Jim Rogers: Fed Policy is 'Outrageous'

By bailing out Wall Street and applying "band-aids" to the economy, the U.S. Federal Reserve may well be causing its own downfall - even as it hastens the demise of the greenback as a viable global currency, investment guru Jim Rogers told Money Morning during an exclusive interview.

Because of such strategic missteps, U.S. consumers could be facing a long and painful economic malaise, similar to the "lost decade" of 1990s Japan, or the stagflation-riddled 1970s in the United States, Rogers said.

Make no mistake: If that happens, there are two clear culprits - current Fed Chairman Ben S. Bernanke and his predecessor, Alan Greenspan.

"[Bernanke] and Greenspan together will probably bring [about] the end of the Federal Reserve," Rogers said during the interview in Singapore. "We’ve had two central banks in America that failed [and] this third central bank will probably fail, too, because of Bernanke and Greenspan. The Federal Reserve [just] put $200 billion more onto its balance sheet of mortgages. Now, I don’t know how big they can expand their balance sheet, but if they keep doing it, there’s only so much - and they just bought Bear Stearns (BSC)."

Rogers first made a name for himself with The Quantum Fund, a hedge fund that’s often described as the first real global investment fund, which he and partner George Soros founded in 1970. Over the next decade, Quantum gained 4,200%, while the Standard & Poor’s 500 Index climbed about 50%.

It was after Rogers "retired" in 1980 that the investing masses got to see him in action. Rogers traveled the world (several times), and penned such bestsellers as Investment Biker and the just-released Bull in China. And, he made some historic market calls: Rogers predicted China’s meteoric growth a good decade before it became apparent, and he subsequently foretold of the powerful updraft in global commodities prices that’s fueled a year-long bull market in the agriculture, energy and mining sectors.

Given Rogers’ prescience - not to mention all the uncertainty facing U.S. investors right now - we thought it was well worth a sit-down with the noted guru, even though it meant traveling all the way to Singapore, where he now lives with his family, to do so.

During that interview here in Singapore, Rogers also said that:

• Although the United States faces perhaps its most daunting economic challenges in at least a generation, "in America, most people do not understand that there is a problem."
• Because of these weak-dollar efforts - as well as the billion-dollar bailouts - "America is now the largest debtor the world has ever seen."
• Although the central bank seems intent on engineering a U.S. economic rebound by creating an ultra-weak dollar, no country in history has ever emerged from a serious financial crisis by "debasing its currency."

The bottom line: The strategies that the central bank is currently employing are nothing short of "outrageous," Rogers said.

"You know, I’ve read the Federal Reserve Act," he said. "Nowhere does it say [the central bank is] supposed to bail out investment banks! Nowhere does it say you should bail out Wall Street. Their mandate was to have a sound currency, and then it was later expanded to have employment - to help employment. But nowhere does it say: ‘Bail out investment banks.’"

Let’s take a look at some of the highlights of the Money Morning interview with investor and author Jim Rogers.

Keith Fitz-Gerald [Q]: There’s a confluence of money flowing into and around China. Do you believe that the U.S., with all its current problems, will get left out?

Jim Rogers: Absolutely.

The U.S. dollar is a terribly flawed currency. I’m trying to get all of my money out of U.S. dollars. I don’t know why anybody would put money into the U.S. dollar, and by extension into the U.S., as we stand here today. The U.S. is probably the largest debtor nation the world has ever seen!

The United States’ foreign debts are increasing at the rate of $1 trillion U.S. dollars every 15 months. U.S. foreign debt is over $13 trillion, and rising rapidly. It’s the official policy of the central bank to debase the currency. They’re trying to drive down the value of the dollar.

Q: The government has succeeded wildly, so far.

Rogers: You haven’t seen anything yet!

They’re trying to drive down the dollar. I’m trying to be patriotic. I’m trying to sell dollars. That’s what they want. I’m trying to help them drive down the value of the currency.

All Americans should. There are certainly probably good reasons to put some money in dollars. For instance, if you have to buy cotton, you have to have dollars.

But for the most part - I, anyway - am joining other people who’re trying to avoid the U.S. dollar, because Washington has sent a very clear signal: "We want the dollar to decline. We’re gonna do our best to make it decline."

Well, everybody has to make their own decision. I’m trying to do what the Federal Reserve wants me to do, and I’m selling dollars.

Q: My take is that former Fed Chair Alan Greenspan and current Fed Chairman Ben S. Bernanke may go down as the worst central bank chairmen in history. Do you see it differently?

Rogers: [Bernanke] and Greenspan together will probably bring [about] the end of the Federal Reserve. We’ve had two central banks in America that failed. This third central bank will probably fail, too, because of Bernanke and Greenspan.

