Soon the sheeple and the bears were worrying about an imminent downturn, but that was not the end of the story as supply had not gotten permanently out of line with affordable demand. After a brief correction in the green paint manufactoring industry, new sheeple were ready to take on economic risk spurred on by artificially low nominal interest rates. Business activity rebounded under a policy of building stables for everybody, even the sheeple who mostly grazed under open sky. This allowed the business people to raise their prices to offset their growing production cost. Once again earnings increased and everything was well. For a while.
The problem was the real interest rates were still too high for people to take on more debt to spend on less productive endeavors. Yet they did so anyway and this only made things worse as more money kept entering the system to be spent in increasingly less efficient ways. However, rising interest rates did not seem too bad as long as asset values that were rising even faster, debt could easily be leveraged for profit. Although many wished that real interest rates would go down, it just did not seem to happen. Some believed that interest rates could be forced down by making normative statements and others believed them and those who could interpret those statements which were writing in a cryptic language called bullsh*t were much revered.
While the rebound caused some prosperity it was not as widely spread at the previous period of prosperity. Evidence was mounting of deeper difficulties with foreign competition, trade imbalances, declining productivity and worst of all, massive amounts of debt. Still most sheeple remained optimistic. New investments were made that required a rate of return of almost 20% to be profitable. These were much more optimistic than the investments made at the beginning that only required a few percent to be profitable. The new investments increased competition and profits decreased.
Read part III here
(sleep well! 😛 )
Originally posted 2008-10-31 06:51:05.