics to turn metal into a machine which works 10x more efficiently than a worker.  Savings and investment is the excess stored value used to produce additional value.  Money is merely the unit of exchange of value and “a dollar” is the US yardstick used to measure this value.  So, an adequate supply of the unit of exchange may be “grease in the engine,” but excess supply and demand will change the length of our yardstick.

The debate has never been more poignant and has meaningful ramifications for investors.  Will the Fed continue the monetary status quo with the accompanying moral hazard?  Or, will some change move us toward more sound money?  Fed, and other central bank, rhetoric and action as we try to emerge from the latest crises, along with a US Presidential Election will make 2012 a very interesting year.

Read the primer here: What is Money and How do you Destroy it

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For information on Alhambra Investment Partners’ money management services and global portfolio approach to capital preservation, Douglas R. Terry, CFA is reachable at dterry@4kb.d43.myftpupload.com