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“Free Market” is a Term That Needs to be Eliminated From our Dictionaries

March 12, 2012

Wikipedia defines “free market” as “A market where prices are determined by supply and demand. Free markets contrast with controlled markets, in which governments actively regulate prices and/or supplies.” The key words here are “supply and demand.” Limited supply or increased demand can increase prices.

The inverse is also true. If demand goes down or supply goes up, prices typically decrease. Our markets are considered free markets, but nothing could be farther from the truth in our financial markets. We have the most manipulated financial markets in our nation’s history. In fact, the manipulation could only be described as extreme. No, I don’t want to be accused of exaggerating, so let me rephrase that last comment. Our government’s/Federal Reserve’s involvement in our economy, and particularly our financial markets, are beyond extreme.

I realize I have written this a million times, but I refuse to let this issue rest. The monetary policy being undertaken by our federal government and Federal Reserve is specifically designed to punish savers. The biggest savers on the planet are pension systems. There is a saying these days, “You can’t fight the Fed.” That means that if you are an investor you need to be compliant with the “money changers’” manipulation.

You may find this difficult to believe, but I find myself expressing these concerns in public — to anyone who will listen — or to anyone who couldn’t care less. On those occasions where the individual actually stays to hear my closing arguments, I seem to always get the same response: “Well you may be right, but imagine what would have happened if the Fed had not come to the rescue; the whole financial system would have melted down.” It is the typical argument that the Federal Reserve’s action was the best of a bad situation. The problem is that we seem to need to reach certain conclusions to justify our current monetary policy.

First, would the entire financial system have melted down if the Fed and our government had not intervened? Undoubtedly the financial institutions would have gone through some major shock therapy, but who says that this may not be the appropriate medicine for a compulsively nauseating financial market leading up to the 2008 economic collapse? Second, how do we conclude unprecedented government manipulation is better than free market ‘cleansing’?  

As we fight for the survival of traditional pension plans, we will have to find out if the saying, “You can’t fight the Fed,” is the ultimate end for the world’s biggest savers. While I might agree that a sound pension system would necessitate more conservative assumptions, the most obvious concern is what might be a realistic rate of return for investment going forward. It seems easy to conclude these days that assuming a 7.75 percent rate of return is overly optimistic — maybe substantially overly optimistic. A decade ago, it would not have seemed unrealistic to assume a rate closer to 10 percent. Before 2008, 8.5 percent could probably have been justified. Yet we never stop and ask why is it that the assumed investment rate of return needs to drop so dramatically. What has happened in our economy to produce this effect?

The answer is in adding to the adage, “You can’t fight the Fed.” We need to understand that “You can’t fight the Fed, the government and Wall Street all together.”

If investment markets were free markets, we would have a fighting chance, at least over the long term.

Am I suggesting that our government, the Federal Reserve and Wall Street are purposely destroying pension plans? No, that is not my point. My point is that there is a monetary policy being undertaken for some time that is increasing at an exponential rate, which punishes savers and individuals on fixed incomes. I don’t believe it is some diabolical plot, but rather, collateral damage of their short-sighted, ill-fated policy. Unfortunately, they hold all the cards.

As well-intentioned as their policies may be, it seems astonishing that we do not vet the ramifications of their unintended consequences and ask what is worse: the original illness, or the prescribed medicine?

One Comment
  1. Randy Nethery permalink
    March 12, 2012 5:30 pm

    Excellent article as usual! If I have to hear how the Fed averted a financial meltdown one more time I may become nauseous. It appears that the same crowd (about 95% of all Americans) who believed the housing bubble would never end still trust the same individuals who led us into this mess. We will now be forced into either severe inflation or long term, Japanese style, stagnation/recession/depression. Either way, the Fed’s poor decisions will cause decades of misery.

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