Much has been made in the press
of the manipulation of LIBOR, without much explanation of the consequences
for prices of all things that depend on supply and demand for bank credit. Outrage
focuses on the activities of avaricious bankers, which is why the connection
never gets made between relatively minor manipulations of credit pricing by
banks and far larger manipulations by central banks.
It is the latter that should
really concern us. Central banks persistently intervene in markets to keep
interest rates below where they would otherwise be. This leads to
artificially high prices for all assets, since they are bolstered by
cheapened credit. The idea that we have a capitalist economy, where assets
are priced on the basis of their productive value is untrue.
We are far removed from free
markets, or prices that are fairly agreed between parties without state
intervention. It is now impossible for any business to rely on market
pricing, which is why there has been explosive growth in derivatives. Every
derivative exists to hedge the risk in a transaction, and while that
transaction is often another derivative, ultimately they all exist to hedge
risk in real business activities. Some of this is sensible in free markets,
such as a farmer selling his crop ahead of the harvest to maximise prices, or
a mine selling its product forward in the knowledge it will have it to
deliver; but the bulk of these derivatives only exist to hedge market uncertainties
that are the consequence of government interventions.
According to the Bank for International Settlements, derivatives for non-financial
customers world-wide totalled $46 trillion at the end of last year, 65% of
world GDP, or about 100% ex-government. This is evidence that genuine
entrepreneurial activity is being suffocated by interventions and
manipulations, because an entrepreneur, by definition, is someone who
exploits price differences, not one who seeks to hedge them.
We should extend our
condemnation of government intervention from interest rates to
government-issued money itself. There can be no certainty in its future
value, making it impossible for a businessman to calculate margins. An
obvious example is the uncertainties facing any business involving the euro.
No one knows who will be in the eurozone and who will be out of it next year,
nor do they know if it will still exist, let alone whether the euro will be
up or down. Uncertainties resulting from government interventions are
So all prices are no longer
simply set by buyers and sellers but are manipulated by governments and
central banks. The system that is failing is not capitalism, but
price-rigging by governments. Governments will always try to persuade us that
it is markets, and not them at fault. They have been doing this to varying
degrees for a hundred years, ever since the abandonment of the gold standard.
We are now on the last lap of this delusion.
We face the economic
calculation problem identified by von Mises. It was the eventual undoing of the Soviet
Union, and we have fallen into the same trap.
Originally published at Goldmoney here