The Chairman of the Federal Reserve has said that money-printing will wind down. The result is massive sell-offs and declining prices today in all asset classes.
This is no surprise.
Investment markets and asset prices have become the plaything of central banks. The trillions that he Fed alone has pumped out must go somewhere. There is some $3.4trillion sitting in bank reserves, going nowhere, but trillions more have gone out, since 2008, into property, stocks and commodities. The result has been gross economic distortions, little open price discovery and even more malinvestments on the back of rock-bottom interest rates.
When the money tap is turned off, or even signalled as with Bernanke’s words, markets fluctuate massively as investors run for cover.
Corrections should have been allowed to happen in 2008. Instead, governments and central banks responded with the greatest exercise in money printing ever, which not only blocked any possiblity of economies correcting themselves, it piled more malinvestments on top of those already existing. All it did was delay the reckoning, because markets always, in the end, win out over government distortions.
Today’s falls indicate that gains across asset classes in the last few years have been down mainly to the money press. When the tap is turned off properly is when we’ll get the real correction. Prices won’t just fall, the queston is by how much. It is inevitable and unavoidable.