Tue, 9 February 2016
There is a not-so-secret crisis boiling below the surface of the financial markets. If you’re not paying attention, you probably have no idea what’s happening. On its face there appears to be a modest stock market decline brought on by low oil prices and rising interest rates. But the truth is far worse.
What you have been told is a lie. The economy is not getting healthier. Last year the stock market had more companies that were down than up. Unemployment remains high despite the best efforts of our government to claim we are near full employment.
Widespread deflation, not INFLATION, has been the major concern for central banks, and they have responded by continuing to lower interest rates to unhealthy levels.
Switzerland has already taken interest rates negative and now Japan has signaled it intends to do the same thing.
Why is that important? What does that mean? Essentially it means that banks are charged interest to keep cash. It’s designed to force banks to lend money. Why is that important? Well to understand that we have to understand deflation and inflation.
Inflation is, at it’s core, a byproduct of two things.
Under a free market as people spend rather than save, banks raise interest rates to try and attract depositors. That increase in potential interest coupled with a rise in the price of goods leads some people to delay the gratification of a new car or TV for savings.
Higher interest rates also send signals to borrowers. High-interest rates mean some people delay borrowing money or choose to spend the cash they have rather than borrowing.
As more depositors delay spending for savings banks, wanting to loan their newly acquired capital begin to lower rates in an attempt to attract borrowers.
All of this happens over long periods of time in minute adjustments.
What central banks have done is attempted to control the economy and fight deflation by artificially lowering interest rates below where they would be in a free economy. This has lead to a short-term boom similar to a heroin injection. But this artificial boom has only disguised the underlying structural problems in the economy. Now, serious problems have arisen.