Menu Close

The Financial World has Twisted itself into a Curious Shape

In both Europe and America the financial sector has been on the edge of disaster for the last three years. Each time a crisis flares up, the fixers rush in with a remedy. Bailouts, TARPs, TALFs, ZIRPs, QEI, QEII and now the ‘twist’.

In its latest effort, the Fed announced: “The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative.”

Already, short-term lending rates are so low it is as if money-in-hand had less than zero value. Adjusted for inflation, you pay the US government to store it for you. Even with interest, you get back less than you lent. And now, the Fed aims to perform the same dark magic on long-term funds, artificially lowering the cost of money so that people will borrow more of it.

All the fixes have the same effect. They add to the world’s debt and subtract from its ability to pay it. The first proposition is self-evident. The second requires some explanation. Prices — set by willing sellers and able buyers — are information. They tell us where to focus our resources. They tell us when we have too much of one thing and too little of another. When prices are low, generally, we redirect investment to where they are high. This brings forth more supply of the thing that was wanted and less of the thing that was not. Result: real growth.

Read more: Twisted: The Curious Shape into which the Financial World has Gotten Itself

Join the conversation and have a little fun at Capitalstool.com. If you are a new visitor to the Stool, please register and join in! To post your observations and charts, and snide, but good-natured, comments, click here to register. Be sure to respond to the confirmation email which is sent instantly. If not in your inbox, check your spam filter.

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.

RSS
Follow by Email
LinkedIn
Share

Discover more from The Wall Street Examiner

Subscribe now to keep reading and get access to the full archive.

Continue reading