Sunday, November 7, 2010

Currency Wars Part VII: Jim Rogers Gets It Wrong Again

Well-known economist, academician, theorist, investor and author Jim Rogers says Ben Bernanke doesn’t know what he’s doing:

Bernanke ‘Doesn’t Understand’ Economics, Rogers Says

Nov. 5 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke’s decision to pump a further $600 billion into the economy shows his grasp of economics is weak, said investor Jim Rogers, chairman of Rogers Holdings.

“Dr. Bernanke unfortunately does not understand economics, he does not understand currencies, he does not understand finance,” Rogers, 68, said in a lecture at Oxford University’s Balliol College yesterday. “All he understands is printing money.”

“His whole intellectual career has been based on the study of printing money,” said Rogers, who predicted the start of the global commodities rally in 1999. “Give the guy a printing press, he’s going to run it as fast as he can.”

The Fed said on Nov. 3 it will buy an additional $600 billion of Treasuries through June, in a bid to reduce unemployment and avert deflation. While Bernanke’s near-zero rates and $1.7 trillion in asset purchases helped end the recession, the Fed said progress has been “disappointingly slow” in bringing down joblessness that is close to a 26-year high.

“Debasing your currency has never worked,” Rogers said…

…Rogers said the Fed was “throwing petrol on the fire” of surging commodity prices, which rose to a two-year high today. He urged students to scrap career plans for Wall Street or the City, London’s financial district, and to study agriculture and mining instead.

“The power is shifting again from the financial centers to the producers of real goods,” he said. “The place to be is in commodities, raw materials, natural resources.”

“Don’t go to Harvard Business School,” he said. “If you want to make fortunes and come back and donate large sums of money to Balliol you’re not going to do it if you get an MBA.”

He declined to comment on the performance of his own investments in commodities.

Rogers, who described the U.S. as the most indebted country in history, said quantitative easing had been a “horrible disaster.”

“It didn’t work the first time, it’s not going to work the second time,” he said in an interview with Bloomberg News. “It’s adding up staggering amounts of debt, staggering amounts of debased currencies. It’s going to cause more distortions, and we’re going to have more currency turmoil.”

The U.S. and U.K. governments’ taxpayer-sponsored bailouts of troubled banks were “unbelievable economics” and “terrible morality,” he said…

…“I’m here to sell books,” said Rogers, who lives in Singapore. “My little girls need royalties,” he added, referring to his two daughters, who are both younger than eight and were in the audience.

I don’t have much time to get into this much, but just to address a few points raised here.

“Debasing your currency has never worked” – I find it interesting that so many, even among those who ought to know better, refer to modern monetary systems in medieval terms and with correspondingly flawed analysis of the consequences. For the record, QE1 did exactly what it was supposed to do, and QE2 has worked even before it was actually announced. Prices of long dated securities are up (reducing the cost of borrowing), and inflation expectations are up. The dollar has also depreciated further – exactly what the US needs.

Also for the record, currency “debasement” worked in the US, UK and France in the 1930s, and it (partially) worked in Japan over the past decade.

The problem with the current QE exercise is not that it won’t work, but that its too small relative to the problems facing the US economy – it’s been estimated that the Fed needs to spend 10x more than what its doing now, to actually reach the required level of monetary easing that the state of the economy demands.

The problems that Rogers identifies are true (potential for asset bubbles, currency turmoil), but not relevant in a strict sense for the Fed. Their mandate is for price stability and full employment of the US economy, not the global one. While they’ll keep their eye out on the diplomatic front, the Fed’s first and primary concern is the 9.6% unemployment rate.

You have to think about that one for a minute – 9.6% is something like 30 million people, a group larger than the entire population of Malaysia. When balancing the potential costs and benefits to financial markets or to people, I’d prefer to be a humanist.


  1. sir,

    im not an economics expert but the way i understand your short article is that, since demand on USD is so huge around the globe, the US can just create wealth without having to produce anything or being productive. all they have to do is print a piece of paper called USD bcoz ppl around the globe sense the paper has value and are tradable.

    am i right?

  2. No, money is not wealth and can never be wealth - that's one of the biggest drawbacks of a gold standard or any other commodity based system.

    Here's the dichotomy - when people demand more money (as a store of value), that means there's actually less money circulating buying goods and services. In short, a recession (and if it goes on long enough, a depression).

    What the Fed is doing is supplying more dollars to try and meet that demand.

    The problem is that while demand for money is high inside the US, it's considerably lower outside the US. Since the US is an open economy (lots of trade), and since much of global trade is denominated in USD, that causes a lot of volatility in exchange rates and in financial markets outside the US.