Are Investors Riding A Credit-Fueled Boom?Free market economist Thorsten Polleit observes: "In the last decades in particular asset prices, including stock prices, have been driven up by the relentless increase in credit and money issued by banks .. However, the boom must eventually end in a bust. This is what the economists of the Austrian School of Economics have, on sound economic reasoning, been pointing out. In an effort to prevent the bust, central banks try to keep banks churning out ever more credit and money. To this effect, they seek to provide banks with the most favorable funding conditions possible. Pushing down interest rates is one thing .. Another thing is keeping the yield curve in positive shape by holding short-term rates down – this certainly spurs banks willingness and capabilities to engage in additional credit creation through which the boom gets going .. While central banks’ inflationary policies cannot go on indefinitely, they can actually continue for quite a while. In fact, an inflationary policy may last much longer than what one may consider economically and ethically desirable. There are good reasons to be invested in stocks long-term, no doubt about that. But if the investor wants an early warning against an approaching bust, he or she should pay very close attention to credit market developments, and the development of yield curve in particular."
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