That He May Run That Readith It

Mark S. Watson


Money 2000

Money is taking on a whole new look, from e-gold to e-money, the traditional medium for economic exchange is changing tremendously. What will money look like in 10 years? No one can say exactly. Nevertheless, it would be wise to look at some of the money trends now transpiring to get a glimpse of how money will change in the future. This report will look at the move towards electronic money as well as economic trends to look for over the next three to five years to five. These forecasts will look at traditional and non-traditional factors, which will effect the economy over this time period.

First of all, no one can talk about money in the US or in the world for that matter until the Federal Reserve's policies are understood. The Fed, being granted the ability to create money, out of debt, is the engine of the US economy. The critical importance of this fact is rarely discussed yet, discussing money with discussing the Fed it is like trying to describe the internal combustion engine without ever mentioning gasoline. The Fed's actions are critical in understanding the recent upturn in the stock market. It's influence is at least as important as the surge in price of technology companies.

Over the past 5 years the Dow Jones industrial average has almost tripled in value. This unprecedented growth is certainly a symbol of prosperity as, in spite of global financial turmoil, US markets have prospered and substantially risen in spite of these global economic upheavals. Has the markets' rise been the result of real economic growth and an increase in productivity, or are other less tangible factors at work?

The present fascination with the Internet is certainly a major driving force behind the current markets growth. Manufacturers of computer hardware, software and new Internet sales businesses are taking off and are changing the face of business. But is the growth really worth a tripling of the market? Indeed many are asking this question and see other factors at work. Two groups of people come to mind when discussing the recent fascination with stocks and with it a couple of other factors. This report will not attempt to debunk much of the real growth transpiring in the economy. It will however, try to put some much needed perspective on some the hype coming from those who make their money selling stocks.

Factor 1 - The Plunge Protection Team activities are not widely known. This is an action committee set up after the crash of 1987 to manage a serious drop in the markets. This group is formally known as The Working Group on Financial Markets. The group does publish reports periodically (so no, this is not a secret cabal). It is composed of some of the Government's important financial regulators and political appointees. It was created by executive order on March 18, 1998 (E.O. 12631) and is charged with overseeing the markets to look for adverse financial and market trends and uses its power to "maintain investor confidence." This group consults with key players in the major stock exchanges to accomplish its goals.

Factor 2 - Fed's Substantial increase of the money supply. The Fed has increased the money supply substantially over the past year, this is a record infusion of liquidity which has gone directly into the US economy. This has been a highly inflationary move, but which has not hit consumer goods prices. Indeed the majority of the Fed's freshly printed money appears to have gone into the stock market by individuals placing funds in stocks, most notably in 401K's and other retirement financial instruments. Additionally banks and large brokerage houses have also put the money into stocks. This appears to be where most of the money has gone. Ordinarily, when so much money is created by the Fed, it causes inflation. Arguably this is exactly what has happened, inflation in the stock market. While those that sell stocks are constantly informing their current and prospective customers that this is a new market paradigm and that price to earnings ratios are not a true reflection of a stocks worth. Indeed, stock prices on some Internet companies are over 300 dollars a share. These prices are for companies that have never turned a profit and are not about to, any time soon. This type of advertisement of stocks is a strange and dangerous shift from responsible behavior which, by and large, has come to mark the big Wall Street trading houses, to the wild and irresponsible speculation presently transpiring.

The Federal Reserve has already stated that it will intervene in certain instances to prevent a meltdown.

``We have the responsibility to prevent major financial market disruptions through development and enforcement of prudent regulatory standards and, if necessary in rare circumstances, through direct intervention in market events,'' - Alan Greenspan, Aug 29, 1997.

The Fed has made it clear that it will intervene to prevent a 'major financial disruption' this removes a great burden for investors who have made bad investments as it helps to remove the pressure of destructive losses. The Fed.'s actions are laudable and needed, nevertheless, hard questions need to be asked as to where the money will come from and who will be the beneficiaries of the Fed.'s financial largess. One of the biggest criticisms of those who dislike to Fed., is that it appears to be a close association of Bankers and financial insiders who use the Fed and its Government given powers to bail out the rich and well connected at the expense of the ordinary citizen. It can be surmised by the above statement and previous actions by the Fed that no bank, no matter how insolvent, or how badly managed, will be allowed to fail. This brings in interesting questions as to the basic check and balance that makes the free market successful, that being the threat of financial loss when a bad investment is made. If this check is removed