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Governments Will Lose Their War on the Markets

Dirty War

DELRAY BEACH, Florida – The markets continue to dawdle. Not much conviction in either direction. We’ve already looked at the War on Poverty, the War on Drugs and the War on Terror.

So let’s move on –  using our new lens to look at another of the feds’ fake wars. No war was ever officially declared against the markets. But for four decades the feds conducted covert operations – a dirty war in which they’ve tried to mislead, obstruct, and suppress market forces.

They used fake money, fake savings, and fake interest rates to confuse investors, businesses, and consumers. They didn’t say so directly, but their purpose was to give out false signals so that people would change their behavior.

“Demand” was too weak, they said. What to do about it? They flooded the system with phony savings (credit). Price signals were distorted. Credit limits seemed to disappear. Debt limits were eased.

Then, in 2008, the war turned hot, with the feds actively and overtly holding down interest rates to push up stock and bond prices. In response to the crisis they caused – by encouraging too much debt in the housing sector – they claimed that the “free market” had failed. They were just responding to the “emergency,” they said.

Soon, everybody got in on the act – expressing an opinion about how high (or low) interest rates should be.

Governments Will Lose Their War on the Markets


Sometimes there’s just nothing you can do… after all, we have to have government, right? What if no gang of highway robbers waving a flag were in charge? There would be utter chaos!

Cartoon by Glenn McCoy

Force and Fraud

Believe it or not, an activist group called “Fed Up” argues that raising rates is –  you guessed it –  racist!

Governments Will Lose Their War on the Markets


Since even gravity is racist, we should not be surprised to find out that interest rates higher than zero are racist as well (as former Washington mayor Marion Barry once explained: “The laws in this city are clearly racist. All laws are racist. The law of gravity is racist.”). Just to help you avoid committing any social faux-pas in the future, here is a comprehensive list of things that are racist.

Cartoon by Glenn Foden

Institutional Investor magazine reports that a group funded by 32-year-old Facebook co-founder Dustin Moskovitz is lobbying against rate increases on the grounds that higher rates are bad for U.S. workers. From the website:

“The truth about the economy is obvious to most of us: not enough jobs, not enough hours, and not enough pay — particularly in communities of color and among young workers.

Some members of the Federal Reserve think that the economy has recovered. They want to raise interest rates to slow down job growth and prevent wages from rising faster. That’s a terrible idea. We stand with millions of workers and their families in calling on the Federal Reserve to adopt pro-worker policies for the rest of us. The Fed can keep interest rates low, give the economy a fair chance to recover, and prioritize full employment and rising wages.”

What? Who are these people? Do they have tails? Horns? They’re right about one thing: When the Fed tries to control the economy, it is politics, not markets, at work.

Markets work by persuasion and voluntary exchange. Politics works on force and fraud. Fed Up is a political organization trying to influence how the force and fraud is applied.   But let’s look at the feds’ War on Markets through our now-familiar scope.

Governments Will Lose Their War on the Markets


And just as racism was about to decline to absolute zero… they suddenly reversed course. According to unconfirmed rumors, the FOMC was struck by invisible evil Trump rays.

Victory is Impossible

First, is this a war the feds can win? No. Of course not. Markets can be suppressed, delayed, and denied – but never eliminated. Markets do not stop working just because you try to bend, distort, and even outlaw them. Victory is impossible.

The market for drugs does not stop just because the feds make them illegal. Instead, they re-price illegal drugs, taking into account the increased cost of doing business. Nor does poverty disappear just because the feds make war on it.

“The poor will always be with you,” said Jesus wisely. Wealth and poverty are relative; there will always be some rich and some poor. Passing laws will not change that.

And “terrorism”? Those who do not have access to conventional armies always resort to unorthodox attacks.  That’s what American colonists did when they launched their war against the British in 1775.

It’s what the Jews did when they launched their “insurgency” against the British in Palestine in 1939. And it’s what the Maquis did during the occupation of France by the Nazis during World War II. Terror won’t stop any time soon. Nor will markets cease to function.

Governments Will Lose Their War on the Markets


But, but… central bankers are magic people! They are bigger than the market! Right? Right?

Cartoon by Jac Depczyk

Bubbles, Bankruptcies, and Misery

Second, does the enemy gain strength from the “war” against it? Well, yes and no. Markets work perfectly well whether you make war on them or not. Governments can put any price on anything they want. But only markets can tell you what they are worth.

