Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22
How to Profit from 2022’s Biggest Trend Reversal - 11th Jan 22
Stock Market Sentiment Speaks: Are We Ready To Drop To 4400SPX? - 11th Jan 22
What's the Role of an Affiliate Marketer? - 11th Jan 22
Essential Things To Know Before You Set Up A Limited Liability Company - 11th Jan 22
NVIDIA THE KING OF THE METAVERSE! - 10th Jan 22
Fiscal and Monetary Cliffs Have Arrived - 10th Jan 22
The Meteoric Rise of Investing in Trading Cards - 10th Jan 22
IBM The REAL Quantum Metaverse STOCK! - 9th Jan 22
WARNING Failing NVME2 M2 SSD Drives Can Prevent Systems From Booting - Corsair MP600 - 9th Jan 22
The Fed’s inflated cake and a ‘quant’ of history - 9th Jan 22
NVME M2 SSD FAILURE WARNING Signs - Corsair MP600 1tb Drive - 9th Jan 22
Meadowhall Sheffield Christmas Lights 2021 Shopping - Before the Switch on - 9th Jan 22
How Does Insurance Work In Europe? Find Out Here - 9th Jan 22
MATTERPORT (MTTR) - DIGITIZING THE REAL WORLD - METAVERSE INVESTING 2022 - 7th Jan 22
Effect of Deflation On The Gold Price - 7th Jan 22
Stock Market 2022 Requires Different Strategies For Traders/Investors - 7th Jan 22
Old Man Winter Will Stimulate Natural Gas and Heating Oil Demand - 7th Jan 22
Is The Lazy Stock Market Bull Strategy Worth Considering? - 7th Jan 22
METAVERSE - NEW LIFE FOR SONY AGEING GAMING GIANT? - 6th Jan 2022
What Elliott Waves Show for Asia Pacific Stock and Financial Markets 2022 - 6th Jan 2022
Why You Should Register Your Company - 6th Jan 2022
4 Ways to Invest in Silver for 2022 - 6th Jan 2022
UNITY (U) - Metaverse Stock Analysis Investing for 2022 and Beyond - 5th Jan 2022
Stock Market Staving Off Risk-Off - 5th Jan 2022
Gold and Silver Still Hungover After New Year’s Eve - 5th Jan 2022
S&P 500 In an Uncharted Territory, But Is Sky the Limit? - 5th Jan 2022

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Government Manipulation Vs Market Forces

Stock-Markets / Government Intervention Sep 07, 2008 - 02:20 AM GMT

By: Money_and_Markets

Stock-Markets

Best Financial Markets Analysis ArticleJack Crooks writes: In America, times like these don't come around often. Usually, Americans are blessed with economic prosperity. Enduring periods of stagnant or shrinking economic growth are exceptions to the rule.

There's a big reason we've been so fortunate ... something often referred to as the market process. Contrary to what the current Federal Reserve or U.S. Treasury might have you believe, it is this naturally occurring progression that keeps the markets functioning the way they ought to function — free of interference.


What better time than during a Presidential election year to discuss the role of government on the economy? Of course, I'm not going to tell you to vote Republican or Democrat. I just want to explain how I feel we should expect our government to behave with respect to the market process.

Government: Always Getting Their Hands into Something

The way I see it, our government officials create too many laws and spend too much money. It's all because they claim to have the best interests of the people at heart when in fact, knowingly or unknowingly, they do not.

The founding fathers rebelled against British rule in part to alleviate the burdens of taxation — not allow it to impede the market process.
The founding fathers rebelled against British rule in part to alleviate the burdens of taxation — not allow it to impede the market process.

And, for now, let's exclude taxes from the discussion. It was our ancestors' objective to rebel against British rule and escape the burdens of taxation, something that clearly impeded the market process. That was one of the ideas on which America was founded.

Instead, let me delve into another dynamic that interferes with the natural flow of markets — government handholding. For many years its impact has been immense. But where do we stand now? Has the government left us with more individual freedoms, fewer regulations, and a solid foundation from which to move forward? Not likely.

Enabling Bad Business With Easy Money

There are two important things that allow businesses to grow — money (credit) and ingenuity. Let's assume that the ingenuity exists and all that's needed to start up a new business is money. Where does one get money? Well, it's always good to dip into savings. But what if the savings aren't there? Then, if the business venture is deemed a profitable one, the other option is to borrow money.

But borrowing money to fund a new business can get sticky. Of course, new businesses create new jobs, and we've come to know that new jobs are good. But because the natural signals from the market are jumbled because of the government's manipulation of interest rates and loose credit, entrepreneurs often embark on expansion of their business at precisely the wrong time.

