Tuesday, December 16, 2008

Forbes Writer Responds

A few days ago, I wrote an article disagreeing with the economic proposals set forth in an article written on Forbes.com by Frank Beck. He responded to my arguments as follows:

"Actually, I believe we are experiencing the same devaluation, just over a longer period of time and it, like a pendulum, will likely swing further than what I proposed. You are right that cash gets “burned” (under either plan, or even under regular inflation). I just hope that those holding lots of cash, also own a home, some gold, and some other hard assets. That is how we position our clients, because the dollar is shrinking almost all of the time."

Many people have made the argument that this influx of cash will result in massive inflation in the future. When the economy picks up, inflation will indeed rear its head. But when the economy is strong, we can remove stimulus (i.e. by the Fed raising interest rates, and by the government switching to saving and paying down debt).

By maintaining a target inflation rate between 1% and 3%, we won't hurt the future practice of lending and we won't send those on fixed incomes to the poorhouse. If inflation is moderate and devaluation takes place over time (which is what has happened for the last 30 years), lenders do not lose purchasing power by making long-term loans.

Devaluing world currencies immediately would be irresponsible and would damage our future.

1 comment:

Nurseb911 said...

You also have to put into the proper contenxt the amount of "fake" money that existed that has no exited the system and all factors of deflation in housing, commodities and other sectors. Yes world governments have been plowing in money, but I think this its been over & above what's been taken out. A 40% drop in equity markets around the world certainly hasn't been replaced by 50% new money creation.

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