By Bill Fleckenstein
Just before Thanksgiving, I held a contest for readers of my website, fleckensteincapital.com (subscription required), challenging them to provide the best definition for the term “funding crisis,” a potential problem I have worried about since early 2009 — and a consequence of bailing out the financial system.
How to invest in bonds
I am becoming more convinced that the various elements of a funding crisis will be picking up the pace and intensity sooner, rather than later, and they may well be the most important factors to consider with regard to investment decisions in 2011.
Before delving deeper into this topic, I would like to share a slightly trimmed-down version of the winning reader’s submission:
“A funding crisis refers to the inability of a country to finance itself without resorting to outright money-printing. This can lead to a vicious cycle of currency depreciation, rising interest rates, poor economic performance and poor investor sentiment, all of which feed on each other in a downward spiral.
A funding crisis can end when proper monetary and fiscal discipline is restored, usually at the expense of severe economic hardship.”
I have been using the term “funding crisis” regularly since the fall of 2008, and I penned the following definition in May 2009:
“If the dollar is called into question . . . and if the Fed’s monetization cannot lower rates (and in fact causes them to rise, due to the consequences of money printing), then the Fed is trapped. The more it tries to solve the problem with money printing, the worse it all becomes.”
Not to labor excessively over defining terms, but I think it is critical for investors to be able to identify the signs of a funding crisis.