Just look at what happened in the Soviet Union. Or China, pre-1979. Or Venezuela. Who bought anything from China when the communists were setting prices? Who goes to Venezuela to do his shopping today?

We visited Russia soon after the Soviet Union was disbanded. Markets were just opening up. But after 70 years of price fixing, there was almost nothing to buy. Almost everything that was being sold had been pilfered from the army. We bought a pair of boots for $1. We still have them. The soles are so stiff they barely bend.

There are really only two types of economies – command economies and market economies. The latter work for everyone – but you never know who  the real winners will be. The former work only for the commanders. Then, when they have stolen everything there was to steal, markets reassert themselves.

As Mises noted, citizens will eventually have to choose between the free market and socialism. One cannot have both, and the latter is the antithesis of a rational economy. All central planning is doomed to fail, and every government intervention in the economy makes it worse (even though there are of course always beneficiaries).

Economies are price-discovering, information-generating learning systems. On the world market, every economy has access to the same resources, more or less. It’s what you do with them that counts.

Dictating prices is like teaching students that Japan won World War II, or saying that two plus two equals five, or rounding off Pi to three just to make it easier to remember. But the more fake information you give out, the more valuable real information becomes.

Governments Will Lose Their War on the Markets


A War The Feds Will Ultimately Lose

Third, did it create a new, corrupt Deep State industry? And fourth, do the combatants on both sides gain as the public loses? Not exactly. This is different from other “wars” announced by the Deep State.

This is how the insiders fund their other wars… and how they shift trillions of dollars from the public to themselves. The War on Markets distorted almost all industries and corrupted the entire economy.

As reported here many times, suppressed interest rates alone probably cost savers as much as $10 trillion since 2008. Goosing up asset prices probably shifted another $10 trillion or so to the people who own them (typically, the elite).

As in all of these fake wars, the casus belli is phony.

Markets do not hurt people; they help them. Price signals, set by markets, are essential. Otherwise, you don’t know whether you’re adding wealth or subtracting it. Trying to suppress free markets or abolish them always leads to confusion, bubbles, bankruptcies, and misery. Economies weaken; people grow poorer.

Gosudarstvenaya duma in Russia

Gosudarstvenaya duma in Russia - Click to enlarge

Today this imposing building houses the State Duma (parliament) of Russia, but once it was home to GOSPLAN, the Soviet Central Economic Planning Agency (the insert shows a 1972 postage stamp with a portrait of Gleb Krzhizhanovsky, the first head of GOSPLAN from 1921 to 1923). This agency had total control over the Soviet Economy – it planned every nook and cranny of it. And yet, even this all-encompassing State Moloch was ultimately not bigger than the market it tried to suppress. Today we know that a surprisingly large “shadow economy” operated in the Soviet Union, helping it to survive. But it was not enough – the central planning agency wasted too many scarce resources, consumed too much capital. Gorbachev partly reformed the political system, but he never attempted to reform the socialist economic system – on the contrary, he did what he could to suppress all free market remnants that still existed, as he seriously believed that the system would work if only the “right people” were running it! It didn’t take long for the economy to collapse utterly and riots began to break out all over the Soviet empire, marking the beginning of its downfall.  The “third way” system practiced in the nominally capitalist West today is merely a method to arrive at the same result more slowly; the pain will probably be all the more profound.

Photo credit: Daria Antonova

Since 2008, wages have been stagnant or falling for most people…  GDP growth has declined and is now probably negative… productivity growth has declined more than any time in the last 40 years… world trade levels are back to 2009 levels and the bounce-back from the Great Recession was the weakest on record.

For now, the war serves its real purpose: to increase the power and wealth of the Deep State insiders. But it is a war that the feds will ultimately lose.  Trying to suppress markets is like putting a giant cork in the mouth of a volcano. It doesn’t stop the eruption; it just makes it more violent.

General Eisenhower’s famous and prophetic warning against the military-industrial complex

Chart by: St. Louis Federal Reserve Research


Cart and image captions by PT


The above article originally appeared as “Why the Feds Will Lose Their War on the Markets” at the Diary of a Rogue Economist, written for Bonner & Partners.

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Bill Bonner
Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities.
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