Where Will the Money Go?

Our leaders would do all of us a favor if they took a course in common sense economics. Common sense economics attempts to view things from the perspective of the global consumer, not “too big to fail” transnational banks. Those with a common sense approach to economics know that lowering interest rates won’t boost domestic spending because Baby Boomers dominate the wealth in America. The Fed is essentially assuming that Boomers are speculators and that they will recklessly borrow and gamble their retirement savings away. This notion defies common sense. The Fed’s refusal to intelligently adjust their theories explains why our economy remains in recession.

Underlying all major trends is capital formation. Capital will account for interest rates, exchange rates, taxes, and profit potential when deciding where to invest. The idea that devaluing the dollar stimulates exports, and therefore improves our economy, is incredibly asinine. All things being equal, global capital will decide to stay at home if the dollar declines because for all intents and purposes, currency appreciation is the same as profits. For example, U.S. real estate can rise 25%, but if the Canadian dollar appreciates 50%, you will still see Canadians coming over to America to shop cheaply.  From their perspective, real estate in America would be in a steep decline.

Global Perspective

Americans are a funny lot; we don’t seem to feel the need to think globally. Let me give you one example. For the longest time, U.S. demand for crude oil was the equivalent of global demand. If prices got too high, U.S. consumers would cut back on their consumption and prices would cater to Americans and fall. Now that there is a growing economic monster called China, this is no longer the case. Americans have reduced their consumption of crude oil in response to higher prices and guess what’s happening? Prices are going higher. Many of the privileges we’ve held for generations are disappearing.

This kind of global perspective mixed in with some common sense will go a long way in determining how successful you are as an investor. The wealth of the world is being transferred from West to East. The wise investor would look at what China is buying and copy them since they are already big enough to create trends. Even someone who doesn’t believe in gold should have bought it years ago once China started showing interest. And remember, the Chinese don’t buy to speculate; their thinking totally differs from American thinking. 

With all global currencies racing to the bottom, I believe exchange rates will greatly effect investing trends. This is one of the reasons I think the Fed’s policy of deliberate dollar devaluation is doomed to fail. It is easier than ever for American citizens to invest abroad, and if the government continues to devalue, there will be a stampede to get capital out of America. When 40% of Americans question whether the President is even a citizen, you know there is a serious lack of public confidence. This lack of public confidence will eventually reveal itself through capital flows out of the dollar.

Where Will the Money Go? is a post from: Expected Returns

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