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What were investors thinking? Interest rates must rise: Don Pittis: 4DBC 4D Business Consulting

What? No more free money?

The reason for the market shock, as reported in the financial papers, was that both the European Central Bank and members of the U.S. Federal Reserve hinted that the free money era was coming to an end.

European Central Bank president Mario Draghi suggested Europe was considering ending the flood of new money into the world economy through the bank's purchase of securities.

There were new rumblings the Fed might actually raise rates as soon as September. After Friday's sharp decline in North American markets, the sell-off continued in Asia and Europe as markets there opened Monday morning.

Fear is not stupid

New York and Toronto began to recover, but there was a new nervous tone "as doubts over central banks' willingness to add more monetary stimulus hit risk appetite," according to the London Financial Times.

'It's not working': Why the old economic rules don't add up any more
Being afraid of more speculative risk at this point is not stupid. Really, the criticism should be reserved for what came before — the speculative loading up on bonds and other assets as interest rates crept as low as they could reasonably go.

A few simple words of explanation for that great majority of us who have only a vague understanding of bonds and interest rates:

When interest rates are falling, buying bonds is smart. To think about why, imagine you had bought a safe 30-year bond back when interest rates were seven per cent. You'd still be getting seven per cent on your money, instead of the miserable few per cent they are offering now.


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