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Market Manipulations

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With all the government meddling in the economy, it is virtually impossible to sort out free-market functions from political manipulations. It is also impossible to predict the economy’s future performance with any degree of accuracy. There are simply too many variables, and with most economic data being manipulated to serve political agendas, the chances of getting an accurate picture of current economic conditions are slim.

An illustrative example of this problem is the recent record highs being enjoyed by the Dow and other major stock indices. While some have touted these gains as a sign of economic recovery, the Dow’s numbers stand in stark relief against an economic picture that is very dismal overall. As FFF’s Sheldon Richman recently pointed out,

The news media trumpet changes in the Dow as though it tells us almost all we need to know about the economic fate of the American people. That’s nonsense. Not everyone thinks the arbitrary index of 30 busily traded blue-chip stocks is terribly relevant to gauging the condition of the economy. Moreover, the average, which reflects the daily change in the companies’ stock prices, is not adjusted for inflation. In nominal terms the Dow hit a record high of 14,447.29 this month. But in real adjusted terms, the average is only at the level reached in the year 2000. In other words, if you invested in the companies that year, you’re no richer now, because the dollar has depreciated thanks to the Federal Reserve. That doesn’t sound so remarkable.

The Fed’s inflation has certainly fueled a bull market in stocks and bonds, but it has also forestalled necessary market corrections. That’s why we are now experiencing a “jobless recovery.” Money creation, as it turns out, is a poor substitute for wealth creation.

However destructive and unfair, this type of market manipulation has been official policy for a quarter of a century.

In late 1987, Ronald Reagan signed Executive Order 12631, establishing the President’s Working Group on Financial Markets, more popularly known as the “Plunge Protection Team.” Supposedly created in response to a global financial panic (stock prices around the world had tumbled in the fall of 1987), the working group was given the explicit mandate of maintaining investor confidence.

Of course, we are assured that the working group, which meets in secret, acts only in the public’s interests. However, many suspect that it often colludes with big trading firms in its interventions. In any event, such collusion doesn’t have to be explicit. Big traders know that the mere existence of such an entity implies the possibility of bailouts. So firms like Goldman Sachs and JPMorgan Chase take much riskier positions than they would otherwise, confident that the government will come to their rescue should they get in trouble.

While the government and major financial firms may find it a relatively easy task to manipulate stock prices, they cannot prevent the effects of their intervention from popping up in other areas of the economy. Such tampering sends ripples throughout the market, and these are often most noticeable in commodity prices.

Commodities betray the government’s manipulation because, unlike fiat money, they cannot be conjured out of thin air. This scarcity makes it harder to fix their prices. This is especially the case for precious metals like gold and silver, the prices of which tend to rise during periods of currency devaluation and fall in periods of genuine economic growth.

But recently, we have seen gold and silver prices drop in the face of unrelenting money printing by the world’s central bankers. What is happening?

Recent events might point to an explanation of this apparent conundrum.

When it was announced last January that Germany’s central bank, the Bundesbank, was seeking to repatriate 300 tons of its gold stored at the New York Federal Reserve, the news sent shock waves through the financial world. But perhaps what should have been more shocking was the timeline the two central banks agreed on for delivery. Apparently, it will take seven years to ship the gold back to Germany. Why?

Many, like the market analysts at ZeroHedge, suspect the Fed has actually leased much of the gold out to private bullion banks. These institutions then sell “paper gold” to everyday investors, which happens to lower the price of the precious metal, because it creates an illusion of a greater supply. This would mask the dollar’s devaluation, making it easier for the Fed to keep interest rates artificially low, and thus enabling it to monetize more government debt. It would also make it hard for the Fed to give Germany’s gold back promptly.

What we have here is an entire financial system based on fraud and bluff. The Fed’s money printing inevitably creates financial bubbles and economic booms and busts, which always end up benefiting a few large banks. The Fed  subsidizes the rich at the expense of the public.

It is the savers, wage earners, and retirees on fixed incomes who are taking it on the chin financially. With interest rates below the inflation rate, they are forced to invest in stocks in the hopes of keeping pace with the dollar’s devaluation. This represents yet another subsidy to Wall Street. But when the current stock bubble inevitably pops, these “little people” will be the ones getting the haircut.

The decoupling of Wall Street from Main Street began as far back as December 1913, when the Federal Reserve System was established. But it really wasn’t until August 15, 1971, when President Nixon severed the U.S. dollar’s last link to gold, that the interests of the financial elite became diametrically opposed to the interests of the rest of us in the real economy. It was then that wages began to stagnate, the wealth gap widened, and the country’s manufacturing and industrial sectors began their inexorable decline. While one can point to various regulatory and tax policies as proximate causes for the U.S. economy’s progressive deterioration, the ultimate cause is the total abandonment of gold, which removed all institutional and legal restraints on the Fed’s money-creating powers.

Aggravating the problem, of course, is the exorbitant privilege the U.S. dollar enjoys as the world’s reserve currency. Having nearly 70 percent of international trade conducted in U.S. dollars creates an almost irresistible temptation to inflate on the part of the issuer. Why bother working or producing things of value to export when you can just print money instead?

Yes, this system has given American consumers access to cheap imports. But, as mentioned above, it has also contributed greatly to the hollowing out and “financialization” of the U.S. economy.

We cannot look to Washington for a solution. The way out of this trap the central bankers and politicians have created is to withdraw from the system as much as possible. This isn’t as radical as it first sounds. It can be achieved gradually. People can begin investing in land and physical assets, and, perhaps more importantly, developing alternative currencies. These and other decentralizing measures will help us break free from the control mechanisms Washington and Wall Street have established over the years and ease the transition to a more just and sustainable economic order.

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    Tim Kelly is a columnist and policy advisor at The Future of Freedom Foundation in Fairfax, Virginia, a correspondent for Radio America’s Special Investigator, and a political cartoonist.