Very good post, Bond Bubble.
I have always thought that the Austrian economists are essentially correct, especially their idea that a manipulated lowering of interest rates leads to an inappropriate slate of manufacturing enterprises. But your post helps me see the obvious (and seeing the obvious is the hardest thing of all IMHO when it comes to economic matters). Distortions can get very deeply rooted, occurring at the level of relative prices.
In a world of distorted relative prices, everything comes to a stop. Food goes rotting while people a mile away are hungry. In short, there is a depression, as the entire system has to slow to a crawl and start over in order to get relative prices sorted out once again.
I don’t know if you saw this post, “from an internet friend,”
www1.investorvillage.com
a quote from which is the following:
“.....He felt strongly that one day we will wake up and it will be to late to even take out what we have left at 10 cents on the dollar. He said that the market just won't open and will stay closed with all equities having no value at all.”
Who knows if this is a legit post or just something that somebody made up. Certainly I think the writer of the post exaggerates, but, with all these qualifications, I can say that I was struck by it. Now, Bond Bubble, you have given me the language to explain to myself the nature of my intuitive response.
We are in a world of distorted RELATIVE prices, a very dangerous world.
A lot of internet ink is being spilled about inflation versus deflation. I’ve thought for a while now that this debate has the aspect of a series of automatic responses --- one side plays its tape, and the other responds by playing its tape, making for a kind of cozy and comforting world, but one failing to capture the essence of the problem. We have 60 years of experience with the kind of distortions that a central bank causes to the money supply and to the price level (under the conditions of the post-war world), and we know pretty much how we are going to respond if X or Y or Z happens.
But the problem may not be a price level problem per se. The sixty years of manipulations have worked themselves down deeper into the economy, to the level of relative prices (e.g., your example of a chicken costing more to raise than it fetches on the market, or more to prepare than it can be sold for in a restaurant).
In this world, what should be done is not so clear, but it seems to me that one thought ought to be in the back of our minds --- certainly it is in the back of mine: how would I want to be positioned if there were some kind of tipping point event, and the markets pretty much just slowed to a crawl for a while, i.e., if the system went first haywire then comatose viz that post cited above? |
