A Little More On Distorted Markets

Businesses have been reducing the amount of money they invest in developing new and expanded business for the last eight years while increasing the amount of money spent to purchase stock leading to a reduction in wages and net wealth for more than 90% of all Americans. You may ask ‘How did we end up in a situation where a company can make more money buying stock than delivering a product or service?’ and that would be a very good question indeed. Let’s answer that question.

This situation is the result of a distorted market. Governments distort markets because politicians wish to reach a social, economic or politically desirable outcome. This has become the primary tool governments around the world use in order to fulfill their promises. This is the tool all of the “ism’s” (Marxism, Communism, Socialism, Fascism, etc.) use to reach their political goals. Unfortunately it has also recently become the favorite tool that the United States, Europe, and Japan have adopted to reach their goals as well. How does a government distort a market? Through monetary policy, fiscal policy, regulation, legislation or sometimes using blunt force.

To bring this back to ‘How did we end up in a situation where a company can make more money buying stock than delivering a product or service?’ the Federal Reserve and Federal government have communicated through their actions of injecting money into the real estate and stock markets that they will not tolerate a reduction in price in those markets. The perception is that the government will do whatever is required to continue the rise in prices in those areas. Subsequently it is considered safer and more profitable for a business to buy stock than to expand their business or develop a new business or product. Businesses buying stock does not create jobs – but it does drive the stock markets ever higher and is typically tied to the CEO’s pay.

A Little History

Over the decades of there has been significant history ignored, twisted, or entirely re-written to suit an agenda, an ideology,or for political expediency. As we have become an increasingly “top down” society dominated by major media, it is increasingly easier to portray the past in a manner that justifies what those in power want us to believe about the present.

Let’s review a little history from a long time ago that is still used in an inaccurate manner to justify our present policies:

Most of us have been taught that the Great Depression was a result of unbridled capitalism. The reality is that it was the result of unprecedented interference into free markets. The Federal Reserve was created on December 23, 1913 with the enactment of the Federal Reserve Act. The Fed was intended to be a “bankers bank” to provide immunity to banks during down times and prevent the periodic banking panics the United States had experienced. On it’s face, this was not a bad idea.

Within eight months of the creation of the Fed, however, World War I broke out in Europe. This immediately expanded and changed the role the Fed was playing. War in Europe was a boom time for American enterprise. The Fed made sure that there was plenty of credit available for American business to expand and ship all the products and raw materials that England and France could possibly consume. Prices skyrocketed due to the war, and Americans did very well selling into the teeth of that conflict. For example, in 1918 cotton rose to $1.35 a bail from less than 30 cents prior to the war. Everyone in the south and southwest planted cotton everywhere they could. My grandparents told me that they saw cotton planted on vertical surfaces. It was easy money.

What happened then? The war ended. In 1919, cotton plummeted to five cents a bail. The Fed had made credit available all throughout the economy in order to produce these products for which there was almost infinite demand due to the war. The war ended, the debt remained, prices plunged, products that were oriented to the war flooded the markets, misallocation of capital was cleared out rapidly. This drove the United States into recession.

To be succinct the war created a temporary boom for some products, the Fed created a credit bubble to finance the creation of those products, capital was misallocated as though the war would continue forever, the war ended, the credit bubble popped, the misallocated capital cleared out and people lost money, jobs, and farms.

At this point we began a very bad habit that we have with us to this day. The end of the war created numerous new independent nations in central, eastern and southern Europe due to the dissolution of the Hapsburg, Romanov, and Hohenzollern empires. The Federal Reserve saw these new countries as potential export markets for the United States and extended them credit for anything they wished to purchase from the United States. The Fed provided credit for these countries to buy corn, wheat, sewing machines, Packards, and many other products. The extension of this credit worked very well for nearly ten years and was the source of what came to be known as the “Roaring Twenties.”

The Roaring Twenties ended with the stock market collapse in October 1929, but the Great Depression did not begin in earnest until 1931. In May of 1931, Creditanstalt, an Austrian bank, failed. That failure caused a domino effect of bank failures in Austria, then Germany, then throughout Europe, and finally spreading to the United States. By October of 1932, it was obvious that the credit the Federal Reserve had extended to Europe would never be paid back. American farmers had already planted their crops for 1932, so when harvest time came there was now an enormous surplus, particularly in corn and wheat. Without the credit to purchase these products, the market was swamped. As a result, corn and wheat prices went negative. Farmers had to pay people to take their product. Consequently thousands of tons of wheat and corn rotted next to railroad sidings in the fall and winter of 1932 while people in the big cities were genuinely hungry.

The easy credit the Fed extended had created a temporary, artificial boom for some products, the Fed created a credit bubble to finance the purchase of those products overseas, capital was misallocated as though the easy credit fueled boom would continue forever, the boom ended, the credit bubble popped with the failure of the European banks, the misallocated capital cleared out, so people lost money, jobs, and farms.

What ended the Great Depression? Once again, war in Europe broke out in September of 1939, the Fed extended credit to our allies, and American enterprise sold into the teeth of war.

The United States has repeated this cycle over and over again since August of 1914. Rather than confront and deal with structural issues within our economy, the government has repeatedly looked to monetary policy and the Federal Reserve to create artificial booms followed by the inevitable bust rather than embrace organic economic growth via free markets. The greater the distortions caused by monetary policy, the farther we stray from free markets and the organic economic growth that free markets provide.

Most people are no longer aware that any alternative to this system ever existed.

Capitalism requires free markets, and we have not had genuinely free markets for a very long time. These busts are not the result of a failure of capitalism, but an unwinding of markets distorted by monetary policy. Unfortunately, we have found the distortion of markets via monetary policy to be the path of least resistance. It is easy money… for a while.

Context Shifting

Coyote Gulch

Coyote Gulch

 

Context shifting is hard.

 

I completed a three day backpacking trip to Coyote Gulch in the Glen Canyon area yesterday and this morning I review the news:
Stolen U.S. Government Computer Code Fuels Cyberattack
Retail Sales Disappoint Again
Global Property Bubble Is Ready To Pop
Doomsday For Malls
Inverse Trump Effect
Empire Fed Plunges Into Contraction
etc etc etc

 

24 hours ago or so my big decision was how much water I should purify for the next hiking segment and I was contemplating where my last chance to get water may be. Meanwhile the big news while I was hiking was the worldwide ransomware attack. I was in a completely unhackable place. No cell connection, no wifi, I would guess one cannot even get radio reception down in the canyons. I was more than forty miles from the nearest cell signal or wifi.

 

The differences in the digital and non-digital worlds could not be more apparent.
I have nice modern backpacking equipment. It is not as though I was hiking in a breechclout and carrying a spear. However returning to the ransomware news puts an exclamation point on how invasive the digital world has become.
We are becoming a different people than what we were just a short time ago. I do not know that the digital world is making us a better people.
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