- By Bill Bonner
We have been writing about radical ways to reduce your expenses. Our monthly budget was $500. We were just fantasizing about it. But readers have actually done it! Interestingly, many of those who reported living on extremely little money report that it was the happiest time of their lives!
Right now, your editor is spending considerably more than $500 a month. He is sitting on the balcony of his cabin, overlooking the harbor at Rhodes. To our right is where the "colossus" once stood - a huge bronze statue, built to celebrate Rhodes' success against the Syrian, Demetrious, the 'assieger' - one of the 'Seven Wonders' of the ancient world. The statue only stood for a few years, before it was toppled in an earthquake and later cut up and carted off by the Ottomans. It was said that there was so much bronze it had to be loaded on 900 donkeys.
But we will spare you the history and return to our subject: farce. Yes, the world of money has become a joke.
Yesterday, the Dow re-crossed the 17,000 mark. What? Is the correction over? Is it clear sailing...all the way to 20,000...and the moon?
On the deck below our balcony, fellow travelers get exercise, by walking around the ship.
Hark! We recognize a voice...
"Well, with interest rates this low...." said the familiar voice. It was Tim Price, colleague from London. Tim was walking around the deck, talking to a friend. It took a few minutes to complete the circuit. So, we only caught little snippets of his conversation...
"One of the hardest things to understand..." was the phrase we picked up on his second passage.
"Of course, we have no idea when that will happen..." was the remark on lap #3.
Like archeologists reassembling an ancient pot, we will have to fill in the missing parts.
'With interest rates this low, every asset price is suspect,' he might have been saying. Or 'with interest rates this low, there are bound to be accidents.'
Super-low interest rates are like highway signs that have been tampered with by a mischievous troublemaker. They send drivers in the wrong direction. Soon, there is a pile-up. Right now, for example, Deutschebank is warning about a huge accident coming in corporate debt. Corporations have been able to borrow hundreds of billions of dollars at some of the lowest interest rates ever. Some of them used the money to good purpose - building factories and developing new capacity to boost output. With that new output they will be able to increase sales and repay their loans.
But the signs misled the bad as well as the good. Many corporations took the money simply because it was made available to them. Then, they distributed it to corporate managers and shareholders - usually via share buybacks. And now, with output prices and world trade in decline - they have no way to pay back the loans. As long as money remains super EZ, they may be able to roll over their debt. But interest rates - like every other price - goes up as well as down. When interest rates go up, the pavement gets slick and the ambulance sirens scream.
"Of course, we have no idea when that will happen," is self explanatory. It needs no elaboration.
But we have to stop. It's time to go ashore.
Publisher's Note: Vivek Kaul, the India Editor of the Daily Reckoning, just made a bold call - Real Estate prices are headed for a fall. Well, if you are someone who is looking to buy real estate, or is just interested in the space, I recommend you read Vivek's detailed views in his just published report "The (In)Complete Guide To Real Estate". To claim your copy of this Free Report, just reconfirm your Free subscription to the Daily Reckoning...
Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.