In response to an FT article of January 23rd entitled, “The new kings of the bond market”, which suggested that banks had ceded their command over fixed income to exchange-traded funds and active portfolio traders, we responded with a riff on the sorry consequences of recent financial developments: a bromide which turned out to be singularly well-timed in view of the extraordinary upheavals suffered just a few, short weeks later:-
A MARKET FOR KNOWLEDGE
“The whole point of the ‘market’ – as we Austrians have been telling you for over a century – is that the prices formed by the countless interactions of our teeming humanity convey information of the best possible quality to help co-ordinate the most fruitful use of scarce resources.
The greater the nodes on that market network; the more individual needs and preferences expressed upon it, the better the solutions: the more enriched the ‘spontaneous order’ it throws up.
The scrambling of the crucial price signals which embody these preferences by the interference of state lever-pullers is one evil we often discuss but what we perhaps do not address often enough in financial markets (theoretically possessed of the densest and most widespread, most rapid, most frictionless networks of all) is the deadening effect of overconcentration and the move to oligopoly under which we are now suffering.
It’s not just the price-insensitive Wizards of Oz sitting behind their central bank HQ curtains and arrogating ever-wider ‘mandates’ to themselves, but also the Whales like Vanguard, as well as the thousands of copy-cat minnows swimming alongside them and the blind-trust ETFs – not to mention the cyber battalions of algos and quants, all busily data-mining for exploitable patterns and hence tending to a robotic, unthinking reinforcement of whatever passing trends this perverse clustering throws up.
Combined with the extreme moral hazard embodied by the Fed, the BOJ, the ECB, et al, in their attempts to prop up the surindebted House of Cards they have jointly constructed, as well as the regular injections of rocket fuel which those efforts comprise, is it any wonder ‘markets’ appear so dysfunctional; so disconnected with reality?
Together with the current, monolithic push for Green finance and the whole apparatus of bans & diktats, penalties & subsidies, forced loans & targeted inflation, cronyism & waste which this will entail, there will be precious little room or means left to continue the historically unprecedented explosion of prosperity which the last two centuries or so have brought, lifting unimaginable numbers out of short-lived, disease-ridden misery, want & oppression: a marvel ONLY made real by the spread of the very Free(ish) Markets we are now destroying.”
THE PRICE OF FOLLY & FOLLY OF PRICE
Much of this mischief has come about because central banks have succumbed to a fixation with engineering rises in their domestic CPI indices of a near-magical 2% per annum rate – regardless of the mounting evidence both that they are fighting the natural forces resisting that (in markets for reasonably freely traded goods, at least) AND that this tendency occasions no harm to the functioning of the economy – certainly not in comparison to the damage for which their pig-headed interventions are responsible.
On this latter topic, we continued our Philippic from above:-
“If technological advance, entrepreneurial innovation, and beneficent network effects from widening circles of trade are producing more ‘utility’ at lower cost, prices should be allowed to FALL accordingly to reflect that greater plenty.
To decry such a phenomenon as ‘deflation’ is arrant nonsense: to try to prop these prices up out of monetary necromancy is to inject excess money/credit when that medium is already acquiring an extra capacity to conduct exchange.
Not only do prices tend to RISE for all other goods & services, those not so blessed by progress -even though they are not actually more scarce- but also fictitious levels of profit are generated in those areas newly in abundance.
Predictably, too much emulation occurs, floating yet another Tech Bubble and breeding a new herd of Unicorns. Real wages are suppressed, lowering productivity, encouraging consumptive borrowing, penalising thrift & poisoning social discourse.
At firms, we see debt further eroding balance sheets, increasing individual fragility, and scrambling the broader relation between the price of financial capital and the quantities of real capital which it can be used to acquire.
This latter dysfunction adds dislocations to intertemporal trade to those already being introduced systematically into contemporary/simultaneous exchanges. Wealth drains between the cracked façade of sham prosperity.
A fractured Commonwealth – as well as an entirely avoidable Boom-Bust cycle – is the result though, sadly, the ensuing crisis merely feeds the Leviathan which brought it about, rather than starving the Beast as a penalty for its sins.
Amid the chaos it has unleashed, the monster arrogates even more powers to itself. Cronyism grows. Zombies are nurtured. Deadwood remains uncleared. As they say in China: ‘The Private Sector retreats and the State advances.’ Macro-morbidity becomes the ‘New Normal’
Before you know it, the Technocrats are talking of ‘secular stagnation’, fretting they have expended all their ‘ammunition’. More profligacy is officially urged and tired, old ‘New’ Deals proposed. The tender bloom of Liberty shrivels.”