When the Price of Money is Wrong, the Price of Everything is Wrong
AUG 26, 2015
The stock market has not gone crazy. It is desperately trying to go uncrazy.
In a healthy, free, and flourishing economy, prices act as unbiased bearers of information, driven by the impersonal forces of supply and demand, validated by millions of independent transactions. In a word, market prices act like a giant adding machine that no one controls. At any time, in every place, prices carry most of what we need to know to make the decisions we need to pursue our individual conceptions of happiness — regarding production and consumption choices, risks and rewards, and spending and saving tradeoffs.
Prices enable us to make independently informed choices. But when politicians, central bankers, and the crony financial institutions that serve them collude to construct politically profitable illusions, they do so by corrupting the price of money. By manipulating interest rates, they can induce massive misallocation of resources, warping consumption, production, spending, and saving choices, and biasing risk decisions across the entire economy. They are given cover by court economists, who work to convince the public that “fine-tuning” the economy and addressing the excesses of the “business cycle” are the proper role of government.
While these distortions can produce powerful short-term illusions, pumping up the value of assets in a simulacrum of prosperity, they can rarely be sustained. Sure, some well-connected cronies will line their pockets and spread their wealth around for a while, but sooner or later the ability to fake reality becomes too expensive, too complex, or too volatile to maintain, and the illusion comes crashing down. At that point, no one knows the real price of anything. Panic ensues, trade is disrupted, stock markets swoon, and economies shrink. The responsible parties then shift the blame, a credulous media amplifies their story, and the process starts all over again.
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