The Federal Reserve last week put $200 billion more onto its balance sheet of mortgages. Now, I don’t know how big they can expand their balance sheet, but if they keep doing it, there’s only so much - [and] they just bought Bear Stearns.

There’s just so much they can do. Maybe that balance sheet is infinite. I doubt it. And it can be said to be infinite; they just print money like Zimbabwe or someplace. But that has to come to an end, eventually.

Maybe Bernanke is going to get into his helicopter and fly around collecting rents now. Maybe when they repossess all the property, he’s going to be the rent collector. But then when they eventually take on all the car loans, I guess he’s going to be collecting car payments, too. And credit card debt, when they take over all the credit card payments, I guess he’ll be hauling us all out saying: "Your credit card’s overdue."

This is insanity.

Q: Is there a circumstance under which you could see the U.S. recovering, or do you think this country is doomed to be an economic also-ran?

Rogers: Historically, nations that have gotten themselves into this kind of situation have only gotten out following a crisis or a semi-crisis, or some gigantic stroke of luck.

The U.K. got out because they discovered the North Sea. Now, you give me the largest oil field in the world, or one of the largest oil fields in the world, I’ll show you a good time, too.

So if you have a stroke of luck [you can escape these kinds of problems], but otherwise, nobody’s ever sorted out these problems without some kind of gigantic crisis or semi-crisis first.

In America, most people do not understand there is a problem! The few who know there’s something going on don’t understand what it is. Most of them who understand it actually think it’s good that the currency’s declining. America’s not going to do anything until things get very, very bad.

Others that offer the rejoinder to this - that the declining dollar makes America competitive - [that] has worked in the short term. But no country has ever restored itself by debasing its currency, not in the long term, not even the medium term.

Many places have tried to debase their currency as a solution. It’s never worked, other than maybe in the short-term, for a while.

Q: Are we looking at a Japanese-style lost economic decade?

Rogers: The Federal Reserve is making the same mistakes that the Japanese made. They’re trying to say: "We won’t let anybody fail. We’ll print a lot of money. We’ll drive interest rates to zero. And we don’t want anybody to fail. We’ll put on as many Band-Aids as we have to."

Well, putting Band-Aids on a cancer patient is not a good solution.

So whether it’s like the ’90s in Japan, or the ’70s in America, remains to be seen.

[One-time U.S. Federal Reserve Chairman] Arthur Burns, who headed the central bank in the ’70s, did exactly what Bernanke’s doing. He raced in and printed money and said: "Oh, everything’s gonna be OK."

But the economy never recovered, inflation went through the roof, and the dollar was under duress. Eventually they had to bring in Paul Volcker and interest rates went over 20%. And eventually they killed inflation and they solved the problem.

They’re making exactly the same mistakes that Burns made. For whatever reason, though, this problem is going to last longer than previous difficulties in America. And it’s probably going to be worse.

Because, now, America is a debtor nation. Now we’re the largest debtor nation in the world. At least in the ’70s, we were still a creditor nation. Japan could survive because they were the largest creditor in the world at the time. So they didn’t fall off the face of the earth.

America’s now the largest debtor the world has ever seen. What’s happening in the U.S. is not going to be fun.

Q: Should the Fed be stepping in like it has in recent months?

Rogers: It’s outrageous that Bernanke’s sitting there. You know, I’ve read the Federal Reserve Act. Nowhere does it say [the central bank is] supposed to bail out investment banks! Nowhere does it say you should bail out Wall Street. Their mandate was to have a sound currency, and then it was later expanded to have employment - to help employment. But nowhere does it say: ‘Bail out investment banks.’

Investment banks have been failing for centuries. The world hasn’t come to an end… even when investment banks have failed. They just caused a setback, and so what!

Recessions are usually good for the system. They clean out the excesses. And my God there’ve been excesses on Wall Street in the past 10 years. You don’t see a bunch of 29-year-old cotton farmers driving around in Maseratis and flying in private planes to exotic locations. Well, you see a lot of guys on Wall Street doing that.

And the idea that we’re now supposed to bail them out is ludicrous! I don’t see any of those guys sending their bonus checks back.

Huge amounts were made in the debt markets. We now know [that money was made] at least incorrectly, if not fraudulently, and yet, now we’re supposed to bail them out. It’s bad enough they get to keep their money. But the outrageous part is that it will cost more to try to prevent a recession than to have the recession.

We have safety nets in place, now. We did in the ’70s in America and the Japanese did in the ’90s. I think there’s good evidence that it will cost more to try to prevent the problems than to have the problems.

Q: That’s a very interesting thought that had not occurred to me before.

