My unpublished (100,000 word) book “The Financial Jigsaw”, is being serialised here weekly in 100 Issues by Peter J Underwood, author
Last week we continued to look at some of the many markets available to investors and their tendency to be manipulated under the present system. This is by no means a comprehensive list but covered the main ones. Here is the link to last week: Issue 38
In this last Issue of Chapter 7 we continue to look at how some markets operate in more depth, the risks involved and hope to convey more understanding of the basic operations of markets in the commodity arena which are most important to consumers but again are open to manipulation. The global system for transporting goods and services is highly sophisticated and based the concept of ‘Just-in-Time. Whilst this system is highly efficient it is vulnerable to sudden disruptions which can leave distributors out-of-stock within only days.
Here is a link to a comprehensive report on how the Fed manipulates markets, worth considering:
https://northmantrader.com/2019/02/03/all-hail-chairman-pow/
CHAPTER 7
Markets
“Interest is the difference in the valuation of present goods and future goods; it is the discount in the valuation of future goods as against that of present goods.”
Ludwig von Mises: “Planning for Freedom”
Everything is determined, the beginning as well as the end, by forces over which we have no control. It is determined for the insect as well as the star. human beings, vegetables, or cosmic dust, we all dance to a mysterious tune, intoned in the distance by an invisible piper.
Albert Einstein
How commodity markets operate
So far we have discussed ‘financial markets’, however this Chapter would not be complete before we looked at one of the most important markets which affect all of us each and every day from the price of food to oil and energy costs; these are the ‘Commodity Markets’.
They function in the ‘real world economy’ and operate in much the same way as financial markets where buyers and sellers meet, except now we are dealing with raw materials and finished goods of all kinds, involving every country around the world.
The underdeveloped countries, often found in the South and East of the globe (‘developing economies’), tend to be the producers of raw materials whereas the developed countries in the North and West are generally consumers of raw materials and producers of finished goods. However a trend is developing where emerging economies are beginning to manufacture their own products using the readily available, low-cost labour force.
Commodity markets are managed, again, mainly through American organisations and are represented by institutions such as the ‘The New York Mercantile Exchange (NYMEX)’ and ‘Commodity Exchange Inc. (COMEX)’; owned by the CME Group of Companies and regulated by the ‘Commodity Futures Trading Commission (CFT)’’. From August 2008 both NYMEX and COMEX now operate as designated contract markets (DCM) of the CME Group.
The other two designated contract markets in the CME Group are the Chicago Mercantile Exchange and the Chicago Board of Trade. The New York Mercantile Exchange handles billions of dollars-worth of energy products, metals, and other commodities being bought and sold on the trading floor as well as overnight electronic-trading systems for future deliveries. The prices quoted for transactions on the exchange are the basis for prices that everybody pays throughout the world.
Commodity markets can become distorted by manipulation
These commodity markets can be unduly influenced by the participating traders and massive financial institutions which have the privilege of being at the heart of the markets; they are known as ‘market makers’. Their inside knowledge can cause immense distortions to global prices and inadvertently cause an artificial inflation of prices as well as shortages of produce around the world.
It is a sad fact that the world overall can and does produce enough food for all the populations but regrettably our dysfunctional economic system does not allow this food to get into the hands of all the people. The annual ‘State of Food Insecurity in the World’ reports over one billion of the world’s population is distressed by food insecurity and subsequent health issues at one time or another.
It was during the 1980s that the International Monetary Fund (IMF) and World Bank in particular began to promote market solutions for food production and distribution; this became to be known as the ‘*Just-in-Time’ (JIT) distribution method with which the reader may be familiar.
These methods rely more on supply and demand rather than direct government interventions; encouraging local farmers to improve productivity and increasing the efficiency of their distribution. In 2007-08, rises in food prices caused a global food crisis and increased the numbers suffering from hunger by over one hundred million.
However, food prices fell back in 2009, due to increased production in response to the 2008 price rises, as one would expect of a market-based system. Following the G8 summit in 2009 food security has remained high on the list of priorities among Western nations in general and the USA in particular and has continued on their agenda for the various G-20 summit meetings.
*Just-in-Time means that goods are available for sale immediately to meet demand and the process is used throughout the world both in distribution systems as well as manufacturing. One effect is to substantially reduce the level of stocks, almost to zero, and the risk is that any disruption to the supply chain causes an almost immediate out-of-stock situation whereby shortages can occur within days. It is projected that Britain is only nine meals away from famine; a truly horrific thought. I witnessed this back in the year 2000 when UK fuel distribution systems were disrupted by protests and supermarkets began to clear their shelves merely days following the action.
