Saturday, December 20, 2008

Money Makes the World

Thanks to the financial crisis people are become more interested in the way markets function.

Anyone who works to help people deal with the crisis has discovered that it is not sufficient to mull over childhood memories and fantasy life. Professionals dealing with real people who have real problems in the real world has to have something more than a passing understanding about the way markets work.

To grasp this reality we need to know about the circulation of money. It is not an easy or simple topic. And yet, much of what is going on in the economic world today concerns whether the Federal Reserve and the Congress can forestall a deflationary collapse by engineering a wholesale inflation of our currency.

Understanding this reality and the way it is playing itself out in markets is essential to managing your life, your career, and your finances.

Surely, your financial adviser-- or yourself if that is your work-- has a view of the current state of the world and has worked with you to reposition your portfolio in relation to the new reality.

Goals have to be re-examined, too, but a good adviser will also work out a larger view of the markets, where they are, and where they may or may not be in the next few years.

I hesitate to write much about this topic since I am very far from being competent in it. Yet, fortune has provided us with an excellent essay by the estimable James Grant in today's "Wall Street Journal." It is well worth everyone's attention. Link here.


Charles A Pennison said...

I too am not an expert on money circulation, but this is my layman's observation.

The current problem is not money supply, but financial institutions unwillingness to take risks. The Federal Reserve is lending banks money almost interest free, and then the banks buy government bonds in return for a relatively safe income on that money. So, the government gives money to banks almost interest free, and then has to pay interest on that money through the sale of bonds. This does not sound like a good business plan to me.

Concerning the Madoff scam, where did that money go? People say that it was lost. Lost where? Into the pockets of option traders?


Stuart Schneiderman said...

Thank you, Charles, for your comment. In effect, we are saying the same thing in different ways. In a deflationary environment both prices and wages decrease. Thus, a person who holds cash will see his purchasing power increase as prices fall. He is acting rationally when he does not shop.

And a bank that must factor in the possibility that its borrowers will have lower wages in the future will not be able to make a rational decision about how much to lend them. thus, it will lend only to the most creditworthy customers.