Friday, December 25, 2009

Moheban Argues: Don't Expect Hyperinflation or the Collapse of the Dollar

Need to understand basic macroeconomics? I just read this book: Debunking the Hyperinflation of Peter Schiff and the Gold Bugs: A Guide for Investors, by Moheban. Recommended read. here's my review.

Peter Schiff predicts "surging long-term interest rates," "runaway inflation" and the ultimate "collapse of the dollar." Will it happen?

Many people proclaim to know the future of the economy. In the 1990's many financial advisers "just knew" that we had entered a "new economy" where technology stocks would continue to rise in value. They had great arguments to back up their claims. Alas, they were wrong; and those who followed their advice lost fortunes. A few years ago, many top economists argued that the housing market wasn't in a bubble and that defaults on the new, creative loans wouldn't cause severe economic problems. They were wrong.

So today many experts argue, with great confidence, that the Fed will have to print tons of paper money to pay off its debts, resulting in hyper-inflation and the collapse of the American dollar. Those who subscribe to this theory and act upon it should, they say, buy precious metals (even at inflated prices) and weight their stock holdings toward foreign securities. While this is a possible scenario, Richard Moheban argues that it's highly unlikely, thus providing a useful counterpoint to Peter Schiff's claims.

I began reading Moheban's book fully expecting to give it a quick read and find a bit of value, but in the end resell it on Amazon. Instead, I underlined, interacted with my pen and kept it for future reference.

Rather than use insider, technical economic speak, Moheban explains the basics of macroeconomics in language that is not only easy to understand, but actually entertaining. During my before-bedtime read, I felt compelled to interrupt my wife's reading to repeat Moheban's illustration of how inflation would occur in a fishing village, as opposed to something as bewilderingly complex as the US economy.

His lucid arguments and helpful analogies resulted in several "Aha!" moments for me, which I wasn't expecting, since I'm a financial writer.

Here's why I recommend Moheban's book:

1.He introduces macroeconomics to the uninitiated. To evaluate arguments concerning our economic future, you need a quick, lucid introduction. This book works.

2.He provides a helpful counter-argument to Schiff and company. To maintain objectivity in any academic endeavor, open-mindedly read intelligent opposing positions. Read Schiff. Read Moheban. Whether you agree or disagree with Moheban, you'll realize that there's another side to these important issues.

3.He helps us to understand just how tenuous economic predictions are when dealing with large, complex economies. Consistent with this, Moheban doesn't declare with certainty where the economy is headed. On the one hand, America may learn its lessons, pay down its excessive debts, and continue to lead the world's economy with its leadership in such areas as higher education and innovation. On the other hand, people may lose confidence in the dollar, cash in their stocks and bonds, pull their money out of the banks and buy guns, knives and gold.

Either scenario is possible; but our economy is so large and complex that we can't make predictions with certainty. And for those who correctly predicted the present economic mess, how can we know with any degree of certainty that they can correctly predict the next stage?

It's important to note that Moheban doesn't believe that all is well with the American economy. He's particularly concerned that if investors in short-term government bonds decide not to continually reinvest, how will the government continue to finance the deficits? Again, we can't know for certain what will happen, so get used to making decisions in the light of economic uncertainty. As Kurt Vonnegut observed in his novel, Slapstick, "History is merely a list of surprises. It can only prepare us to be surprised again."

J. Steve Miller
Author of Enjoy Your Money! How to Make It, Save It, Invest It and Give It


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