At the beginning of the week on the NYSE we saw another massive liquidation of assets, thus resulting in another “crash”. The question is, whether or not this is another crash or the long awaited hangover due directly to the easy money policy that has plagued us time and time again. Such as, when we hit the subprime recession, people initially decided to opt out of taking the hit and decided to go after the “Hair Of The Dog’ approach.
When you stay up all night drinking, the next day you will pay the consequences of the night of partying. These consequences are being sick and possibly throwing up, in a sense it is your body rejecting all the alcohol that your body has retained. After a few hours, maybe the whole day, you will be regretting the night of drinking. When you hit the worst of the hangover, you begin to feel better and eventually get back to normal. What will make that hangover more harsh is when you resort to the hair of the dog, or the drinking of more alcohol to overcome the horrid feeling you have. In the long run, your body will reject more alcohol making the hangover last longer.
This is much like an inflationary boom and the consequential recession, the night of easy money policy creates a sense of tranquility. That we can now live beyond our means in a stage of inflationary trends, and dollar devaluation. However, once the market creeps back up and decides that we really are not able to live outside of our means; we will hit a wall and have an asset liquidation. This liquidation acts as a hangover, in the same sense that our body is rejecting the alcohol, the market is now rejecting the bad assets created by an inflationary boom. The best way to deal with the liquidation of assets, much like the hangover, is to allow the bad assets to escape the market. Thus, after the grueling process of liquidation, we will be back to a state of stability.
The worse thing to do in the case of asset liquidation is to expand easy money, because all it will do is prolong the “hangover” and, much like the hair of the dog, cause a longer harsher recovery. This is what we see happening in the stock market right now. What’s even worse is the market is rejecting the 0% interest rate the Fed decided to continue.
Since Q.E we have seen spontaneous price inflation in financial assets, resulting in liquidation, which has sent us into a perpetual stage of constant easy money and constant liquidation. However; now our fiscal tools are preventing the easy money policy. Plain and simple, there is such high leveraged debt in the market, no one trusts the fed and their interest rate scheme anymore. The stock market took a nose-dive, and things really are not looking up for the United States right now. Now, the bureaucrats are coming up with excuses for the constant easy money policy, though what really needs to occur is for us as a society to bite the bullet, take the hit, then re-establish tight money policy to offset the years of inflation. After such has occurred, we can start allowing long term investment to take place and reintroduce actual capital into the market, rather than over-valued assets.
Janet Yellen, and the Fed, will refuse to allow this to happen. Why? Because it is her job to lie to the people in an attempt to let them know the Fed actually benefits society, rather than causes harm to it. So in the next few days, while the liquidation continues, the people at the Fed and in Washington will scramble to figure out what caused it. Anywhere from the GOP possible Gov. shutdown, or looking to blame China or Russia, in the same manner an alcoholic will say “my neighbors upset me so I’m going to get drunk tonight”. Without realizing, the market has grown dependent on the easy money policy and is now at a stage of rejection; or as the alcoholic negates to realize it is due to their excess drinking that is causing alcohol dependency.
This, the liquidation, is because of the QE policies in place to respond to the inflationary boom and the continual recession of 2007. Just as the elongated hangover is a response to the hair of the dog. We can deduce, through sheer logic, that the biting of the bullet of 2007, as opposed to the bailouts and QE, would have already corrected itself and we would not be in the sense of market turmoil we are in today. I see, QE 4 looming around the corner. Which will only prolong the inevitable.