Rogers: Well, we’ll see if it’s right. In nature, there’s the natural phenomenon of forest fires. The forest fires are pretty terrible when they’re going on. But nature invented them to clean out the forest so that the forest could then come and grow from a new, sound foundation. That’s what recessions do, too. They’re a natural phenomenon.

Nobody likes it when we have them any more than anybody likes a forest fire. But in the end, everybody’s better off. Bernanke thinks he can stop this; he’s going to very well destroy the system by trying to save it.

Q: Could you see a segment of the financial system surviving this? Or do you think that there will be such catastrophic change that we won’t recognize it till several years from now?

Rogers: Ask me again in five years, 10 years. That was true after the ’30s, certainly. It was true even after the ’60s. Very few people went to Wall Street in the ’70s, very few. A whole generation ignored Wall Street in the ’30s and in the ’70s.

Will that happen again? Probably, because of things we’ve been discussing.

So there will be big changes, of course. If you’re in the field that deals with - and works out - bankruptcies, you’ve got a great future - on Wall Street, or in the legal profession. If you’re in commodities, you have a great future. Some sectors of the financial community are going to do well. Many others are going to disappear and/or do badly.

Q: How low could the dollar go?

Rogers: I have no idea. You just have to watch it as it evolves. Politicians and bureaucrats can do unbelievably stupid things, and have [done so] throughout history.

They will usually do things that are so stupid nobody can believe them, but it happens. You have to watch and see as it goes.

Comments

[Tom B]

Rogers is right-- why can't HE be the Fed? Destroying the dollar to bail out idiots who over built or over borrowed or over lent punishes all those of us who were hoping to be able to actually USE our dollars.

[WeezieBenobi]

I've been reading a lot of this information and it's a great lesson. But how does one shore up their 401k which has relatively limited options. (Aside from the basic large/mid/small cap growth/value funds we have global, bonds and in one 401k, inflation linked bonds.) For my regular savings/investments which I have unlimited choices, it seems that some decent commodity and currency ETFs, with some global debt and stocks is a good mix. Can anyone recommend a decent portfolio to get someone through this? Thanks to anyone who has some sound ideas.

Great article, Keith, and thanks for taking the time to write it.

[High Yields]

Were there any suggestions for what currencies would be best to hold instead of US dollars?

[sbenard]

Go Jim Rogers! I like someone who tells it like it is. What was most sad to me was when he said that, "In America, most people do not understand there is a problem." How true! Americans expect that the future will look like the past, but they don't realize that the dynamics of the world have changed, and their own Fed and politicians are selling them out!
This is bound to end very, very badly!

[Tom B]

"Americans expect that the future will look like the past,"

America, as it exists today, is unsustainable. Unless we start thinking "fair trade" instead of "free trade" China could surpass us. The EU already has, thanks to the declining dollar.

[emily x]

Fantastic. This guy is one of the only voices of reason in the entire financial community. Michael Metz is another.

Re: the currency question above, Rogers has previously recommended: Swiss franc, Japanese yen, Chinese rinmindi.

[Mike Swygert]

The propspects for America's economic well being are bleak indeed, as Jim Rogers says. But, to blame the Federal Reserve and its past and current chairs is far too simplistic. The crisis results from our pervasive culture of debt and greed and a philosophy that Americans and its government can "have it all all the time/" The fall of the Roman Empire, I fear, is being repeated.

[Dave M]

WeezieBenobi ... I rolled over part of my 401K into a self-directed IRA brokerage account. That opens up all sorts of ETF's, including GLD (gold) and SLV (silver).

[iThinkBig]

Unlike the 1930's the common man has access to a great amount of information online. As times get really bad in the next three or four years it would not surprise me to see a revolution.

Most Americans right now don't understand why they can't find a decent paying job or why they are falling so far behind. I see a collapse of the banking system and instead of 1 in 10 on food stamps, see a time where the majority of Americans are eating rationed, government wheat pasta and cheese. As this approaches the common man will simply revolt realizing he/she was sold down the river for globalism where only a few got rich and Wall St./Central Banker greed. The problem is once you bail out one group you must begin bailing out all. This is fast becoming a socialist country and fascism will wind up being the only cure. As the systemic failures begin to occur and the majority of Americans have their entire life's saving erased, people will demand heads to roll. The top 1% will have big gates and many are moving overseas. The real entity to blame is the U.S. government and Fed. Perhaps I am not the only one to realize this and perhaps why curtailing the 2nd Ammendment is coming up so often these days...

