One of the most succinct propositions in economics is that there’s no such thing as a free lunch. Put more plainly, when you think you’re getting something for nothing, you’d best check your premises.
Take free Internet search. Is that really free? No, it’s paid for by advertising. Free news from over-the-air broadcasters ABC, NBC and CBS? Advertising. Free advice from financial planners? Commissions on mutual fund sales. Free roads? Check out the taxes you pay on fuel. Free lunch from an insurance salesperson? Commissions, too (an insurance salesperson once bragged to me that he only needed 1 out of 20 people to buy insurance at those events–so you should know right away the “product” is a rip-off!).
There’s no such thing as a free lunch.
In no case should this be more obvious than government support of the economy. Hey, if all it really took were the Federal Reserve printing money to promote prosperity, then Wiemar Germany and Zimbabwe would have been the most thriving economies in history. They weren’t/aren’t (both disasters on scales that make earthquakes and hurricanes economically boring in comparison).
And so, when the Fed ends it’s quantitative easing program this summer, we should all be on the lookout for economic tremors. We ate the lunch, now the bill’s coming due.
I’m actually quite surprised market participants have been short-sighted on this issue. I naively thought the quantitative easing program hinted at last summer would be seen for what it was–quite costly. Instead, the market started partying like it was 1999.
This attitude will, however, prove short-sighted. Unfortunately, John Q. Public has joined the stampede. As usual, he waited until the herd reached full speed, long after the lead steers saw the Fed’s policy as a license to speculate. My guess is that he’ll leap off the cliff only to look back and see the lead steers observing the slaughter from the sidelines.
So was it ever.
Perhaps we’ll get a third round of quantitative easing and the day of reckoning will be put off. If so, that lunch will be no more free than the last several.
It will be interesting to observe how the lead steers react, and how long it takes for John Q. Public to learn that there are no free lunches.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.