Central banks interfere with free market operations
The efficient operation of world markets is crucial for the maintenance of price stability ensuring a constant supply of materials of all kinds to reach the peoples of our increasingly small planet quickly and in good condition.
Our world is beholden to massive markets and banking systems, such as in the USA and the developed northern hemisphere, to constantly provide for our wellbeing and thus each of us should be interested in developments taking place today that could put this in jeopardy in the future. The Federal Reserve Bank of the USA has a major dilemma which was put so well in James Howard Kunstler’s, ‘Mid-Year Digest’:
“If the Fed were to reduce its purchases of this debt paper [Quantitative Easing –QE], nobody else would buy it. The reason the Fed buys the quantity it does in the first place ($85 billion-a-month in 2013) is that nobody else would touch it at the offered zero interest rates. The US Treasury and the mortgage ‘bundlers’ could only sell the stuff if they paid higher interest rates; but the US government would choke to death on higher interest rates because its aggregate debt is so huge and the scheduled interest payments so gigantic that a one percent increase would destroy even the fantasy of economic equilibrium.”
It might be that going forward from 2013 China’s new leaders will reduce the world’s second largest economy’s dependence on an ever increasing and destabilizing debt mountain; this appeared to be following the American pattern including expanding its “shadow banking” system which will be explained in the next Chapter.
Their leader, Xi Jinping, recently commented about a “mass line education campaign aimed at addressing problems arising from the “four winds” of formalism, bureaucracy, hedonism, and extravagance” all of which are continuing unabated in the American model.
Free markets encourage cooperation between disparate peoples
The greatest economic progress made throughout man’s history has been the harmony created through trading between ourselves, individuals as well as nations. Centralized government tends to fail when forced on people of differing beliefs, political or otherwise; whereas free trade, the free flow of goods and services across borders, has proven highly successful throughout the centuries.
Our current crop of multinational and global corporations, consist of people from a wide range of cultures, religions, races and ethnic groups as they work cooperatively producing goods and services to match market demand and profiting therefrom.
The old adage that “we can only help others if we first help ourselves” has remained true and is supported by “charity begins at home”. This is no less true in economics and our own personal financial lives where economic self-interest prevails.
‘Producers’, in the form of global corporations making ‘real’ goods, are continually forced by the market to adjust their actions, products and business practices resulting in what we witness in our supermarkets and service outlets every day.
Compared to even fifty years ago the range of products we are offered is extraordinary and is the measure of success of free market trading in the real economy. Although this activity is facilitated by the indispensable actions of financiers and bankers the concomitant downside is the blatant disregard of the effects on the real economy by financial manipulation; using technology to create an ‘illusory’ economy through ‘financial engineering’, which produces nothing of real value but merely causes distortions in price and supply metrics, ultimately destroying the established natural balances in supply and demand.
These Jigsaw pieces of the ‘Markets’ now frame the coming Chapters as we examine how the global financial system has reached the state it has, the attendant risks and what the politicians, financiers and bureaucrats are attempting to do in order to address these on-going difficult-to-solve issues.
To be continued next Saturday
You brush the US trade imbalance and debt as lightly as a Kardashian applies makeup to her nose; and you’ll explain how politicians can fix the US problem in the next article. I can’t wait. The US is probably the biggest importing Gluttonous Behemoth in the World with the biggest Debt by a factor of 10. Trump almost alone has been trying to reverse an Economic Niagara Falls while foreign and domestic enemies (a huge majority) are attacking him in every way short of murdering him. The Debt is way to big to repay so it must be printed/inflated away (a great crisis opportunity to kill the Federal Reserve); America should redirect it’s Economy from improvident Finance to fruitful Production, especially Agriculture and STEM; and restore individual responsibility (Welfare for the people who cannot work, not for able bodied people given a ticket not to work). What say you a real Expert?
Many thanks Robert for your review and I sure hope that I didn’t give the impression that the US trade imbalance and debt is something that can be solved. Or that I am an expert on the subject – I am merely an amateur observer who has formed options, right or wrong, about the way the global systems work and are likely to unfold.
The system has failed and it is only a matter of time before the whole thing unravels, dollar as well. Unfortunately you are only reading small extracts but you will see later on how I argue the case for collapse and crisis. I am trying to tell it how it is and how the system works at present.
You clearly have a great deal of knowledge on the subject, which I respect, but the book is designed for those not having the benefit of knowing how economies work.
I agree entirely with you as to what the USA should do to resolves these issues but I fear that only a crisis will invigorate the leaders and usher in a new economic paradigm – and that is being optimistic, I know, probably war is the final outcome, as always.