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Americans Going for the Good Life

Posted by Steve Markowitz on March 20, 2012

Whether one believes in a Capitalist or Socialist system, human nature dictates most of our actions and interactions in society.  Capitalists believe that the free market is the best mechanism for self-regulating these individual desires.  Those that are Socialist leaning put more faith in the government to do the regulating.  While Capitalism has shown to be an imperfect mechanism, central planning and interventions by Progressive governments have proven disastrous.  The current sovereign debt problems affecting many Western countries are the result of such interventions.

Perhaps the most significant Progressive governmental intervention today is the efforts to fix the ongoing sovereign debt problems.  Their solution; push interest rates to near zero to keep the cost of sovereign debt service low and at the same time enable the commercial banks that are also insolvent access to nearly free money.  To assume there will not be serious unintended consequences to what is the most significant governmental intervention ever attempted on a worldwide scale is akin to a nearly religious belief in alchemy.

Today we focus on one consequences already occurring as a result of the low interest rate policies.  This artificially created low interest rates on the safest investments, governmental bonds, also affect interest rates up the chain including those at the higher risk levels.  In other words, return rates for even risky investments have been lowered proportionally.  As a result, investors’ returns have decreased to historically lower levels creating the desire (demand) to move up to higher risk in an effort to increase meager returns.  The longer the current artificial interest-based recovery continues with assets such as equities appreciating, the greater the incentive for investors to increase their risk tolerance.  This is a similar the housing bubble caused by the earlier low-interest Federal Reserve policies that not only made mortgages easier to afford, but pushed investors into buying the risky securitized bonds that ultimately failed; i.e. the toxic concoction that created this mess in the first place..  Now governments are trying to turn the tide with the same low interest rate policies.  That’s insanity!

The low-interest rate policies of the Fed are again cajoling people into risky investments that will result in another bubble and bust, possibly in the bond market.  Following is a clip titled A Day In the Life of a Financial Advisor.  With a bit of humor it shows the spiral that many Americans now face; chasing increased returns without enough concern for risk, the missing control ingredient in the Progressive model of capitalism.




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