Are Free Markets Dead?
Moneychanger: If government is suppressing prices across markets, what is left? That’s the death of free markets.
Powell: One intervention necessitates another and another and another to prevent the rigging from falling apart. I don’t think we even know what the market price of toothpaste is.
— Chris Powell, Chairman, Gold Antitrust Action Committee (Moneychanger interview, April 2012)
In March 1988 after the 1987 stock market crash Ronald Reagan created the President’s Working Group on Financial Markets. It charges the Treasury secretary, Federal Reserve chairman, SEC chairman, and CFTC chairman or their designees to “enhanc[e] the integrity, efficiency, orderliness, and competitiveness of our Nation's financial markets and maintain investor confidence.” Specifically, the Working Group had to investigate the crash, making recommendations necessary to reach these goals above, and recommend actions appropriate to carry out the recommendations. Oh, yes, the Working Group was to consult, “as appropriate, with representatives of the various exchanges, clearinghouses, self-regulatory bodies, and with major market participants to determine private sector solutions wherever possible.” In other words, don’t move a peg without consulting Wall Street.
The Group was quickly nicknamed the Plunge Protection Team, since folks suspected its real purpose was to prop up the stock market during plunges. Since the 2008 crisis, more and more observers suspect that its only purpose is to prop up stocks in every downturn, let alone in crises.
Since 2008 Fed and government propaganda have trained the population to believe that the world economic fate hangs on every stock market uptick or downtick. Thus it became more important than ever for the PPT to curb every down move to keep the Potemkin economy looking sharp.
None of this is new, it has simply metastasized in all directions. The U.S. government has been manipulating markets, certainly currency and gold and silver, since the 1930s. It’s not new, and it’s universally accepted as morally fine.
HOW INTERVENTION WORKS
The PPT probably doesn’t buy stocks directly. The simplest way to intervene is to buy stock market index futures contracts. For example, if the S&P500 has taken a hit, the PPT would buy S&P500 futures contracts, driving it higher. Arbitrageurs watch that futures contract because its value ought to equal the actual S&P500 index. When that S&P500 futures contract trades higher than the S&P500’s value, arbitrageurs will sell the futures and buy the S&P500 stocks to lock in that small, riskless arbitrage profit. Their buying then raises the index and the PPT’s buying index futures drives the stock index higher.
Why does a market plunge? Buyers flee. Without buyers, sellers take over and the market plunges, panicking the public into a self-reinforcing cycle of more sales and lower prices and more sales. The Plunge Protection team has made itself “the buyer of last resort.” Since the Fed can create money out of thin air, the idea of “loss” doesn’t bother the Plunge Protection Team at all.
WAIT! That does not, however, mean that the PPT can simply buy forever. At some point the downward tidal wave smashing the market overwhelms even the PPT’s resources.
WHY BUY IF IT’S ALL MANIPULATED?
This reality answers a complaint I often hear: “If governments are manipulating markets – stock, gold, silver – then what’s the point of investing? They control everything.”
This statement confesses that government is god and can do all things, precisely what they manipulators want you to believe. Stated that way its true ridiculousness shines forth. Manipulators can control markets only at the margin. Think of the “margin” as the edge of a river along the bank. There the current is gentle, but out in midstream the current is irresistible.
The primary trend is the midstream. No amount of manipulation possible can lift a market whose primary trend is down or hold a market down a primary uptrend.
As proof I offer the US Treasury’s manipulation of gold and silver since 1995. While the evidence shows the Treasury and assorted central banks have labored mightily to suppress gold and silver, those markets have still risen relentlessly, and even after a three year correction stand at multiples of their price when the suppression began.
A MATTER OF RECORD, NOT SPECULATION
The Plunge Protection Team’s existence and mandate to intervene in financial markets is a matter of legal record, not conspiracy theory. So is the Exchange Stabilization Fund (ESF) created by the 1935 Gold Reserve Act. By statutory mandate the Treasury Secretary operates ESF to influence currency exchange rates and the gold price, but he is not required to report the Fund’s activities or assets to anyone, not even congress. Thus the ESF offers a powerful secret slush fund to manipulate currencies and gold – and I reckon silver, too.
Even though the existence of these manipulating government entities is a matter of public record, they operate in secret so we can only guess at how far they go. They are the Abominable Snowmen of markets, leavings us always trying to infer their passing by tracks in the snow. But listen: if they have the power, we can be sure they are using it.
Since 2009 official institutions – central banks, government pension funds, and sovereign wealth funds– have dived into equity markets with both feet and two hands. Last June a report appeared from the extraordinarily ill-named OMFIF, the Official Monetary and Financial Institutions Forum in London. The name from which springeth the hideous acronym deceives. It is not itself “official,” but operates for official institutions. Here’s OMFIF’s description of itself in the original Omfiffian:
The Official Monetary and Financial Institutions Forum (OMFIF) is an independent research and advisory group. A platform for confidential exchanges of views between official institutions and private sector counterparties.
