The week following the Brexit vote the markets initially bottomed out. Then only a few days later they rebounded in astounding fashion. Since those initial two weeks, markets have been steady. Every piece of news has been lackluster. Some good, some bad but mostly just average. The markets have responded with very little movement in either direction and trading has been low. This came to a halt yesterday when the US markets dropped anywhere from 2 to 2 ½ percent. But the question is why?
Recent comments by the Fed have pointed to a rate hike sooner rather than later. So the markets reacted to rumors, nothing more nothing less. But the bigger issue is not why the market went down. We already know that human emotions are fickle. We panic and allow that panic to dictate our reactions to situations in life. The bigger issue is why are we so terrified of higher rates?
Many blame the great recession on bubbles created by rates being too low for far to long. We’ve left rates at levels the US has never seen before for nearly a decade. To compound the problem nations in Europe as well as Japan have moved their rates to negative territory. So if we are to believe that keeping rates too low for too long will create bubbles then is the fear actually about another recession? Do many believe that once rates go up here in America the bubbles created over the past eight years will finally burst?
Or are we terrified that higher rates will make the massive amounts of consumer, business and governmental debt unsustainable? Record amounts of debt have been taken out over the past eight years because the Fed has pushed policies that have encouraged this. They’ve penalized everyone who want to save in order to promote economic growth through debt. This my friends is the definition of insanity. All the Fed has done is encourage people to over extend themselves. A problem that will eventually be revealed.
In essence, there are a lot of reasons people fear higher rates. But never the less, we need to push rates higher no matter the fears we have. We need to finally encourage saving over spending. We need to encourage wise economic investments so our economy is no longer a delicate fragile creation. When borrowing money is expensive people will make sure the investments they are make are good ones. When your handing out money under the guise of economic development your doing more damage than anything else. You might not see it in a year or even a decade from now but the house of cards will come crumbling down eventually. No matter how hard it is or how unfavorable it is, rates need to go up. They must go up. The decisions the Fed is making today will profoundly effect our economy for decades to come.