Rational Market Myth
Armageddon without nukes
By Paul Craig Roberts
June 21, 2013
Clearing House -
One of the myths of economics is that markets are rational.
Theories are based on this assumption, and the belief that
markets are rational fuels the argument against regulation. The
market response to the Federal Reserveís June 19 statement that
it will taper off its bond purchases if its forecast comes true
is unequivocal proof that markets are irrational.
The Federal Reserveís statement that it ďcurrently anticipates
that it would be appropriate to moderate the monthly pace of
purchases [of bonds] later this yearĒ depends on a very big if.
The if is the correctness of the Fedís forecast of moderate
economic growth and employment gains.
The Fed has not stopped purchasing $85 billion of bonds each
month. So nothing real has changed. Indeed, there was no new
information in the Fedís statement. It has been known for some
time that, according to the Fed, its bond purchases will
In response to this repeat of old information, the stock and
bond markets sold off in a major way on June 19-20. This market
response to the Fedís statement indicates that the Fedís
forecast is unlikely to come true. Low interest rates and a high
stock market are totally dependent on the liquidity that the Fed
is injecting by printing $1,000 billion per year. If this
liquidity is not injected, what will sustain the markets? If the
markets crash and interest rates rise, how can the Fed expect
In other words, the participants in the stock and bond markets
know that the markets are bubbles created by the printing press.
There is no real basis for the high stock and bond prices. The
prices are an artificial reality created by the printing press.
Rational markets would take into account the printing press
element and would price stocks and bonds at a much lower level.
Zero real interest rates mean that there are no risks. But how
can there be no risk in Treasury bonds when the debt is growing
faster than the economy?
Normally, high stock values mean strong profits from strong
consumer income growth and retail sales. But we know that there
is no growth in real median family income and real retail sales.
I suspect that the reason the Fed made the announcement, which
seems to be derailing the Fedís forecast of recovery on which
the announcement depends, is to relieve pressure on the US
dollar. For several years the Fed has been printing 1,000
billion new dollars each year. There is no demand for these
dollars. So far these dollars have inflated stock and bond
prices instead of consumer prices. But the implication for the
dollarís price or exchange value in currency markets is clear.
The supply is increasing faster than the demand. If the dollar
falters, the Fed would lose control. Rising import prices would
soon drive domestic inflation and interest rates far higher than
the Fedís targets.
Washington has succeeded in getting Japan and the EU to print
yen and euros in order to eliminate the likelihood of flight to
other large currency alternatives to the dollar. Smaller
countries have also had to print in order to protect their
export markets. With so many countries printing money, the Fedís
statement implying that the US might stop printing makes the
dollar look good, and, indeed, the dollar rose on the currency
Having neutralized the alternative currency threat to the
dollar, the Fed and its agents, the bullion banks, the banks too
big to fail, are still at work against the gold and silver
threats to the dollar. Massive short selling of gold began at
the beginning of April. Again on June 20 massive shorts of gold
were sold at a time of day chosen to maximize the price decline.
Only those who intend to drive down the price would sell in this
Since QE began, the Fed has deprived retirees of interest income
and has forced retirees to spend down their capital in order to
pay living expenses. Judging from the initial market response,
the Fedís latest policy announcement is adversely impacting
bond, stock and real estate investors, and the manipulation of
the bullion markets continues to wreak destruction on wealth
stored in the only known safe haven.
How can a recovery happen when the Fed is destroying wealth?
The Fedís irrational behavior could be seen as rational if the
assumption is that the Fedís intent is not to save the economy
but to save the banks. As the Fed is committed to saving the
banks ďtoo big to fail,Ē it is likely that the banks know of the
Fedís announcements in advance. With inside information, the
banks know precisely when to short the stock, bond, and bullion
markets. The banks make billions from the inside information.
The billions made help to restore the banksí balance sheets.
Guy Lawsonís book, Octopus (2012), shows that front-running on
the basis of inside information has always been the source of
financial fortunes. In order to save the banks, the Fed now
supplies the inside information.
How is this going to play out? I suspect that the recovery,
although officially a weak one, does not really exist. However,
thanks to statistical artifacts that understate inflation and
unemployment and overstate GDP growth, the Fed and the markets
think that a recovery of sorts is in process and that the
unprecedented money printing by the Fed will succeed in shifting
the economy into high gear.
No such thing is likely to happen. Instead, as 2013 progresses,
a further downturn will become visible through the orchestrated
statistics. This time the Fed will have to get the printed money
past the banks and into the economy, and inflation will explode.
The dollar will collapse, and import prices--as globalism has
turned the US into an import-dependent economy--will turn high
inflation into hyperinflation. Disruptions in food and energy
deliveries will become widespread, and a depreciated currency
will cease to be used as a means of exchange.
I wouldnít bet my life on this prediction, but I think it is as
likely as the Fedís prediction of a full recovery that allows
the Fed to terminate its bond purchases and money printing by
Americans, who have been on top of the world since the late
1940s, are not prepared for the adjustments that they are likely
to have to make. And neither is their government.
Paul Craig Roberts was Assistant Secretary of the Treasury for
Economic Policy and associate editor of the Wall Street Journal.
He was columnist for Business Week, Scripps Howard News Service,
and Creators Syndicate. He has had many university appointments.
His internet columns have attracted a worldwide following. His
The Failure of Laissez Faire Capitalism and Economic Dissolution
of the West is now available.
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