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A Big Slap in the Face for Free Markets

Mon, Sep 29 2008, 10:20 GMT
by Jack Crooks

Money and Markets

You can't possibly have hidden yourself from the news of the $700-billion planned bailout that's working through Congress this week. And I won't mince words — I consider it a big slap in the face for the free market system.

Henry Paulson repeated over and over again exactly how agitated, disgusted, annoyed, infuriated, angered, embarrassed, and irritated he felt about asking for this amount of money, or any money at all. Sounds sincere if you stop it right there.

But apparently those feelings weren't enough to reinvigorate his free-market spirit, abolish potential bailout plans, do away with unnecessary regulation and let those who deserve to suffer, suffer.

How Free Markets Are SUPPOSED to Work ...

Availability of credit allows money to flow between savers and borrowers.

Resources and funds are allocated to various projects or investments during a boom phase.

Eventually borrowing becomes excessive and leads to malinvestment, thanks to the suppression of the real rate of interest by our illustrious Federal Reserve Banking system.

At this stage, adherence to free market theory would allow for an efficient cleansing period and a healthy recovery period. How? Irresponsible and unprofitable businesses fail. Bad debts get liquidated. Excess resources go on sale, flow into more stable ventures and pool together with more profitable resources controlled by healthy corporations or entities.

Sure, pain is felt by certain parties who can't keep things going. But the moving parts become more efficient and stronger. Healthier, more efficient businesses emerge.

As the Austrian School of economists says, the bigger the boom generated by manipulation of money and credit, the bigger the ultimate bust.

That's important, because thanks to the massive manufacturing and sale of derivatives, there has never been a boom supported to such a large degree by thin air. And since the laws of gravity haven't been outlawed yet, what goes up must come down.

How Our "Free" Markets Are Being Handled Right Now ...

Unfortunately, self-proclaimed free enterprisers — President George W. Bush is one among many — are either ignoring or are unable to accept the fact that some people must suffer as the purging process runs its course.

Often their vision is blurred by their quest for a tighter grip on the private sector. They call it "compassion" ... but I call it "zeal for power." Worse yet, they use other people's money — namely, ours!

In its infinite wisdom and undying compassion for the public, our government does all it can to hamper the market's cleansing tools — recessions and deflation.

Instead of one swift painful smack in the head by the invisible hand, their very visible hand "helps" ensure that economy will grow much less efficiently AND remain much more vulnerable to future shocks to the system.

That's not compassion ... it's nonsense!

In fact, on a historical basis, many parts of the U.S. economy are in awfully good shape. We're told to believe otherwise since doom and gloom dominates what the mainstream media consistently reports.

One of the biggest fear indicators they use: Employment numbers. After all, Americans don't want to lose their jobs.

But look at the current employment situation on a historical basis: While U.S. job losses are on the upswing, they are fairly modest ... and should be expected in a self-cleansing market.

As my chart shows, taking into account only the last 40 years, today's unemployment rate sits relatively low compared to 1975, 1983, and 1993.

If we play our cards right we could see the current rise in unemployment top out around the same levels as it did roughly five years ago. That would be nothing to panic over.

Let's look at inflation — another economic boogeyman ...

Current CPI in the U.S. sits just north of 5%. That's easily less than the roughly 6% to 7% back in 1991. And in 1980, for example, inflation reached almost 15%.

Countries, particularly emerging markets, would kill to have inflation as LOW as 5%!

More to the point, Americans can afford necessary food items as easily as ever. Here's a snippet from an article put together by the Federal Reserve Bank of Dallas last month:

Based on the average U.S. pay rate, it takes less than two hours of work to pay for 12 basic food items — tomatoes, eggs, sugar, bacon, milk, ground beef, oranges, coffee, lettuce, beans, bread, and onions.

That figure is nearly as low as it's ever been.

Consumption may finally be taking a breather, as it should, but discretionary items like computers, DVD players, cellphones, digital cameras and color TVs have become far more affordable. And that even includes those families considered "poor."

Now, Here Are My Thoughts on the U.S. Dollar ...

Sure, the greenback lost a lot of value as its bear market dragged on. That's normal and healthy. And one thing the dollar DIDN'T lose was its status as world reserve currency.

So many analysts and economists are hastily calling for the end of the U.S. dollar as we know it. But the U.S. is far from being a banana republic, as I often phrase it.

Plus, circulation and availability of a world reserve currency is critical for the entire global financial system to function efficiently. And now that we all understand just how fragile this system really is, it's easy to see why it's in no one's best interest to see the dollar in the dirt.

I think this is one of the reasons that our government's implicit weak dollar policy has ended. And that has been signaled to the other big players around the globe.

Confidence in the system — and the world's money (the dollar) — is step one in the healing process that will likely carry on for many months or even years.

This is why we have not seen, and may not see, another cut in the Fed Funds rate.

Moreover, unless we start seeing other countries begin to abandon our capital markets — and I am talking about Treasury and Agency paper, primarily — the dollar could continue to surprise the skeptics.

As odd as this may sound, my examination of past banking crises shows that a nation's currency bottoms before or with the crisis.

The U.S. dollar index bottomed on the day the Fed and Treasury stepped in to save Bear Stearns, and has been acting very well in a very bad news-driven environment ever since.

Moreover, despite my view that the U.S. government is dipping its hand way too deeply into the markets, making them increasingly less free, it's all a relative game.

Many other countries around the world are either officially in, or about to slip into, recession.

And on a relative basis, because their governments are much more entrenched in the market than Uncle Sam is in ours, their ability to recover is hampered even more.

Why is this an important part of the dollar equation? Because it means that, despite all our warts, it's quite possible the U.S. might still win the global economic beauty contest by getting judged the least ugly.

Stay tuned!

Published on  Mon, Sep 29 2008, 10:25 GMT