Normally unprofitable businesses would simply reach a point where they must close their doors. But often times, when cheap credit is readily available, these same businesses find ways to keep the doors open longer than they normally would. And because weak players are left standing, it tends to weaken the entire industry. This is what happens when the government tries to "do well" through incentives and bailouts. As the saying goes, "The road to hell is paved with good intentions."

Assume for a moment that the Federal Reserve is merely an extension of the government directly responsible for monitoring the economy, which is what this so-called private organization really is.

As we all know, the Federal Reserve is trying hard to keep the good times rolling for our economy. Amidst handing out money to any bank or institution that rolls up with a piggy bank full of any old structured debt products, the Fed has brought rates down to 2%.

Federal Reserve and U.S. Treasury policy has only succeeded in creating a crippling credit crunch.
Federal Reserve and U.S. Treasury policy has only succeeded in creating a crippling credit crunch.

Sure, such low rates encourage new borrowing and new businesses to sprout up, but do low rates encourage sensible borrowing and attractive business investment? Not usually.

If a project can be expected to yield 4% and money can be borrowed at only 2%, there's a good chance a whole lot of marginal business investments will emerge.

But when so many new businesses form, demanding assets and resources, what happens to the cost of those assets and resources? Those costs rise, and suddenly these business investments don't look nearly as profitable as they once did. That's when we're left with a heaping mess — artificially low interest rates fuel artificially valuable projects.

The Austrian School refers to this as malinvestment. And thanks to the massive amount of rocket-fuelled derivative credit and acquiescence by the Fed and an implicit weak dollar policy from the U.S. Treasury, dollar credit was cheap; it funded all sorts of projects around the globe that never should have happened and likely would not have happened, had the market pricing signals not been manipulated.

Now, a massive base of malinvestment abounds and the credit crunch is the market's way of trying to cleanse the system.

How About A Little "Tough Love?"

What's the solution then, if the government shouldn't be creating jobs out of thin air, or if the Federal Reserve shouldn't be opening up the money spigots for just anyone?

How about "no pain, no gain"? Or how about some tough love? We need to rid our economy of excesses, and malinvestment isn't the answer. It's not healthy. The market process is a bit like natural selection: The strong investments survive while the marginal investments are weeded out.

Granted, this "tough love" approach is becoming increasingly unpopular. No one wants to see their own economy struggle. No one wants spending to decline and jobs to be lost ... especially not their own. This idea of trimming the fat is a no-no for the socialist mentality Americans are coming to accept. They much prefer putting off long-term consequences if they can keep the party hopping right now. Americans now seem to prefer the Nanny State to rugged individualism in a big way.

However, to drive home this point, consider this excerpt from an essay by French economist Frederic Bastiat:

" In the economic sphere an act, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge on subsequently; they are not seen; we are fortunate if we foresee them.

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

Yet this difference is tremendous; for it almost always happens that when immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil."

Easy money isn't the answer to what ails our stagnant economy.
Easy money isn't the answer to what ails our stagnant economy.

Restoring Real Value Through Deflation

Despite all the pot-stirring and visible-hand economics the government believes in, I think we could see the market process still hold the upper hand.

We first reached a point of saturation and now we're at a point of repudiation. That is, through money pumping and interest rate cuts money became cheap. American consumers and businesses stocked up on credit until they were up to their eyeballs in debt. But now the tides are shifting — debt saturation is becoming debt repudiation.

The Federal Reserve can dish out all the money it wants. But if banks aren't lending it or if no one wants to borrow it, then it's useless. It will not be used to invest in new businesses, it will not help to create more jobs, and it will not aid consumer spending patterns. It boils down to this: The market process is taking back control, and we can expect deflation.

But let's not be scared — deflation restores real value to its rightful place. It tends to boost the value of money relative to goods, i.e. increasing general purchasing power for those with cash balances. It allows the most efficient users of scarce capital to survive, and those propped up by artificial manipulation of the rate of interest and crony capitalism to die—as it should be.

Best wishes,

Jack

Important note: One week from Monday, on September 15, Martin Weiss and Mike Larson will be online with a free one-hour video webcast entitled "Plague to Pandemic: Why Banks Are Just the Beginning. How the Credit Disaster Is Now Spreading. The Next Dominos to Fall. How to Go for Windfall Profits." If you value the safety of your investments — and especially if you're looking for a way to keep them growing in this perplexing environment — click this link to register now, while you still can.

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

Money and Markets Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Scott
10 Sep 08, 15:44
Government Intervention

I think Jack is half right in that the Fed's manipulation of the market helped to cause the US econamy to get to where we are today, but it was the change in the bankruptcy laws coupled with the cheap money that really is to blame. Why Bush and the GOP controlled house and senate gave carte blanche to businesses to do bad business is beyond me. Every credit card company/fiancial instution had cheap money available and didn't have to worry about any consumer being able to wipe the slate clean. They knew that they would get paid, it was just a matter of when.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in