Did Martians invade? Was there a big storm that wiped out all the crops? Was the final drop of gasoline finally consumed bringing 99% of travel to a standstill?
Just what was the big disaster that caused the Dow Jones to plummet by about 500 points last Thursday?
Nothing so dramatic as little green men, tornados, open warfare, or even mom’s credit card getting maxed out. No, no, it was something much more subtle.
A guy with a really cool beard hinted, just hinted, that he might, possibly, maybe, slow down his purchases of government bonds… next year… maybe.
It seems incredible that one guy can causes billions of dollars to change hands or even vanish, just by uttering a few words. He didn’t even DO anything.
It is incredible.
What is perhaps even more incredible, is that so many people blame the ills of society on the “free market.” But what kind of free market can be shifted so dramatically by the whims of one guy with a beard?
In a true free market, prices are set by supply and demand. My the desires and production of millions of people, not by a guy with a beard.
If there are a lot of buggy whips and no one to buy them, the price of buggy whips will fall. If the price falls enough, then no one will make any more buggy whips and they will be “regulated” out of existence.
In a free market, prices ARE regulation.
And they work very well when allowed to. For example, plasma TVs used to cost upwards of $20,000, but the mere fact that so many people were willing to pay that price sent a signal to other manufactures to make more of them… and with greater supply, prices came down.
It was this price driven regulation that allowed even people of modest means enjoy what was once a luxury item
Unfortunately, price regulation is often not allowed to work properly. And very often it is the man with a beard who is at the center of it.
For example, during the credit crisis of 2008, prices of bank stocks were sending a signal that society does not need corrupt or incompetent banks. The free market was sending a loud and clear signal, “Be Gone!”
Had the free market been allowed to work, those institutions would be gone, and though that would have caused much pain to many people at the time, we would now be much better off.
But because those banks are controlled by powerful people with powerful friends, they were given billions of dollars, and I suppose, a stern talking to.
It didn’t seem to help things very much, at least not for regular people. The economy sputtered and coughed and soon the man with the beard had another great idea. Well, actually it was the same idea but with a new name, he would give the banks even more money and call it Quantitative Easing, aka QE.
The banks really loved him for this, and they wanted you to love him too. So he started appearing on magazine covers with captions like, “The Hero.”
Well, that QE thing didn’t work out so well, so it was followed by QE2, and then Operation Twist, and finally by the un-named program to buy $85,000,000,000 worth of bonds EVERY month, with money that the guy with the beard just makes up out of thin air.
This kind of aggressive money creation has a lot of effects. One of them is a lot of optimism about the stock market, because that money has got to go somewhere and if the banks can’t lend it, then they are going to purchase companies through the stock market.
Now just think about that for a minute.
Banks that were on the verge of going out of business, were instead given billions of dollars, and with those dollars are taking control of real businesses that make real things for real people – and it costs them NOTHING.
It is the mother of all scams.
But why is it allowed to go on? Why is there no outrage?
There are many reasons, but one of the least obvious is this:
YOU are in on it.
To be continued…
