The Myth of Free Markets
What battlefields are to armies, markets are to commerce and finance. Blood is lost on the first, livelihoods on the second. When too many livelihoods are threatened, the parties involved or their governments will try to regulate the markets and hammer out agreements. When that does not bring solutions, their armies will resolve the matter so that the market equilibrium will be attained and harmonious human relations re-established.
There are markets for commodities, industrial products, financial products, services, antiques, collectibles or whatever. Markets may have a specific geographic location like the LME, Wall Street or the Suq. Or they may function without a specific home base, like the automotive, pharmaceutical , insurance and textile markets which trade worldwide.
The market is the meeting place for the opposing trading parties, the buyers and sellers - and in between are the intermediate traders and market bosses. Brokers and traders are in public view. Bosses keep away from the limelight. All are there to make money, using all the tricks of the trade allowed or untraceable. The buyers to buy as cheap as possible, the sellers to sell as high as possible. And the traders and market bosses striving to get their biggest bite from both sides. And then there is the government, whose interest is either with the producers, the consumers or the bosses and intermediaries, depending on which party guarantees the government and cronies the greater payback or the most votes.
Markets are the soul of capitalism. where economic and financial power rub shoulders - from the local vegetable market to the infamous London Bullion Marketing Association (LBMA). But markets are not a level playing field where wares and services are offered and bought in a passive way.
Stock markets project an appearance of order and impartiality to the ignorant public - as economic theory would have us believe. But it is only a mirage. There are a thousand and one temptations confronting the morally weak marketers to take advantage and circumvent the rules. Good traders can make or break prices levels in many ways. For instance: squelching orders by way of matching buying and selling orders; following pre-arranged trading patterns; colluding and/or spreading rumors on the floor or in public.
To have influence with the media is highly essential. The media employ many journalists with a manifold of different leanings and opinions. When the "trusted" Editor-in Chief wants to make the public optimistic, he suppresses the news from the negative reporters and vice versa.
Price fixing, monopolies, dumping and favoritism are often common and pervasive. UNFORTUNATELY, only one in a thousand misbehavers are brought to the public's attention and ultimately prosecuted. When the stakes are high enough even bridges have been blown up, mines flooded, warehouses put on fire, ships sunk, merchandize sabotaged and people killed. After a deal is done, come the claims and haggling about quality, quantity, delivery, insurance, discounts and payment. Only the ones with the longest financial breath (i.e. staying power) will in the end make big money.
Refinements in trading, short selling, futures and options were introduced over the years. The goal was not to improve the smooth functioning of the markets, but rather to produce benefit to the insiders. If there would not have been any insider's benefit, then the exercise would have been futile . I have considerable experience in just about all markets: metal, financial, precious stones, coffee, hides, textile, cotton, wholesale produce markets up to the local veggies market. Subsequently, I must confess I still have to find a market free of collusion, rigging, bias, preferences and favoritism. There is no level playing field where humans are involved - regardless of what the public is told about free and open markets.
In the long run every market is doomed to be tilted towards the strongest financial players. And once a market has tilted, it is more than likely to stay that way - at least till unforeseen force intervenes. It could be a relative upheaval, a crash, a war or a revolution - which might change the whole ball game. Till that day the money will keep flowing and piling up on the stronger side of the market, consolidating the tilt. The world's rich countries dictate the prices to the rest of the world. It is my guess that if the struggling ever-emerging countries would have had a chance to trade their wares on a level playing field, they would never have become burdened with this eternal debt, which is growing heavier daily -due to interest piled on interest as Western finance dictates.
With time Western capitalism works in such a way that capital clusters and gravitates together into a few hands only. It has been that way since time immemorial. Look at all the super mergers and takeovers of late. It cannot be big enough. Only billions will do now. The penchant for markets to become corrupted and favor the financially strongest tells only one side of the story. The greatest imbalance of today's markets, however, is being perpetrated by a tsunami of speculation monies, totally divorced from the particular trade or field of commerce.
Originally, the purpose of all markets was to facilitate trading and to match supply and demand. But today's markets have drifted far from their original goal. Markets have changed from goal to finance orientation. Consequently, markets have become a free-for-all playground for speculative excess capital. And we owe our "thanks" for the "benevolence" to the over-inflated Bubble beget and nurtured by corrupt governments and irresponsible monetary mis-management.
