“Well…which is it?”
We put this question, rhetorically, to a group of dear readers, in Melbourne.
The background for this question is as follows:
To Err is Human, we had told them. Mistakes are always being made. In a properly functioning economy, these errors are always being made…and corrected. People go broke. Investments go bad. Projects are cancelled…discarded…and rejected.
But in the last quarter century, interest rates were generally falling. This created a very forgiving economy. Mistakes were still made. But the cost of them went down. You could pay more for a house than you should have paid…but no problem; you could refinance at lower interest! And then, the price would go up – problem solved. Or, you could overpay for a stock. Again, falling interest rates were generally pushing up stock prices – you almost couldn’t lose.
Then, in the last six years, mistakes almost disappeared. People might have wanted to go broke – but lenders wouldn’t let them. The lenders kept showing up with more money! You could buy a house…or a Structured Investment Vehicle; no matter how big a mistake you made, you’d be rescued by easy money and rising asset prices.
Looking at the economy itself, as the flood of money gushed in…mistakes disappeared beneath the surface. Typically, in the United States, there was about one quarter of correction – with negative growth – to every four or five quarters of expansion. But more recently, the ratio of correction to growth fell to only one quarter out of every 19. Which was where our question began:
Either humans are less prone to error than they used to be…or there are a lot more mistakes in need of correction.
But we’ll have to explain this tomorrow. Today is already over here in Melbourne…stay tuned.
Markets and Money