A market economy depends on prices. They provide both producers and consumers with vital information. It has been said, quite accurately, that the Soviet Union collapsed because it never had honest prices.
Unfortunately we don’t have honest prices either. The two biggest prices are interest rates and currency prices. These affect the entire economy. But world central banks won’t leave them alone. They are constantly manipulated (down, down, down). The result is market confusion, bubbles, and busts.Today the US Fed announced it will do even more interest rate manipulation, this time in longer maturities. This is another slap in the face of savers, people who put money aside and want to invest it in reasonably safe ways. It will also have massive unintended consequences. Indeed one of the unintended consequences is described in the story below, which concerns how this Fed action will affect insurance companies offering annuities. Don’t be surprised if it drives insurance companies into risky bonds. This could lead to insurance company’s going bust and with them the lifetime savings of all the annuitants. If this happened today the government would step in and nationalize insurance, with nobody pointing a finger at the guilty party, which is the government itself.
Markets are a wonderful human discovery. Why must central banks do everything they can to destroy them?
Hunter Lewis 9-21-2011