• Free Markets Are Rare Indeed
Posted by Ron Robins on February 21, 2008
Most major markets influencing business and consumer decisions are not ‘free.’ They are manipulated by governments to varying degrees. Governments feel that it is for ‘social good’ that they intervene. Here is a brief list of key markets and descriptions of the government interventions. You can decide about the worthiness of these interventions yourself.
Currencies
The world’s most important currency, the US dollar, does not really trade freely. The US Treasury established in 1934 the ‘Exchange Stabilization Fund’ specifically to ‘manage’ the US dollar exchange rate. Its dealings are secret. In 1987, 1998, 2003/4 and likely at many other times, the treasury departments and possibly central banks of the US, Japan, the EU and other countries collectively intervened to manipulate currency values. China has pegged its currency, the renminbi, to the US dollar for many years. As the US complains about Chinese currency manipulation, it needs to come clean about its own efforts first.
I suggest that currency traders and speculators should not be blamed for strong currency movements. They are nearly always reacting to bad or anti-market policies of governments and central banks and generally reflecting the ‘collective consciousness’ of the global financial community.
Stock markets
Stock markets are not free of government intervention either. After the 1987 US stock market crash, President Reagan established the Working Group on Financial Markets, (the ‘plunge protection team’), to effectively stop stock market crashes. How and when it operates is again secret. Journalists and others have tried for years to get information of the Working Group’s meetings and activities, but to no avail. On January 22, 2008, it was believed that the US Federal Reserve purposely reduced its Federal Funds rate by 0.75% just before the US Dow Jones Index was due to open 600 points (over 5%) lower! This move potentially saved the US stock markets from a major crash that day. Here we have a clear – and public case – of market intervention for the purported ‘public good.’
Interest rates
The US Federal Reserve, the EU Central Bank, Bank of Japan – in fact nearly all central banks regularly announce interest rate changes to short term securities. And through their buying and selling of government bonds, they also influence rates on all longer-term securities.
Unfortunately, a largely economically illiterate public clamours for manipulated, low interest rates. Central banks generally oblige, despite them supposedly being mostly ‘independent.’ Artificially induced low interest rates then create excessive borrowing, such as we have seen in housing. A housing bust follows and everyone blames the government – rather than themselves! (Question: who is really best able to set interest rate policy? Is it a country’s central bank or the free market?)
Oil
By controlling over 40% of global oil production, OPEC (the Organization of Petroleum Exporting Countries), stage-manages global oil production and prices. Not only do they control production levels, but they have been free to cite their oil reserves’ data with no independent verification of what they do actually have in the ground. And there are many reasons – as Matt Simons, eminent oil analyst, suggests – why we need to be sceptical of the Gulf States oil reserve numbers. Again, with the reserves being unaudited by any reputable international agency, OPEC is able to abnormally influence oil prices.
Food
Governments influence agricultural markets to a massive degree. Annual agricultural subsidies in the EU amount to about $75 billion; in the US $55 billion. These subsidies with those of many other countries dramatically distort global agricultural production and prices. The Doha round of World Trade Organization (WTO) free-trade talks floundered largely because developing countries demanded that agricultural trade distorting practices be reduced and eliminated. The developed countries resisted and the trade talks collapsed. For much of the developing world the one area where they could compete – and potentially bring them out of poverty – is with agricultural exports, even with today’s significantly increased transportation costs.
Ethanol and biofuels is another area where government intervention to support markets has caused dramatic negative market dislocations. Food cropland and food crops now going towards the production of ethanol and biofuels has resulted in significantly increasing food prices around the world. In numerous developing countries it has contributed to food shortages and riots.
Two final thoughts…
Unfair economic or financial advantage is often gained by those who have inside knowledge of where and when governments intervene. Indeed, they can ‘front-run’ the governments’ actions and make huge fortunes without the public ever knowing what is going-on. This probably occurs especially in stock markets, where it might be welcomed by the governments who see it aiding their efforts to manipulate markets.
This discussion demonstrates that society does not have, nor apparently really believes in, wholly free markets at this time. Why? It feels that individuals cannot be trusted to do the ‘right’ thing. Yet, as we see here, governments frequently do not do the right thing either! In other posts I demonstrate that high consciousness individuals are much more likely to do the’ better’ thing. Such individuals will allow truly free markets to function and will create affluence, environmental sustainability, and fulfillment, beyond anything envisaged today. To turn things around and to begin to understand how free markets with higher consciousness individuals can work, see these posts Free Markets Need ‘High Consciousness’ Individuals and The Missing Ingredient in Economics – Consciousness!
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© Ron Robins, 2008.
Enlightened Economics 
goldsystem said
Great article. I have added you to my subscription.
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GDAEman said
What you say is all correct. BUT, the markets are also influenced by the transnational corporations themselves… they pull the government’s strings and create the rules via the WTO and other means. They practically run many of the underdeveloped nations by buying the leaders.
In the US the corporations get the government to do their bidding… Can you say “United Fruit Company” and “Monroe Doctrine”? Some call this corporate/government relationship fascism. The missing ingredient surely is consciousness… about the scam that’s being pulled on “we the people.”
Keep blogging. I think you’re on to something.
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Stephen said
“Indeed, they can ‘front-run’ the governments’ actions and make huge fortunes without the public ever knowing what is going-on. This probably occurs especially in stock markets, where it might be welcomed by the governments who see it aiding their efforts to manipulate markets.”
I suggest that the shoe is on the other foot. It is the big money behind the scenes that controls the governments of the world. These wealthy people take their position, and then manipulate government policy to make their “investment” profitable. This happens in ALL areas of government policy, not just the few that you mentioned.
In the words of Warren Buffet:
“This trend has already pushed up prices. But we are far from market equilibrium. For those whose profits are intertwined with government actions, political influence is still ridiculously underpriced. It won’t, however, stay that way. If a market model prevails, political clout will eventually be priced appropriately, which means survival of the fattest will be ensured.””
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nubs203 said
Great article. I agree with all of it and I wish the US government would wake up and realize that we dont operate in a free market. We are deluding ourselves and allowing other countries (and huge corporations) to take advantage. Indeed, equilibrium is near impossible with any kind of government presence in the markets, which there always will be.
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Stephen Porter said
“Stability breeds instability.”
– Hyman Minsky
Stability leads to excessive risk taking and too much debt. Instability leads to more conservative investing and less debt. The cycle is natural and self-correcting.
Attempts by the central bank and plunge protection team to stabilize the economy cause excessive risk taking that eventually causes a huge crash.
All of life is cyclical, and the business cycle serves many useful purposes. For example, recessions cause debts to get paid off, marginal businesses close freeing up resources for stronger businesses, all businesses are forced to consolidate and become more efficient, the threat of unemployment causes people to save for a rainy day and become more self-sufficient, and so on. A mild business cycle is healthy for the economy. By interfering with the business cycle, central banks encourage the build-up of extreme imbalances.
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