Prices are the messenger of supply and demand for goods and services. They're often demonized, and people will often react in anger to prices without realizing that sometimes high prices can actually be a good thing -- because it channels wealth in an incredibly different manner.
Prices can be seen as the writing on the wall by the invisible hand. In a free market, a sudden lurch in the price-range of bids/offers reveals to us something incredibly important about the market, and a little research should allow us to then know exactly what just happened.
And that's the problem with the US economy. Price distortion exists essentially everywhere. Food prices, energy prices, construction prices, alternative energy prices, college prices, real estate prices, stock prices -- it's all manipulated and is causing our economy to be absurdly inefficient and completely stuffed with malinvestment.
Why Pricing Always Matters
One of the most important flaws of the arrogant central planners is that they apparently miss why prices exist the way they do.
They look at the free market and proclaim that credit is too expensive, stocks should go higher, college is too expensive, and completely ignore that the economic system has prices those assets and quests for incredibly important reasons.
So they go about manipulating the market to "make" real prices go down. That might involve just paying people to buy something, which will automatically make the price increase for those not receiving subsidies.
This is why the housing bubble occurred, why the student loan bubble is occurring, and why almost every major economic disaster is government caused.
As the age-old saying goes, don't shoot the messenger. In the economic sense, doing so will just backfire -- and the entire pricing system will be broken.
What Prices Are Doing
Prices are essentially the mechanism by which the invisible hand directs resources. It takes the most "in demand and under supplied" assets, and makes it expensive and hence profitable for people to supply.
Prices also are high enough that some people don't purchase the thing in question. This is essentially an economic mechanism for ensuring that people aren't able to consume more than the market an handle unless they've produced enough -- per capita -- to justify the consumption.
This is actually important and good. Not everyone should qualify for a mortgage; not everyone belongs in college; not everyone should be able to buy a Porsche right now.
How This Impacts The Economy
Whenever the government begins to intervene, we shouldn't be skeptical, we should instantly assume that the economic implications will not at all be what was promised.
An example would be the most obvious situation of the housing bubble. Because the price of credit was suddenly lowered and there was legislation created intended to ignore why the poor couldn't afford too much housing, there was a bubble that involved a lot of subprime mortgages.
The subprime mortgages going down are one of the reasons the bubble burst dramatically, but it was only part of the malinvestment. Rich people were buying houses at too high of price as well -- because interest rates on credit was too artificially low -- a pricing problem -- we saw a bubble and a malinvestment bust.
The same is going on absolutely everywhere. The housing bubble was an obvious example, but the economic destruction and carnage being wreaked everywhere is absolutely breath taking.
What This Means For Investors
This is one of many, many reasons skepticism is necessary for investors. People who make bold claims about the short-term future are rarely right. Forecasting as an industry is almost impossible. Certainty shouldn't exist for investors.
This doesn't just go for "establishment" investors who expect the future to look identical to the past in terms of returns. This goes for contrarian investors as well -- and is one reason so many have been wrong when it comes to their predictions of collapse as well.
In the end, the economic destruction caused by ignoring manipulated prices should lead investors to consider the following:
Precious metals. I bring up gold and silver up in a lot of my articles because every investor should have at least some money in them. This isn't about profit, but about long-term financial security. Forecasts of happiness and prosperity are simply unkowable, which means being prepared for an economic and monetary "reboot" without betting the farm.
Stable companies. Stable dividend companies like Coke (KO), Exxon (XOM), Waste Management (WM) and Wal-Mart (WMT) won't be going anywhere anytime soon, and are more likely to survive the manipulated prices. Even then, they're also more likely to benefit from manipulated pricing.
"Lazy man" portfolios. I love the idea of lazy-man portfolios in general, but in light of the continued price manipulation, I love them even more. The permanent portfolio strategy is a great example of a lazy-man portfolio. The idea is that there's a set asset allocation, and set regular rebalancing times. The portfolio takes care of the rest. All you do is add regularly to the holdings. I've heard about the "Gone Fishin'" portfolio, and it's probably worth looking into.
Lowered expectations. Lowering expectations -- or lowering goals -- is one of the simplest ways of increasing financial security. It doesn't necessarily mean losing money if done correctly. Paranoia (putting every dime into the Ron Paul portfolio, for example) is a horrible idea over time, but adding a good bit of gold is great for increased diversity and "doomsday" insurance.
Analyzing the manipulation. This is incredibly difficult because price manipulation trends can take decades to play out, but it's certainly possible. People who saw the college price bubble and manipulation coming, for example, have had different investment and business opportunities that others wouldn't. The problem, of course, is that the manipulation doesn't have a lack of consequences -- bubbles burst.
In the end, we have a manipulated economy. The price of almost everything doesn't adequately reflect the invisible hand. This is creating insane amounts of malinvestment, and is slowly doing to college kids what was done to home owners and investors just a few years ago.
Politically, this isn't going to remotely change anytime soon, and investors should position themselves accordingly with the right skeptical, security-oriented assets.
Additional disclosure: I own physical gold and silver and will be adding to my position regularly.