Jim and he had given up and gone to play poker on the computer. Christine was a true friend. She knew precious little about international finances, yet she was willing to help a friend who was obviously in need. “Let’s see,” she said. “A bunch of people called fund managers loaned the German central bank €4.5 billion for two years and the Germans promised to pay it back after two years”. Christine continued “We know that the Euro is in trouble, what with all the talk about recession going on, aren’t they providing bail outs and trying to help them?” “But that’s my problem,” said Moira, “They are printing money and if I have said it once I have said it a thousand times: you can’t borrow your way out of debt.” Then Christine said, “My financial adviser says that you may not be able to borrow your way out of debt, however it is possible to inflate your way out of debt.” “My point exactly. Everybody knows that central Governments around the globe are printing money like there is no tomorrow and that is concerning me as well. If they keep printing they will certainly let the inflation genie out of the bottle. And we all know once she gets out, she can prove very difficult to get back in.” “I thought that central Governments were fighting deflation, not inflation,” Christine responded. She could see Moira open her mouth and take a deep breath, so she quickly said “And before you say anything more, I think you have been looking at this problem the wrong way around.” Moira was immediately curious. Christine continued, “From what I understand you have been thinking that the economic world is off to hell in a handcart. Central Governments are printing money like wallpaper, the Euro is doomed and everybody should invest in gold as it is the only store of value that will be recognised as real money. Obviously not everybody thinks like that. “Right now, the popular perception is that the Euro is doomed as a failed economic experiment. What would happen if the Euro went up in value over the next two years?” Moira was stunned. She had to admit that she had been prejudiced and adopted a myopic look at the world. She had forgotten to consider the alternatives. Over a simple cup of tea, Christine had shown her the importance of having a balanced point of view. It had taken a bunch of European fund managers to prove that whilst the system appeared broken, it was still operating. The fund managers had done their job and taken a bet, (a big one at that) that the system would be better in two years. They were making a counter intuitive investment. Sure, the
If they keep printing they will certainly let the inflation genie out of the bottle. And we all know once she gets out, she can prove very difficult to get back in
outlook appeared bleak, but that’s when big and bold investment calls usually provided the best return. It was blatantly obvious, they weren’t investing for interest return, as there was none, they were value investing for currency return. If it worked, they and their clients would be handsomely rewarded. Christine smiled as she watched Moira physically relax in her chair. Jim was also happy. He had been listening from the study and was thrilled that Moira had finally identified a solution to her dilemma about why someone would lend money for zero interest. As Moira was showing Christine the way out, Jim overheard Moira saying, “I’ll bet those same managers have a similar exposure to gold in the same portfolio.” Copyright © Peter J. Hensley December 2012. This article is meant to be Class Advice and a copy of Peter Hensley’s disclosure statement is available on request and is free of charge.
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