Adherents of the Austrian school of economic thought, such as myself, have been saying for some time that we’re in a stock market bubble and that when it pops there will be a lot of pain. Now some in the mainstream are starting to say the same thing, even on CNBC:
I don’t know if it will be 60%. I think the Fed will not allow that to happen and instead will print enough money and funnel it into the market to keep it from falling off a cliff.
The Keynesians who are running the show right now think that they can smooth out the business cycle by juicing the markets with printed money and low interest rates when there’s downturns, which seem to happen every five to seven years. The problem we face today is that they never stopped juicing from the last downturn so when the next one happens it’s going to have to open up the fire hoses to make any difference at all. Look for sharply rising consumer prices next year or maybe in 2016. And if they try to tame the inflation by raising interest rates then the market will tank. They’re stuck.
There’s a lot of bad investments and a lot of bad debt out there that need to be liquidated. It’s going to happen one way or another.
The culprit is low interest rates.
When you’re investing money that you paid 6% or 7% to borrow, you have to be very careful. You have to do your homework. What ever it is needs to produce that kind of return just to break even. But when you’re investing free money, or almost free money, just about any return at all is profit. So investment flows into some pretty marginal enterprises.
It’s not that low interest rates turn investors into fools. It’s, as economist and (my) stockbroker Peter Schiff says, low interest rates turn fools into investors. Market-based interest rates would keep the amateurs out and prevent a lot of malinvestment and a lot of pain.
Post a Comment