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Wednesday, 12 February 2014

Fake It ‘til You Make It

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If you look at the headlines, it appears as though the global economy is well on the road to recovery. The American stock and bond markets are at all-time highs which would seem to indicate that investors have every confidence that companies will be earning record profits and, along with governments, be easily able to service their debts going into the future.

The only problem with this picture is that it in no way represents the opinion of actual investors. Rather, it reflects the quite extraordinary efforts of the world’s central banks, through money printing and bond purchases, to boost these markets together with the housing market.

Why would central banks (the US Federal Reserve System and the Bank of Japan chief among them) wish to drive the prices of stocks, bonds and real estate higher? The official answer is that higher asset prices will create a ‘wealth effect’ that, as was the case in the early 2000s, will cause people who see the value of their homes and investment portfolios rising to feel richer and more confident about spending money, thereby kick-starting a virtuous cycle of rising employment and income.

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