[Malkiel]

None of the comments from this "guru" are about anything other than emotional reaction divorced from strategic thinking and analysis. The FED is reacting to specific problems and issues; its actions aren't going to demonstrably "solve" problems, they are intended to influence certain trends in certain directions. This approach has kept America economically powerful in every era where we were doing things "wrong" by Rogers' view, such as the high-inflation 70's and 80's. The history of the FED over the last 3 decades is that its efforts have sparked the most prosperous economic era in our modern history--but every boom is unstable, and when it falters for a while we got to listen to blowhards like Rogers and all of his moralizing acolytes above wagging their tongues about moralities that have no relevance to the economic order...

[Tom B]

"The FED is reacting to specific problems and issue" The Fed sees bank failure as the primary event that plunged us into the Great Depression, according to Marketplace (NPR) the other night. It's not an unreasonable hypothesis. But the interest rate cutting is killing me; the dollar's worth nothing anymore. We should contemplate MODEST--emphasis on MODEST-- tariffs against countries that are taking away US manufacturing.

[run338]

"The history of the FED over the last 3 decades is that its efforts have sparked the most prosperous economic era in our modern history"

The shortsighted have spoken...good luck with that "greed is good, credit creation is endless and the empire will never fail"....I guess we'll be the 1st empire in history to pull off this hat trick without failing...I have a bridge to sell ya as well! Maroons!

[sliman]

Rogers has made me lots of money. But I would never trust the Chinese government over the U.S.

GOOD LUCK JIMMY, LETS TALK IN 10 YEARS.

[flow5]

The Fed is not responsible for the current account deficit. This is the problem that will be our demise.
research.stlouisfed.org/fred2/series/BOP...
It started to fall out of bed with George H.W. Bush politics - c. 1990.

[rbblum]

Maybe the primary intent of the US creating a weak dollar is to be successful in introducing and supporting the Amero; just another step in defining the North American Union (the communities of Mexico, US and Canada).

[kurt walter]

The Fed is 100 percent at fault. Jim Rogers has been right so much in the past that his feelings right now are scary. But it is easy to have no money invested in the USA. There are many ways to own foreign investments. Whenever I see a congressional panel on TV, I am always amazed how ignorant most congress people are.

[AZCaballero]

Rogers again impresses, although this is nothing new to hear. I think more attention should be put on the countries that supply China not neccessarily China itself. For example Australia, strong currency 80% of the worlds urnanium, Rio & BHP are both Aussie companies, why do you think they are the world mining leaders? There is enough coal in Aus. to keep the world warm for a hundred years and they are a net exporter of food as well, combinded with a sound government and financial system. You couldn't look for a better place to invest! Why does it always fly under the radar?

[Jay Jay]

Rogers is right and he's using my wild fire analogy for markets.

[dorvedor]

I am a big fan of Jim Rogers. Quite awhile ago I read an article about him in Fortune magazine. It made so much sense that I completely changed my stock portfolio to follow his advice. Smartest thing I have ever done in the stock market. Even in this terrible market, my portfolio has never been better. Read his book, "Hot Commodities". You'll be a believer. Thanks Jim.

[Huh.]

So, what can be done? Lots of doom-n-gloom and finger pointing going on, but no saviors in sight here. 'Seems they all left the country. It is easier to complain and nod our collective heads sagely as one of our brightest points out the roots of what ails us (curious how the fingers don't point at themselves as contributors to our current demise...).

Is the U.S. not worth fighting for any more? The common man has dutifully supported the companies he worked for by buying into the American Dream, only to be abandoned by the fat-cats who see only $$$ in the consumption. The "greatest generation" set the stage for the economic might of the U.S. They had a can-do attitude that built a mighty engine of manufacturing, agriculture, commerce, sport, and art. Too bad their children threw it all away. 'Funny how those cycles work.

Since nobody else seems to be offering any, here's a few suggestions:
i) Support the late Bussard's research team as they struggle to replicate their amazing WB6 results. If they succeed in creating such a practical fusion power system they can license the tech to the world. Trillions per year in licensing fees in our nation's coffers within a decade! Wait. That'll bring back the fat-cats. Bad idea.
ii) Give Alaska to China, wiping our debt to them. There's quite a bit of oil in them-thar hills, and the Chinese would likely have no compunction about what environmental impact they would have going after it. If WE suck out all the oil Alaska won't be worth squat except as a beautiful vacation spot, and the Chinese might demand the entire west coast and a few of our more interesting cities.
iii) Everyone take a vow of poverty (well, okay, just accept that you are actually poor already) and start working manual labor on a farm. It'll have the side benefits of reducing the increase in national debt per year, drastically reduce carbon emissions (rah rah rah for the green movement), and make the U.S. a garden again.

Well, I guess they aren't such hot ideas. But I'd like to see something better from those who actually know what they are doing.