Of course, that is the criticism which has been levelled against the US economy. But the US economy is itself a creation of money flow, because the $ is still the world reserve currency and US assets are of a particularly high quality, the reason for this, this blog has examined as well.
The US economy combines investing with money flow but the two tend to be in oppositon. They should not be, in theory, one should fill the gaps of the other. Investing is not about flow, it is about stasis with bursts of flow (that is the very definition of a policy of finding good shares cheap selling high and buying back, when the money flow itself ebbs).
The problem has been decades long inflation of assets using the Fed Funds target to create a conduit, to boost assets whether they be house prices or shares, using the attractiveness of the US to money flow. Now boosting house prices was a good idea, it was a piece of unusual bottom up boosting this blog has talked about, unusual for the US. It could have worked except money flow boosts do not seems to have that capacity to self boost.
This is a complex point and it part of the mechanism in the Dow which grows share values, and shows its computational shadows in such things as Fibonacci levels. Money flow does not do this, it inflates. It needs a conduit such as an interest rate differential and then viola money flows. But the money does not flow into the places investing money goes to. There is an overlap, of course but in effect the two are different.
What all this means is once the flow stops the asset values crash. Now the asset values of good companies did not crash, they sure fell, the best companies, excluding oil companies fell about 33% - 50% at the depth of the crash, that is a huge revaluation, but nothing compared to those companies which had booked revenue on money flow/conduit induced asset inflation. I am implying that conduit existed before the crash.
What I am saying is the nature of the Dow to grow, that compounding magic which creates real wealth, must be protected. Money flow does not go the highest quality. Investing does, that is its very point. If interest rates are raised it will bias flow into quality assets, because the money to be borrowed will be more expensive. The more expensive something is the higher its value is, and the higher its bais towards higher quality assets.
Not that this is going to happen now, but this is for the long term and it resonates with Obama's call for a restoration of the US economy towards one of investing, rather than money flow (in effect). Raising interest rates will also bring that money going into EUR assets back into the US.
The US should maybe not depend solely on its inherent attractiveness to money flow, that brings problems when sovereign funds talk about divesting from $, with money made partly from the US disinclination to invest (easy credit goes into money flow).
The US does not need to be dependent on this source, there was endless criticism of this during the past expansion. It has all the power it needs in its people and the creative things they do.
© 2010 Guy Barry - All Rights Reserved.
