Are we headed for another market crash?
This question is on the minds of many traders and investors. Again, we are seeing meteoric rises in stock valuations based on nothing but pure speculation. Companies pop up out of nowhere and spout a market cap of billions overnight. Multi billionaires are the soup de jour of the modern economy. No one is producing. Everyone is living off the largess of the FED’s printing press. National debt is in the stratosphere. And yet the party hosts keep filling punch bowl with happy juice.
Something must give.
Let’s put this in the context of time preference.
From the Consumers point of view, time preference is a function of a consumer’s desire to postpone present consumption in favor of future consumption.
This lower time preference leads to a greater amount of savings for investment in future goods. Present consumption is postponed in favor of future consumption of goods and services. More savings in an unhampered market tends to lower the cost of money (interest rate) to producers.
This lower interest rate is a signal to producers to put durable and capital goods into production as opposed to consumer goods.
According to Rothbard it is these industries that tend to show the greatest inflation at market tops, and the greatest misallocation of resources.
When the FED intervenes and pumps trillions of fiat currency into the economy, it is creating a situation (lower rates) which gives a false signal to producers. The lower interest rates generated by massive infusions of fiat currency makes it look as if the consumer’s time preference has lowered and that the consumer is postponing current consumption in favor of future consumption. But, in fact, this is a false signal and nothing of the sort is happening.
Savings are extinguished
Instead of saving consumers are buying up consumer goods and driving up their prices causing inflation in the consumer goods sectors. This includes stocks. Their hope is to garner higher valued assets that they can sell to offset the declining value of other dollar denominated assets. Unfortunately, most consumers who lack the skills to make effective choices end up holding the bag when their stock assets get beaten down.
Shortages result from lack of production
Furthermore, fewer consumer goods are therefore produced, which leads to shortages.
The available inventory gets used up slowly under normal circumstances. However, when a supply chain disruption (pandemic, or other natural/national disaster) occurs, the amount of consumer goods’ inventory gets used up at a faster rate.
With the massive infusion of money supply (FED fiat money printing) chasing after a lower supply of consumer goods’ inflation will inevitably follow. Too much money chasing after too few goods is the definition of inflation.
Producers, seeing they have been given a false time preference signal, reallocate some of their capital away from future goods’ production into speculative endeavors such as the stock market and drive prices higher and higher. All of this takes time to unfold.
With less consumer goods’ production and a massive increase of money supply, the currency loses value and inflation reaches hyper inflationary proportions. Domestic products become too expensive to sell due to a weakening dollar, and exports suffer.
We may be seeing a drift to gold as a hedge against inflation.
In addition, when the FED “gives” money to people freely, without a requisite production of “something” by the recipient, that loss of supply by the recipient reduces their demand for other goods’. A consumer’s’ supply of their work product is in effect their demand for the work products of other consumers.
So, much like the capital goods’ producer getting a false “interest rate/time preference” signal, consumers aren’t producing anything either.
This is a perfect storm that can lead to economic collapse.
The current tech frenzy is just people chasing after a pipe dream. And I see a massive stock market contraction.
The tech firms’ valuations cannot in any way be attributed to production by any stretch of the imagination. Their prices are pure speculation.
Toay, we have excessive money printing, low interest rates, a weaker dollar and inflation. This is not a good situation.
How will the FED set this aright?
They won’t. Adding more money to the pool will only make matters worse. Click here to read an excellent article by Frank Shostak of Applied Austrian School Economics
So, what do we do?
Make sure your financial house is in order. Keep your debts in a manageable range. Be sure to have a minimum of six months of reserve savings nearby. Don’t speculate with money you cannot afford to lose. If you need help, ask for advice.
If you would like to check out the health of your portfolio, contact the folks at the Quiet Foundation.
They will be glad to help you out.
Please leave a comment at the bottom and ask any questions you like.
Stay safe and healthy.