The overriding aim is to enable the private and public sector[s] to learn from each other in different ways, promoting better understanding of the world economy and higher across-the-board standards. OMFIF’s main areas of focus are economic and monetary policy, asset management and financial supervision and regulation.
OMFIF cooperates with central banks, sovereign funds, regulators, debt managers and other public and private sector institutions around the world.
Are you still awake? I have no deeper proof, but long research experience leads me to jump to the conclusion that this “private” organization has a very broad and public purpose, namely to herd these institutions into the funnel of the Establishment plan by forming their ideas and framing the agenda. Think “Council on Foreign Relations.”
THE CHANGED WORLD OF OMFIF’S REPORT
The June OMFIF report (reviewed by London’s Financial Times) revealed that “a cluster of central banking investors has become major players on world equity markets.”
The report showed that 157 central banks, 156 public pension funds, and 87 sovereign wealth funds own “assets equivalent to 40% of world output.” The report warns the trend “could potentially contribute to overheated asset prices.”
Do you really think so, Financial Times? Let’s see: 157 institutions who can print money out of thin air (talk about deep pockets) have invaded the world’s stock markets buying up shares. Naww, I don’t see how that could overheat anything.
Traditionally central banks have justified their rotten, parasitic existence by posing as guardians of the national currency and keepers of reserves. As first chartered, the Federal Reserve could only buy bankers’ acceptances and US government securities, and not directly from the government but “on the open market.” (This provision keeps the Fed from directly “monetizing” government debt.) The sales pitch promised the Fed would provide an “elastic currency” by granting loans for planting season which would be repaid at harvest.
As institutions performing a public service, making a profit was not really a part of central banks’ announced life-purpose – even if they were privately owned. The US Federal Reserve by its charter must return its profits to the US Treasury every year. (This is a ridiculous sop thrown to enemies of the central bank plan in 1913. The Fed’s profits are chump change, less than peanuts, compared to the value of its government-created privilege, i.e., to set the nation’s interest rates and to create money out of thin air.) In many countries central banks have been nationalized by their respective governments, even though they still operate independently of those governments.
Since 2009 central banks have shifted from their traditional activities of investing in bonds and financial market instruments to investing in equities, forgetting their traditional purpose. This shift has been spawned by their hunt for yield, like everyone else. It ties your mind in a knot, but central banks around the world have enforced a Zero Interest Rate Policy (ZIRP), but now claim their own policy forces them to chase yield by investing in equities. Remember the man who murdered his parents and then threw himself on the mercy of the court because he was an orphan?
Whatever the excuse, the central bank invasion of equity markets is a fact, and they admit to investments of $29.1 trillion. As August 2014 closed, the world’s 58 major stock markets were capitalized at $63.8 trillion. In other words, these central bank and government institutions already own 45.6% of stocks on those exchanges. Right at half.
- China’s State Administration of Foreign Exchange has become the world’s largest public sector equities holder, says the OMFIF report. (This I can understand. Where could they better recycle all those reserve dollars than by buying western productive capacity?)
- The Swiss National Bank has an equity quota of about 15%. The Swiss!
- The Danish central bank holds equities worth about $500 million at end-2013.
- Without specifying who is buying what, OMFIF says that “global public investors” have increased stock investments “by at least $1 trillion in recent years.”
WHERE’S THE ECONOMY
Stop right there. If these official institutions own half of all equities, Where is the real economy? Who is in charge?
Where is the economy where individuals or even corporations assess risk and risk their own money? What happened to free enterprise?
What happened to individual ownership if state institutions own nearly half the world’s equities? What prevents those state institutions manipulating markets? Could politics ever dictate buying or selling equities to favor someone?
Do stock prices in any way reflect economic reality, or only the Federal Reserve’s Potemkin politics?
Is there any market left, besides masked government mules and the ticks who ride their hides?
WHERE’S THE FREE MARKET?
Free markets depend on the rule of law, transparency, and a level playing field. They depend on someone taking risks, and bearing the responsibility, win or lose. How can anyone know whether secret central bank slush fund or Plunge Protection Team buying is driving a stock up, or genuine economic prospects? Or buying up dogs from its cronies? When central banks are in a position to predict its own policies and know what industries might profit from them, why wouldn’t they buy that stock? Or whisper their names to friends? Who will guard the guards themselves? What has become of capitalism’s level playing field? Transparency? What happens to the interactions of buyers and sellers in the price discovery mechanism when half the buyers are, essentially, one big Pillsbury Dough Boy?
Longer you think about this, more depressing it gets. Government seems to control everything, blocking every road. You can’t even make an investment without their shadow darkening it. Politics has supplanted freedom.
Yet Governments have been taking control of national economies since the late 1800s. Antitrust laws and regulation must “save” the people from predatory railroads and oil companies. Municipal socialism (cities running gas, water, sewage, and transportation) must save the poor from predatory pricing of necessities. The Progressive Era advanced regulation across a broad front: food industry, drugs, narcotics, working hours, providers of medical services. The Do-Good campaign battled for censorship, Prohibition, and eugenics (state control of who could reproduce to eliminate the unfit and “subhumans”).
