A Deflowered Central Bank

Online, May 25, 2010 (Newswire.com) - What a pleasant contrast to the US Federal Reserve, which seemed to be at the beck and call of the treasury department. But a hard currency line needs a lot of discipline and an independent central bank is not to everyone's liking.

The French President Sarkozy, whose ego is in inverse proportion to his short limbs, always tried to get his fingers on the monetary wheels but the Germans held him back. Now, under the pretext of a Mediterranean debt crisis, little Napoleon got his triumph. Not only was the Maastricht treaty ignored and broken, the no-bail-out clause violated and taxpayers burdened with a trillion of new debt, but most importantly, the vandals succeeded in raping and sacking the ECB. Its French president Monsieur Trichet agreed to buy any and all junk bonds which might be offloaded onto his bank by sovereign bankrupts and their banks.

As any teenager can tell you, the first time is always more difficult than the follow-ups. We can, therefore, expect the euro to turn into a soft currency from now on, melting away just like Salvador Dali's clocks. Is this a bad thing? It needn't be, as long as we are aware of the fact and protect ourselves accordingly. The coming inflation will have its winners and losers, as always.

Who are the winners? Banks and big, multinational companies who are habitually guaranteed, bailed-out and provided with free money if they make a mistake or behave foolishly. Providers and holders of gold and other hard assets should also come out smelling roses.

The middle class, or what's left of it, will hold the short end of the stick. On them will fall an increased tax burden, stagnating incomes and rising prices, relentless offshore competition and other assorted evils. People depending on fixed incomes from pensions or bonds are bound to be losers too.

Germany alone, in itself a state on the way to bankruptcy, has just agreed to guarantee 123 billion euros for the delinquent southern states. To describe Germany as on the way to bankruptcy may sound alarmist or over the top, but when one considers the unfunded trillions in pensions and health costs, in combination with a greying and slumping population, it becomes obvious. Many cities and regional councils are already busted flat right now.

Most Asian and some other developing countries are in a better position than the self-indulgent West. They never introduced free schooling and health care, pensions or unemployment benefits and other such goodies we've been accustomed to. They looked rather backward for it, but every day less so. That's why, for example, the Singapore dollar looks much more healthy than either the euro or the US dollar.

Should one still buy gold at present high prices? Our advice, just in case you've not followed our advice of the last few years, is: yes! But don't overdo it and buy it in steps to get a reasonable average price.

Are shares still a good investment? Yes also, because low interest rates will be with us for an extended period and companies still reap the benefits of globalisation. Inflation doesn't matter much to them as they can adjust their prices (that's actually why we have inflation) and some losses in stagnant countries will be easily made up by gains in fast-growing developing countries. Smoking and driving cars might not be good for you and the environment but as long as people do it the companies involved will make money.

That's why Philip Morris and Shell are making good money despite the granola eaters' abhorrence. As an investor, don't fight the market and don't fight human nature.