Following the Zimbabwe Model
Michael Pento
04/09/2008
By Michael Pento
Delta Global Advisors
Dr. Martin Feldstein, who is a Harvard University professor and
President of the National Bureau of Economic Research, said during an
interview on a financial TV Network that the greatest accomplishment
of the Fed was that it "made the U.S. dollar more competitive on
international markets." In other words this professor of economics at
one of America's most prestigious universities is lauding the fact
that the USD has declined precipitously against our major trading
partners. He further went on to boast that it is the very fact that
our currency has been so weak that has saved us from a deep recession
and allowed the US to re****t positive GDP numbers. His state of
optimism centered on the fact that U.S. ex****ts were increasing due to
the cheapness of the dollar.
The belief that economic growth can be produced on the back of falling
currency pervades Wall St. and Wa****ngton D.C. at this time. While it
is true that a weak currency tends to boost ex****ts, it neither boosts
growth nor improves trade deficits. For an example, look at the USD
vs. the Renminbi. The USD has declined 18.21% vs. the Renminbi since
the removal of the peg in July of 2005. Yet the trade deficit with
China has increased to $256 billion in 2007 from $201 billion in 2005.
All the while Chinese GDP has soared while America's has stagnated.
This sophomoric reasoning shows a complete lack of understanding of
what engenders economic growth. As I stated on CNBC's Kudlow and Co.
last week, economic growth results from low taxes, low interest rates,
low inflation and an unfettered free market. The paths of those key
economic conditions are currently all going in the wrong direction.
However, investors are choosing to ignore future tax increases (Bush
tax cuts sun set in 2010), ramping inflation and a plethora of free
market busting directives from Wa****ngton. They are instead putting
their faith in the Fed. As to what the Fed can accomplish let me be
clear. The only thing the Fed can do is print more money.
Unfortunately for the Fed, the "P" in G.D.P. stands for Product not
Printing. Growth is not measured by the annual rate of change in the
amount of money printed but rather the change in total output of goods
and services.
According to that philosophy which is also held by Dr. Bernanke, the
world's most prosperous economy should now be Zimbabwe. After all, the
Central Bank of that country has provided ample liquidity to stimulate
the economy. In fact, the central bank's governor Gideon Gono has
provided enough stimuli to send inflation to 164,900% (Official CSO)
in February of 2008. No one is arguing that Mr. Gono reacted too
slowly in his decision to cut interest rates. And no one is
celebrating the fact that the Zimbabwe central bank is "now on the
case" to combat slowing growth and a weakening economy.
If monetary growth was able to promote economic growth, Zimbabwe's
economy would be soaring. Instead, we find an unemployment rate of 85%
and a nominal G.D.P. rate of -5.7% in 2007 and -3.6% (IMF estimate) in
2008. But the current economic mess was not always the case in this
country. During the rule of Robert Mugabe since 1980, the country has
gone from one of Africa's finest examples of economic prosperity to
having the highest inflation rate and lowest real GDP on the planet.
The facts are that as long there is enough new money created to
satisfy the increases in work force and productivity growth the
economy will remain in balance. Monetary growth rates are now light
years ahead of that level. Every unit of currency created above the
intrinsic demand level will lead to higher prices. New money created
is the definition of inflation. Higher prices of goods and services
ensue when the amount of money creation outstrips the supply of goods
and services in an economy.
The biggest lie ever perpetrated on the investing public by the Fed is
that printing money can spur economic growth. It never has and it
never will. Never in the history of economics has a country been able
to become prosperous by devaluing its currency. Why we are trying it
in America is beyond my comprehension. I'm sure the citizens of
Zimbabwe scoffed at the notion that their once prosperous country
could ever share the fate of Weimar Germany. And I'm equally convinced
that most investors will chuckle at the mere suggestion that we are
going down the same path here in the United States.
The current U.S. national debt is $9.44 trillion. Looking forward to
the coming deficits that face this country, we have projected deficit
of $59 trillion. It is clear that the Fed will be forced to monetize
the debt away as it is impossible to either tax or grow our way out of
the situation. There is good evidence for reaching that conclusion
based on the actions being taken today to clear up a comparatively
minor crisis in the housing market. Instead of allowing free markets
to work and to reconcile the imbalances created by the asset bubble,
we have decided to debase the USD until home values stop declining.
Investors that prepare now for the coming inflation cycle will fare
much better than those who chose to believe it can never happen here
in the USA.
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