O, what irony! The crowning achievements of this supposedly “democratic” Progressivism were the income tax and the Federal Reserve, tools of Elite economic control. Then Progressivism took us into World War I.
The Great Depression, caused by the Progressivist Federal Reserve, offered manifold rationalization for centralizing more economic control in government hands. The New Deal cartelized occupations as lowly as beauticians, took over agriculture, and regulated banking and finance. FDR’s government had a “plan” to get out of the Depression, but in the end fell back on the same old expedient, war, justification for yet more controls.
But for a hundred years, after the crisis passes, control and regulation always abide.
A RAY OF HOPE
Let me offer a ray of hope. There are long term cycles in human affairs; a centralization cycle began about 1600 – 1650. Power flowed from individuals and localities to centers, especially the state. The nation state was converted from the rule of an individual sovereign to a legal fiction, an undying corporate state.
This centralization cycle began reversing to de-centralization about 1990, but trends don’t turn on a dime. After World War II the French, English, Dutch, Italian, Spanish, and Portuguese empires disappeared under “de-colonialization." The only two empires left standing were the United States and the Soviet Union. In 1991 the Soviet Union broke up, leaving only one empire with world hegemony: the United States.
The US today operates between 700 and 800 military bases worldwide. In a 2010 report, Base Structure Report, Fiscal 2010 Baseline” the Pentagon admitted to 662 overseas bases in 38 foreign countries with over 300,000 personnel. Since 1990 the US has virtually constantly waged war, and even without hot conflicts continues to prosecute the War on Terrorism and the War on Drugs. The one world empire is overstretched.
But consider: the emergence of a single worldwide empire shows centralizing peaking, not continuing. For the next several centuries a new de-centralizing social trend will send power flowing back to individuals, nationalities, and localities and away from centers. Nation states will break up into their constituent “nationalities.” We just saw that with the Scottish referendum for independence from the UK. Thirty years ago the very idea of Scottish independence was unthinkable, even treasonous. This year, that referendum became a reality. Catalan, the Basque country, Normandy, Tuscany, northern Italy and the rest of the world were all watching.
What’s my point? The massive incursion of central banks and government institutions into equity markets is the sign of their power peaking. It testifies that the trend is ending, not continuing. They are choking on their own power; the control system is failing.
The Federal Reserve’s actions since the 2008 crisis have been historically unprecedented, and have all involved seizing newer, wider power. ZIRP alone virtually took over the economy, since interest rates – the price of money – are the heart of an economy and economic decisions.
Planned economies don’t work. Government control always fails, and more control makes it fail faster. Sure, the Plunge Protection Team can slow the inevitable bear market in stocks, but that won’t help the economy or markets. The ability of prices to move freely is the heartbeat of a free economy. Stifling and delaying stocks’ price readjustment will only make the eventual re-pricing more savage. Every government price support or suppression scheme always begets an enormous price snapback in the opposite direction. Think of silver and gold, 1960 – 1980. Think of the two real estate bubbles, the Savings and Loan crisis of the late 1980s and the Greenspan Bubble that began bursting in 2006 and eventually became the Great Panic of 2008. All were spawned by government suppression or support.
WHAT ABOUT GOLD & SILVER INVESTORS?
The African proverb says, “When elephants fight, it is the grass that suffers.” We’re just the grass down here. We need to get out of the elephants’ way. I’ve searched heart, mind, and history, and can’t find anything better than gold and silver.
Clearly the creators of Federal Reserve currency want to discourage their competition, so they must suppress silver and gold. And they have mounted the tiger of their own making, promoting stock markets as the sole gauge of economic health. How will they get off that tiger?
The snapback will be terrible, and it will reach everyone. As of 10 October with stocks plunging, it appears the tiger’s fixing to throw the Fed off. They’re liable to get mauled, and the US economy with them. Payday always comes some day.
My wife keeps reminding me not to take the price of silver and gold on my own shoulders. After all, she says, it’s insurance. No matter when people bought, it’s still insuring them.
I’ll accept that. Silver and gold are insurance against the worst economic turmoil. Because through the ages they have always kept value, we trust they will continue to keep value, and their value moves opposite to stocks, bonds, government promises, and central bank fiat money.
OUTSIDE THE SYSTEM
But lately, as I’ve pondered the financial police state and government’s increasing economic control, another aspect of silver and gold appeals to me: it is a value outside their financial system. Metals need no counterparty performance to make them good. If you own gold and silver in your own hands, no financial tyrant can flip a switch and cancel its value, as they can with your credit cards and bank accounts. What they can’t find, they can’t steal.
Is “financial police state” an overstatement? I don’t think so. Since 1970 the US government has created a surveillance system that scrutinizes and records every penny you spend, every purchase you charge, every check you write.
In other words, the only value you can stash outside their system and all the turmoil it is prey to, is gold and silver.
Against a backdrop of markets crashing, an outlook for more of the same, and a sick economy that refuses to recover, a little stash outside their system looks pretty good.
Originally published October 2014