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Posted on January 13, 2009 -
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What is meant by the terms "real money" or "hard money"? I associate hard money with a gold-backed currency or a consistently well managed paper money standard, both of which can protect the financial system from the many dangers of a fiat, poorly managed paper standard. We know that the main danger of a paper standard is that if too much money is printed, it becomes worth less as the value of the money is inflated away through excess supply.

Previous Federal Reserve Chairman Paul Volker (in the early 1980's) saved our country from hyperinflation as the gold price inflated in the 1970's from a fixed price of $35 to $850 in 1980. Double digit inflation raged, and interest rates on commercial paper rose as high as 19%. Volker ushered in a period of tight monetary policy, exacting a deep recession in 1982. Thus began the disinflationary process that Alan Greenspan continued during most of his term. The U.S. economy experienced a long period of lower inflation from 1982-2000, which was a golden age for capitalism and investment in the stock market. The stock market ascended over ten times in value during that time while the gold price languished.
 
The Federal Reserve under Chairman Bernanke in 2008 printed money with abandon to prevent the current credit recession from exacting a further toll on many banks and millions of consumers who entered into untenable mortgage agreements. The Fed's easy money policies may be a threat to the long term viability of the capitalist system itself should the ease result in escalating prices, which may impair the economic survival of further millions of Americans. Bernanke, a student of the Great Depression, is likely to use any possible means to prevent a repeat of the 1930's. But in this case, the cure may be worse than the disease. See my article posted on May 14, 2008: Call to the Bernanke Federal Reserve: Round up the Debt!
 
The Federal Reserve using extreme monetary ease in 2008 and possibly forward to fight the credit seizure in our economy may result in significant inflation down the road, a dollar under severe pressure, and economic dislocations in future years.
 
Whether we have a gold standard or not in the future (which admittedly has its own set of issues), there are opportunities to make money currently by investing in various paper and hard asset classes, including stocks, bonds, foreign currency instruments and gold. See my article on gold, posted on April 23, 2007: When Gold Speaks a Thousand Words.
 
Under economic duress such as we had in 2008, the government can begin to simply diminish our currency's value by printing money. This means families can pay off their mortgages with cheaper dollars and government can inflate away its massive debt. Under those circumstances, bond prices could fall and interest rates could go up (yes, I said up!) as inflation increases. 

Famed investor Jim Rogers has spoken in television interviews of a massive bubble in the bond market, and I would agree that there are better alternatives than lending one's money to the United States government in 2009 for little return as it seeks desperately to extricate itself from the downside of the business cycle.
 
Currently, as 2009 begins, we witness a dramatic slowing in the global economy, as country after country embarks on its own stimulus plan. Ken Heebner, a respected veteran mutual fund manager whom I have quoted in this article series before, has stated on financial television that as a result of this slowing, there may be a glut of commodities on the world market for years to come. Thus, there may not be commodity inflation for some time, according to Heebner.

In contrast, David Dreman, another well known veteran money manager and Forbes Magazine columnist, has recently advised getting back into certain oil stocks as he believes that inflation will return as a result of the current easy money policies in the U.S.
 
If Dreman is right, the gold price may rise strongly after its current intermediate pause, and major oil firms may do quite well in future years until the necessary tight money policies to fight a ballooning price level force an end to the boom. I believe our leaders in government will have to learn the lesson of the 1970's once again, when double digit inflation forced the Fed to choke off an overheating economy.
 
Common stocks are surprisingly a reasonable hedge against rising prices as companies' revenues (and their costs) may increase in an embedded inflation. Thus, their "paper value," or stock prices may increase. It seems possible to me that the late Obama years may end up being characterized by a rapid increase in the price level. The last great inflation was led by increasing gold and oil prices (the Jimmy Carter years). It was not until after the inflation was "broken" by Volker's tight money that we embarked on a super bull market in stocks that lasted from 1982-2000.

My investment portfolio contains positions in oil, oil service firms, gold bullion and coins, mutual funds that invest in foreign currency instruments and diversified stocks and other mutual funds. Gold could even prosper during periods of general economic mismanagement during the Obama years. Yet, I believe after much economic pain and a peak in gold, the bull market in stocks may again return and a diversified stock portfolio could do quite well as the major averages finally increase consistently some years from now.
 
For now, countries with economies and money supplies well managed by monetary authorities with an eye toward maintaining low inflation may have better stock market performance and currencies that appreciate in value. In that line of thinking, I continue to hold the Franklin Templeton Hard Currency Fund, the Templeton Global Bond Fund, and a Japanese Yen Exchange Traded Note.

 

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