Managing Markets

April 21, 1997 – A distinguishing feature of the twentieth century has been the emergence of the Nation-State, and most of these territorial entities have been characterized by an autocratic, out-of-control central government exercising unconscionable and excessive power, even while pursuing a mindless drive for more. Even in those Nation-States where the accumulation of power has been slow and somewhat limited, central government has grown regularly and relentlessly, and few will disagree that the brutal, total wars fought this century were a direct result of this quest for total control by ruling elites.

There have been countless governments in this century acting nearly omnipotently with vast and generally unchallenged levels of authority, exercising power to a degree only dreamt of by absolute monarchs of the past. Because the result of governmental power can for all practical purposes occur only when the governed submit to the ruling authority by responding to their requests/laws/dictates, why has the Nation-State exercising absolute power thrived this century?

I think the answer lies somewhere in the power of mass communication, and the use of propaganda. People have willingly, mindlessly succumbed to the force of false – even immoral and evil – tenets beaten into them as holy doctrine by the ruling elite of some Nation-State. The objective of this doctrine is not the truth, nor the general welfare of the people, but rather, the aggrandizement of power by the ruling elite and the preservation of their kingdom – the modern and all powerful Nation-State.

These doctrine are easiest to see when they have been applied to militarism. The conquering of new territory, the subjugation of minorities, the identifying of enemies who presumably threaten the Nation-State – policies such as these have led to the horrific wars of this century. But the Nation-State also promotes its self-serving doctrine in other areas, and some of these are not too easy to see.

One pernicious dogma of the Nation-State that has emerged in recent decades is the so-called need to “manage” markets. This managing would of course need to be completed by “qualified” experts, which is to say, members of the ruling elite.

Think about this statement – the so-called need to manage markets – for a minute. Consider all the application that it is given today – it may be more clear to use the word intervene instead of manage because that outcome best describes the net effect of any government action. In what aspect of our life does the Nation-State not intervene today? Where does the US federal government not intervene today?

Before you fall into the trap sprung by the propagandists of the Nation-State that intervention at times may be useful, consider first the implication of what intervention in any form is all about. Intervention thwarts and harmfully disrupts the market process – which is the exchange of goods and services by individuals interacting voluntarily and peacefully with one another. This is an important process that enables each person to advance and raise their own standard of living. This voluntary exchange between individuals describes a central aspect of our society, so why should any government interfere with the process by which individuals voluntarily interact with one another? In short, they shouldn’t, but governments have sought this power throughout history – and they still do.

Consider also the implications of government intervention at the individual level. If the government has to intervene on our behalf, doesn’t this intervention assume that we individuals are not competent enough to act on our own behalf? …that we don’t know how to act in our own best interest?

Some people may choose to willingly give up their own freedom to act thinking that somehow the government is intervening for some beneficial purpose for society as a whole.

However, this notion is mistaken because governments do not intervene in markets on behalf of the public good. They intervene on their own behalf in order to sustain their power by rewarding some favorite industry, company, labor union or political movement that has taken action favorable to the ruling elite – political donations, vote gathering, etc.

It is for this reason that I watch very closely the intervention that takes place in the financial markets. Is the automobile industry seeking a stronger Dollar? Is the banking industry seeking lower interest rates? Is the textile industry looking to raise import tariffs? What other market or activity needs to be ‘managed’ by the federal government?

While many federal government interventions are regularly reported in the press, others are not so transparent. Why? Most people intuitively recognize what intervention is, namely, the exercise of raw power by government contrary to the natural course of the markets. Therefore, the federal government steps lightly in some areas, reporting its intervention at a minimum, or perhaps not at all. One example is the Gold market.

Gold rallied to $500 following the October 1987 crash because of the prevailing nervousness and uncertainty. At that time, the federal government then dishoarded 525,000 ounces, their largest action since the 1970’s. The timing and size of the action suggest they were designed to put a top on the Gold price.

This intervention was reported by the Federal Reserve at the time with little time lag, but was done so without any fanfare. The decrease in the Gold stock appeared in their weekly balance sheet, but no public announcement was made of the dishoarding. Since then, there have been many rumors that the federal government has been intervening in the Gold market, as well as in the stock and bond markets. However, no one has to my knowledge produced the ‘smoking gun’ to confirm that this intervention has taken place, even though there have been from time to time many suspicious circumstances pointing to some intervention. One of these took place on Friday, April 11th.

You may recall that day. The Produced Price Index was released that morning, and it rose 0.4%, far above expectations and far above its recent trend. Also, that morning began with Gold and the other precious metals trading relatively firm, and when the PPI was released, two things happened.

As would be expected by an increase in inflation, the Gold price began to rise, and the 30-year T-Bond began to drop hard. However, these trends did not last long. It appeared that some powerful force had entered the market.

The force appeared first in the Gold market. As Gold started to move up, someone started to whack it, and they did so relentlessly. You could clearly see the chain of events as they progressed.

First, the day traders who were long Gold quickly recognized the magnitude of the selling, so they joined in, selling their long positions and jumping in on the short side. This selling added additional pressure to the market, which in turn triggered stops and selling by other longs. By this time the hedge funds and the commodity pools were also jumping in on the short side, and notwithstanding its promising start, the Gold market was in full retreat. It ended the day down $1.60, closing above its worst levels only because the short sellers covered at the end of the day.

But the suspicious action that day was not confined to Gold alone. While someone was putting Gold into a retreat, it soon appeared that someone was also trying to hold up the T-Bond market, which was reeling badly in the face of the big inflation number reported that morning.

After a quick and precipitous drop, the Jun’97 T-Bond contract would not break below 106-16. It was as if someone was willingly standing there all day taking whatever selling the market had to offer. Who would take such risks? Was the federal government intervening in an attempt to counteract the report that inflation is getting worse?

Unfortunately, we don’t know, and probably will never know because no one is talking. However, perhaps the risk was also controlled, as subsequent events demonstrated.

The big buyer in the T-Bond remained for some time. He was back all day Monday as well. Then Tuesday morning the government reported that the Consumer Price Index was less than expected, and this result caused the T-Bond to begin a tepid rally, which has continued. Did the big buyer unload in this rally the position accumulated on Friday and Monday? And perhaps even more seriously, how accurate was the CPI? Did it get fudged in order to set up this rally?

The problem with analyzing these inexplicable occurrences in the market is much like the nature of intervention itself – you don’t know where to stop. So rather than let our imagination run wild, it’s best to recognize the events as they transpired, without making any specific conclusion about their cause. But we can make some conclusions about the Nation-State ruled by the federal government.

We’re on a path that does not have a pleasant outcome. We know that the discredited intervention and central planning of the Soviet Union didn’t work there, so why should it have a admirable result anywhere else? Can a lot of intervention by the Soviet Union be ‘bad’, while somewhat less intervention in any other country be ‘good’? Are the central planners in the Federal Reserve and Treasury Department immune to mistakes made by central planners in other countries? No, that conclusion does not seem plausible.

Ludwig von Mises said that governments will destroy markets long before they ever understand how they work. It seems that process may be underway in many of the Nation-States seeking to expand their power and to perpetuate their stranglehold on anyone acting in the market process – in other words, on you and me.