eFlourishing Masthead Outlined

 Published Weekly by Family Wealth Management, LLC 
          December 8, 2010                                                                                     Issue 40

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If you've been reading our monthly print newsletter, Flourishing, you know what I think of John Maynard Keynes and his economic theories.  If you haven't and don't, I'll briefly state here that I think he was an evil expletive deleted.  Mine is a minority view, or at least it was, until recently.  For example, yesterday (November 28), Newsweek featured an article by Ruchir Sharma, head of Emerging Markets at Morgan Stanley, entitled "The Triumphant Return of Hayek".  


Friedrich August von Hayek (1899 - 1992) was a student of the great Ludwig von Mises (1881 - 1973) and a Nobel Laureate (1974) for his account of how changing prices send important market signals that enable disparate individuals to coordinate their financial and business plans.  One could say that Hayek described in detail and confirmed the validity of Adam Smith's invisible hand as the most efficient regulator of the marketplace.  Unlike Keynes, Hayek was a staunch defender of a gold-backed currency, capitalism, and economic freedom.


Here is some of what Ruchir Sharma had to say:


There's a growing backlash against the Fed's monetary activism, for two reasons.  It is increasingly clear that the Fed can print all the money it wants to but has no control over where it ends up. Ever since the Fed stepped up talk of quantitative easing this summer, the prospect of easy money has driven up prices of commodities and emerging-market stocks, and Wall Street is abuzz with talk of the "next bubble."  Second, monetary activism suffers from the same fundamental flaw as Keynesianism, in that it protects inefficient players instead of injecting renewed vigor into the economy.  In a telling statement of the Fed's thinking, New York Fed member Brian Slack recently said that, with luck, quantitative easing will work by keeping "asset prices higher than they should be," as that adds to household wealth.  This is why stimulus can be so unpopular: it often benefits the rich (who own a disproportionate share of inflating assets such as stocks) at the cost of the poor (who are hurt most by the related rise in food and energy prices).


Federal Reserve Chairman Ben Bernanke, it is alleged, is an expert on The Great Depression. Given his choices and the political environment in which he operates, I'm sympathetic to his problem, even as I disagree with his policy of monetary inflation.  I believe that if they were today faced with Bernanke's predicament, Hayek and von Mises - each having seen first hand the effects of out of control spending and monetary inflation in Europe - would demand a return to the spending and monetary discipline of a gold-backed currency.  According to Sharma, a significant portion of the public now shares that view. Until next week,



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