A low interest drug withdrawal mini-test

An instance of what really the “low interest drug” means is very well seen today. The controversial signals from FED on the QEs have kicked almost all markets in uncontrollable moves up and down with general trend of down. May be this will mean Fed will soon announce another money print round – this time in an effort to save the stock exchange whose fall is not less important than the government debt of the official reason for money print - economy and unemployment. USA simply cannot allow long periods of assets devaluation as much social systems are dependent on the asset prices – for instance pensions. So the too bearish symptoms on Wall Street are a good excuse for another QE.

But the topic of this article was different. It was about the “low interest drug” that has poisoned the economy and is moving it to an entire crash. Today we see how the intention of FED for the money supply is influencing almost all markets. Stocks prices are moving not due to real business data, but due to political decisions. Imagine a company that has enormous markets abroad, stable income and cash flow. Its share price must be stable and must move with the change of something in real business. Instead – it moves with Bernanke comments. So what is making the price of the shares? The business or the bureaucrats?

That is what “low interest drug” means. Assets are being bought and sold according to the existence of easy money and not according to business prospective. With too much time keeping artificially low interest rates, the value of assets is a function of “hot money” and not of a strong mind. So when the hot money flow is to change, this affects all markets of all assets.

But all this is madness. Investors are obliged to buy assets on a higher than the real price is, because all assets are bubbled and contain a “hot money” ingredient in the price. And this means that savings – accumulated with real labor and hardworking, are put by force in assets with artificial price. So when this price goes down, de facto a robbery happens.

Trying to avoid this FED is obliged to keep interest rates low and the flow of hot money constant. I.e. it must keep the drug injecting active. Otherwise a drug withdrawal appears. I.e. big problems appear. Today we are seeing exactly this – the markets are convulsing only while hearing the doctor plans to stop the drug.

This type of drugged economy cannot end in a different way than the usual drug addict.

June 28th 2013

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