Let’s hope they calculate wisely ...
Our news reports give us scant reasons why stocks fell so much recently. We heard the usual one-liners. We heard “concern about inflation.” We heard “The market is due for a shake-up.”
What we did not hear was much news about the real cause. Which is a pity. Because the real cause has also brought down a lot of other prices.
Real estate prices have fallen of course. Not just here, but in many countries.
Gold prices have fallen a lot, and suddenly. Silver prices have fallen even more. And just as suddenly. Stock prices fell here. They also fell in markets around the world. The largest tumble was in Japan. Even oil prices have slackened off.
All these prices are tied to liquidity and inflation. Ho hum, liquidity. Whatever that is.
If you don’t know what it is, you might want to spend a minute to read about it. After all, it affects a lot of prices in your life.
First, inflation. Inflation is when there is too much money chasing too few goods.
Liquidity is when there is too much money. Central banks like the Fed can control liquidity.
Now, we like to have liquidity - a lot of cheap money - following a crisis like 9/11 or the dotcom bust. When investors can lay their hands on a lot of cheap money they are more likely to keep investing after a calamity.
Trouble is, the world has had too much liquidity lately. Too much money slopping around the world. Much of it came from the fortunes made in healthy and booming economies - like ours.
Much of it was cheap money. Speculators borrowed money in Japan at 1 percent. They used the cheap money to bet on real estate. And to bet on gold and silver and other commodities. And to bet on crude oil.
There was too much of this cheap money chasing after too little real estate, gold, etc. And this caused inflation of the prices of those commodities.
Why have prices fallen recently?
They fell because central banks around the world are clamping down on this cheap money. Some of the banks are raising interest rates. Speculators have to pay ever higher rates of interest for their gambling money. Our own central bank, the Fed, has raised interest rates many times of course.
Central banks can also mop up liquidity. They can reduce the supply of money in an economy. They use several tools. One is to require individual banks to take money off the table, so to speak. They require the banks to keep more of their loan funds in reserve. This shrinks the pool of money available to loan.
The central bank of Japan has indicated it will be doing this. This is not good news to thousands of speculators. They will see the price or cost of their money go up.
As the price of their money goes up, they will speculate less. They will not go as far out on limbs as they have been.
Meanwhile, our Fed and various other central banks have made money more expensive by raising rates. This slows down business activity. The company that planned to borrow $20 million at 6% for expansion may balk at 8 or 9%.
If all goes well, the moves by the banks will slow down the world’s economies. If all goes well, they will - together - engineer a soft landing. If all goes well, they will squeeze some of the inflation out of prices.
If they miscalculate, they could push various economies into recession. Let’s hope they calculate wisely.
From Tom ... as in Morgan.
For more columns and for Tom’s radio shows (and to write to Tom): tomasinmorgan.com.
What we did not hear was much news about the real cause. Which is a pity. Because the real cause has also brought down a lot of other prices.
Real estate prices have fallen of course. Not just here, but in many countries.
Gold prices have fallen a lot, and suddenly. Silver prices have fallen even more. And just as suddenly. Stock prices fell here. They also fell in markets around the world. The largest tumble was in Japan. Even oil prices have slackened off.
All these prices are tied to liquidity and inflation. Ho hum, liquidity. Whatever that is.
If you don’t know what it is, you might want to spend a minute to read about it. After all, it affects a lot of prices in your life.
First, inflation. Inflation is when there is too much money chasing too few goods.
Liquidity is when there is too much money. Central banks like the Fed can control liquidity.
Now, we like to have liquidity - a lot of cheap money - following a crisis like 9/11 or the dotcom bust. When investors can lay their hands on a lot of cheap money they are more likely to keep investing after a calamity.
Trouble is, the world has had too much liquidity lately. Too much money slopping around the world. Much of it came from the fortunes made in healthy and booming economies - like ours.
Much of it was cheap money. Speculators borrowed money in Japan at 1 percent. They used the cheap money to bet on real estate. And to bet on gold and silver and other commodities. And to bet on crude oil.
There was too much of this cheap money chasing after too little real estate, gold, etc. And this caused inflation of the prices of those commodities.
Why have prices fallen recently?
They fell because central banks around the world are clamping down on this cheap money. Some of the banks are raising interest rates. Speculators have to pay ever higher rates of interest for their gambling money. Our own central bank, the Fed, has raised interest rates many times of course.
Central banks can also mop up liquidity. They can reduce the supply of money in an economy. They use several tools. One is to require individual banks to take money off the table, so to speak. They require the banks to keep more of their loan funds in reserve. This shrinks the pool of money available to loan.
The central bank of Japan has indicated it will be doing this. This is not good news to thousands of speculators. They will see the price or cost of their money go up.
As the price of their money goes up, they will speculate less. They will not go as far out on limbs as they have been.
Meanwhile, our Fed and various other central banks have made money more expensive by raising rates. This slows down business activity. The company that planned to borrow $20 million at 6% for expansion may balk at 8 or 9%.
If all goes well, the moves by the banks will slow down the world’s economies. If all goes well, they will - together - engineer a soft landing. If all goes well, they will squeeze some of the inflation out of prices.
If they miscalculate, they could push various economies into recession. Let’s hope they calculate wisely.
From Tom ... as in Morgan.
For more columns and for Tom’s radio shows (and to write to Tom): tomasinmorgan.com.
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