Far from improving the proper functioning of the markets, these capricious waves of money on the loose are only good to nurture market instability and foster price distortion. The Western financial Market Bubble has replaced sound financial evaluation methods with IRRATIONAL EXUBERANCE - as the Chairman of the U.S. Federal Reserve Bank so aptly expressed it.
It is the author's conviction that the way present day markets are run has made a total farce of free and fair trade as it is supposed to be. The market's bias and manipulation has become a menace to the free world's well-being. The World Trade Organization (WTO) has nothing to do with free trade. It has been made into a platform for privileged commercial interests to battle it out. Third-World countries stand no chance in a "free, open-market" environment - such as is being imposed upon them.
The 'Mother of All Markets' is the gold market. The golden rule states: "He who holds the gold, rules. " It is also the market with the highest turnover and the richest clients: Central Banks and governments. It is not a market for the little man in the street. All what John Q. Public can hope to do is try to outguess the big guys or take advantage of niche opportunities. Only once or twice in a lifetime will the man in the street have a real chance to make big money in gold - and that is the moment when even the Central Banks, governments and financial consortiums will be disciplined by the course of history and unforeseen events. In light of recent market action, this author is firmly convinced the "once in a lifetime chance is at hand."
On May 13th, Bill Murphy of GATA e-mailed the following London gold community gossip:
"Gavyn Davies is a Goldman Sachs partner and is also Tony Blair's economist. Davies is Goldman Sach's international economist and operates out of the UK. Davies just also happens to be the chief financial advisor to Gordon Brown, who is Britain's Chancellor of the Exchequer. The well circulated rumor is that Goldman Sachs is short 1.000 tons of gold and that Davies was the influence behind the English decision to sell gold. It would appear there is a big conflict of interest here, to say the least." Two days later the following article appeared in the London Financial Times on May 15, 1999:
"More regulatory safeguards promised...... The British government has made some concessions in the face of protests over its plans for a beefed-up Financial Services Authority to crack down on insider dealing and other market abuse by promising greater protection for people accused of breaking the rules...." Are some honorable embers of the City, just in case details of the latest gold bullion or other financial manipulations might come to light, preparing to cover their back-sides with the help of the government, whose greatest source of revenue comes from the same "City?"
All markets are wide-open to corruption! Furthermore, the older tha market, the more it is likely to be corrupted. Laws covering markets are widely inadequate and much too lenient. Contrary to the Financial Times article, white-collar crime should in principle fall under criminal law. Perpetrators should not be able to escape justice through holes in civil law. One car stolen might mean a loss of $10.000 - whereas a fraudulent broker might cause the loss of all one's life savings and endless misery.
It is rightfully said that when hundred of thousands are driven away from their birthplace by ethnic cleansing, the world speaks of "crimes against humanity". When millions are in jeopardy of losing their livelihood in the coming financial collapse through unscrupulous manipulation by insiders, will that ALSO not be the equivalent of "financial crimes against humanity?"
Where has moral leadership gone? Gone with presidents who do not even understand where they did go wrong, the one in the Oral Office, the other ex-president of Euroland. Gone with a prime minister who covers up for the City Boys. When there is corruption and lies at the top, how can we expect the ordinary man in the street to behave? The underlying reason of today's problems does not lie so much with the markets, finance, education, the media and society themselves, but with the permissiveness and the total collapse of standards and morality in the Western world where everything goes and all give a damn.
It is the same decadence seen shortly before the French Revolution, the Fall of the Roman Empire, and the Fall of Babylon: "Mene Mene Tekum Upharsim" - "Counted are the days of the Empire". This time we are not only in for a lone standing financial crisis, followed by an economic collapse as in 1929. This time the early wobbling of the financial markets is only a prelude of greater upheaval and changes to come other than just financial. Purely financial restructuring will not do. In the cards is a profound global restructuring in all aspects from a system of nation states into a planetary community. (See my editorial "Gold in Macro Perspective" last page)
(Part - II next week)
Hans Schicht
Lake Chapala, Mexico
14 June 1999
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