All Cartels Eventually Fail

Much in the vein of Lincoln’s declaration that you can fool some of the people all of the time, all of the people some of the time, but not all of the people all of the time (or for very long), central planning must economically fail.

Witness the self-assumed task of the Federal Reserve to promote inflation.  Joined with the other theory-driven “smarter than the markets” central bankers from around the world, the Federal Reserve and its teammates have decided, in short, to inflate their way out of the sluggish economies of the world.

Now these all-knowing central planners are confronted with what they didn’t know was going to happen.  OPEC is falling apart.  The cartel-supported oil prices are crumbling just as the central bankers are out to promote inflation.  Crude oil is at a four-year low.  But, ironically, the price of oil could be falling apart precisely because of the central bankers.  For as Newton declared in his second law, for each action, there is an equal and opposite reaction.  Forcing interest rates to zero sounds inflationary.  However, this action has collapsed the velocity of money (the rate at which a dollar moves through the economy).  Stock markets rise, but economies lag and stagnate – the opposite reaction.  The central planners are pushing on a string with a bull dozer.

As OPEC struggles to hold the prices up in a range of prices the real market might never  have taken, one cannot help but notice the artificial nature of attempts to hold markets.  Note to Janet Yellen.

OPEC is a cartel and has been successful in its endeavor for about forty years.  The game appears to be up.  Countries have become reliant on $100-a-barrel oil.  Deals have been struck and collateral set all over the world on the price of supported oil.  Oops.  This could be catastrophic.  Unraveling markets, especially from artificially supported levels, are “falling knives” no one wishes to step in and confront.

The concerted action of the central bankers from around the world is really nothing more than a cartel at work – the CBCPC, or the Central Banking Central Planning Cartel.  All acting in concert, placated by those who benefit from pre knowledge of coming actions (note to NY Fed), these central planners are holding the hot potato.  It can work for a while, as Lincoln referenced. 

Markets are wonderful mechanisms when allowed to work properly.  Low prices cure low prices, as high prices cure high prices.  Propped up arrangements can indeed look wonderful for a while.  But just as with silicon and Botox, things begin to shift and slide, and there is nowhere to turn.

The stock and bond markets have been drive to remarkable extremes by the central planners.  Witness the relationship between the 30-year treasury and the Standard & Poor's index.  Relationships are historically stretched.  Germany holds bond auctions that are under-subscribed, requiring that they buy their own paper in auction. 

Cartels arrange prices away from market pressures, temporarily.  Just like magicians, they don’t do magic; they create illusions.  Central bankers don’t do magic, either.  And if Lincoln had been a trader, he would have said, “You can’t fool all of the markets all of the time.”  The price of oil falling is a nightmare for the central planner cartel, and suddenly there are too many balls in the air.

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