Editor's note: This article was originally published on Real Money Pro Dec. 1 at 8:43 a.m. EST.
NEW YORK (TheStreet) --"The popularity of inflation and credit expansion, the ultimate source of the repeated attempts to render people prosperous by credit expansion, and thus the cause of the cyclical fluctuations of business, manifests itself clearly in the customary terminology. The boom is called good business, prosperity, and upswing. Its unavoidable aftermath, the readjustment of conditions to the real data of the market, is called crisis, slump, bad business, depression. People rebel against the insight that the disturbing element is to be seen in the malinvestment and the overconsumption of the boom period and that such an artificially induced boom is doomed. They are looking for the philosophers' stone to make it last." -- Ludwig von Mises (1940)
"Panics do not destroy capital, they merely reveal the extent to which it has been destroyed by its betrayal into hopelessly unproductive works." -- John Mills (1867)
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Free money (and zero interest rates) are the fathers of malinvestment.
Over history, the artificially low cost of credit and central bankers' unsustainable increase in the money supply trigger poorly-allocated business investments.
The dot-com bubble in the late 1990s, the U.S.housing bubble in 2002-07 and the proliferation of those "financial weapons of mass destruction" (derivatives) are past examples of what Austrian economist F.A. Hayek called a byproduct of errant monetary policy, which produced low interest rates and, eventually, misleading relative price signals. causing a boom followed by a painful bust.
Today, the Federal Reserve and, for that matter, central bankers around the world, have made a mockery of fundamentals as a slowdown in the rate of global economic growth (see overnight data in China, Germany and the U.S. (retail sales)) have coincided with a near parabolic move in the U.S. stock market over the last six weeks.
Nonetheless, investors' confidence in central bankers' ability to engineer escape velocity and a self-sustaining trajectory of global growth is at a bullish extreme, manifested in relatively high valuations (at over 17x earnings). This comes despite 25% of the world's GDP barely growing (with Brazil, Japan, Italy and Russia in recession) and Germany's and France's flatlining growth and with the U.S. growing at only 2% to 2.5%.