The crisis will remain once this latest easy money-induced stock rally has fizzled out...
IN THE WIDER MARKET, nobody seems to care about gold. It's a bubble, right? And that bubble burst last month. Besides, stocks are moving and it's time to jump on board, writes Greg Canavan for the Daily Reckoning Australia.
We reckon that's the consensus view at the moment, anyway. And the market's Pavlovian response to extended liquidity from the European Central Bank and another £75 billion in money printing from the Bank of England, both announced overnight, is certainly giving credence to this view.
The market is conditioned to respond to 'injections of liquidity' or additional 'quantitative easing'. But since the credit crisis, the boost from these measures is increasingly short-lived. That's because insolvency issues are mistaken for a lack of liquidity.
These central bank announcements generally hit the market when sentiment is at a low point. The effect is purely to boost sentiment. This can lead to a 10 per cent rally in a blink of an eye. Within weeks, 'sentiment indicators' turn around and the consensus view turns bullish again.
And why? Because of a change in price. In a normal world, price is a reliable signal to base financial decisions on. In a world of unsound money, price signals are increasingly misleading.
Printing money doesn't create wealth. It just spreads a country's existing wealth over an increasing base of 'money', which is just a representation of wealth. It's like a company addicted to issuing shares. All it does is dilute shareholder wealth while giving management more time to pull a rabbit out of a hat.
Providing endless amounts of liquidity is a stop-gap measure too. It props up the weak and insolvent and distorts the risk/reward structure that capitalism thrives on.
Citizens in the US have had a gutful of the destructive policies of their central bank. For the past week or so, a protest movement called 'Occupy Wall Street' has been, err, occupying Wall Street.
What about the Reserve Bank of Australia (RBA)? Like all central banks, the RBA is trying the steer the economy by looking in the rear-view mirror. Earlier this week the board elected to keep rates on hold but indicated there might be room for future easing.
This is an about face from earlier statements. For most of the year, the RBA's mantra was interest rates would probably rise again. It cited strong global growth, wage and inflationary pressures and a strong terms of trade.
But when you're looking over your shoulder you don't see what's in front of you. The RBA made the same mistake in 2008 when it was raising rates in the face of an oncoming credit crunch.
This raises a few important points. Obviously, setting the price of money or credit is an impossible task for a small group of people. But that's the system we have and we'll have to deal with all the problems that throws up.
More importantly, though, it just goes to show you shouldn't take any notice of what the RBA says. While the bank was talking tough on interest rates earlier this year, market interest rates were falling. The RBA is only now coming around to the market's view.
Most of the economists who regurgitate the RBA's view for a living were caught out too. The one exception was Bill Evans of Westpac, who employed independent thinking to predict a rate cut well before the mainstream.
So is the RBA's belated recognition of a weak Aussie economy a contrarian indicator? After all, the market began rallying the day after its announcement and hasn't looked back. It simply seems to be saying, 'What debt crisis?'