Jimmy Rogers: ‘Abolish the Fed’

March 16th, 2008

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Recently, one of our readers, alerted us to a video interview of Jimmy Rogers at CNBC. He was the contrarian who was famously right on the commodity bull market several years ago. That interview was conducted a few days ago, after the 400+ point rise in the Dow Jones after the Fed announced a US$200 billion liquidity injection and for the first time, lend Treasury bonds in exchange for mortgage bonds. Both Jimmy Rogers and Marc Faber (see Marc Faber: Bernanke Policy Will ?Destroy? U.S. Dollar) are contrarians who are influenced by the Austrian School of economic thought. However, both of them differ in style. Marc Faber is more of the intellectual/philosopher style whereas Jimmy Rogers is more of the straight-talking street-smart style.

Jimmy Rogers’ first reaction to the 400+ point rise was,

You see what it did to the stock market. You see what it did to your friends at Wall Street. But it is not good for America. It is not good for the 300 million Americans. It is not good for the world. This man Bernanke goes from bad to worse.

Jimmy Rogers was asked, why was a 400+ point rise not good for American? Basically, the reason was because of the huge amount of money being injected into the financial system, which will eventually result in inflation, depreciating dollar and ultimately cause a worse recession. We agree with Jimmy Rogers, as we said before in November 2006 at How will asset-driven ?growth? eventually harm the economy?,

Indeed, as we mentioned in our previous article, The Bubble Economy, this is exactly what the Federal Reserve is currently doing to the US economy. In 2001, when the US economy was faced with a threat of recession, the Federal Reserve embarked on an expansionary monetary policy (aka ?printing money?) in an attempt to prevent it from happening. We believe this policy does not prevent a recession?it merely postpones it, in which the upcoming one will be more severe instead.

Even if Bernanke succeeded in ‘preventing’ a recession by re-inflating the economy with another bubble, it will set the stage for an even bigger recession in the future.

As Jimmy Rogers said, by collecting mortgage bonds in exchange for Treasury bonds, the Fed is getting involved in a “landlord business,” by collecting ‘rents.’ Are they going to get involved in a car loan and credit card business next? What the Fed did was akin to ‘printing’ money, which was what they did in the 1970s. Then Paul Volcker came to crush inflation with crippling high interest rates (see Peering into the soul of Ben Bernanke for a mention of Paul Volcker).

Jimmy Rogers is still bullish on the commodities, no matter what happen to the dollar. With the monetary printing press running at full speed, it will exacerbate the commodity price inflation even more. Jimmy Rogers reckoned that Japan made the same mistake (by cutting interest rates to zero) and “18 years later, they are still trying to solve the problem.” As pointed out by one of the interviewers, the Fed did not technically ‘print’ money by lending Treasuries in exchange for mortgage bonds.

So, Jimmy Rogers was asked, what will he do if he is in Bernanke’s shoe?

I would abolish the Federal Reserve and resign.

That provoked some laughter. He was asked, how would that help the 300 million Americans?

We wouldn’t have anybody printing money. We don’t have inflation in the land. We don’t have a collapsing US dollar. We will start to have a sound currency again. And we start to get rid of inflation. Inflation is not good for the world. No country in the world has succeeded by debasing its currency. That’s what this man is trying to do. He is trying to debase the currency as a way to revive America. It has never worked in the long term.

However, Jimmy Rogers was asked for a “real solution” to solve the current problem. His response was this:

What is so wrong about a recession? It can cost you more to prevent a recession than have a recession… Recessions are good. They clean out the excesses and [we] start out from a sound foundation and then you go again. It is like a forest fire… nature invented forest fires to clean out the undergrowth so that the forest can then revive and grow from a sounder foundation.

We agree with Jimmy Rogers on this (see What causes economic booms and busts?).

Regardless of a recession, how can an investor make money out of this market? Jimmy Rogers’ recommendation is to “buy agriculture” where investors are going to profit in 2, 3 or 5 years. By “agriculture,” he meant agricultural commodities like cotton, wheat, sugar and so on. He specifically favoured commodities themselves more than stocks of commodity producing businesses. The Chinese Yuan, Japanese Yen and Swiss Franc are his favourite currencies. Shorting investment bank is another possibility.

But wouldn’t shorting investment banks deepen the rot in the financial system?

Jimmy Roger’s reply is:

Wait a minute! Why is it the end of the world if an investment bank goes bankrupt? … If you bail out every investment banks, that is not capitalism- that is socialism for the rich. Why should two or three hundred million Americans suffer so that we can bail out two or three investment banks?

What about more or better regulations on the investment banks?

More regulations? You want Alan Greenspan and Ben Bernanke? These are the guys who got us into this situation. They are supposed to be regulating the banking system for the past 50 years. These are the guys who let it all happen. I don’t want more regulations. Let the market regulate it. If xyz needs to go bankrupt, let them go bankrupt. I promise you, that will send a very straight signal and you will have a lot of self-regulation when these guys start to go bankrupt.

Regulations will not solve the problem. Instead, it will introduce more problems.

When it comes to China, what about their inflation problems? To Jimmy Rogers, at least the Chinese government is more honest about their inflation problem. The American government, on the other hand, is denying that they have an inflation problem. Thus, the EU, Chinese, Norwegian and Australian central banks are doing a better job. Ben Bernanke, on the other hand, is “pouring gasoline into the fire.”

At this point, the interview was cut off.

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