Distortions in money markets due to government interventions

Dear Friends,

 

There is lot of talk all over the world over the failure of capitalism

and neo-liberalism. and about market failuers, etc. Vaild enough.

 

But were the markets, esp, money markets, really 'free' enough ?

 

Many many distortions as follows :

 

1.Unlike all other commodities, products and services,

legal tender money of all nations is issued, controlled

and printed only by governments. But a few centuries

back they were private 'banknotes' baked by gold.

Hence, this is a basic and vital distortion of market.

Imagine a state where there are numerous 'currencies'

issued by banks and which gain the trust and goodwill

of the people thru reputation and past history.

 

And this legal tender certainly is printed and pumped into

the sytem with no qualms or norms for the quantity to

match the national output/GDP proportionally. Hence,

the old story of chronic deficts and chronic inflation

which distorts all price signals, etc.

 

The Central banks further distort the money markets,

by 'fixing' the rate of interest periodically to

'stimulate' the economy or etc. The rates in a ideal

free market will always be allowd to 'float' freely

and be determined by market forces.

 

Hence twin distortions of supply of money and

interest rates make this far from a free market.

 

2.Goverment subsidies, and gurantees like underwriting

home mortage loans by the twin gaints Freddie Mac and

Faany Mae. Hence the 'incentive' to dump 'toxic assets'

created without any sense of responsiblity or ownership

on govt funded FI distorts free markets.

 

3.Tax rates are universally deemed to be too high and

unfair by most people.But govts deems them necessary

to finance its operations, esp dpefence budget.

Hence evasion of taxes everywhere leads to creation of black

money and this money has to be stashed and stored in

a 'secure' area.  Flows into areas when otherwise it would

not due to this distortion.

 

4.Free convertiblity of currencies : Not all currencies of the

world are fully and freely convertible. Hence the emergence of

carry trade. (borrow yen at near 0 % interest in Japan,

convert into USD and invest in a asset yielding better

returns. This is a major distortion.

 

5. US dollar as reserve currency and the currency for most

international trade and investement. Suppose if there is

no 'reserve' currency and all transactions are done only

in local currencies. (e.g : India trades with Saudi in

only riayls or rupee, etc) ; hence USD is artifically

over valued and the entire world subsidies US trade

and other deficts, while US can keep on funding

itself by printing USD limitlessly. this is a major

distortion of money marktets.

 

An Ideal free market : (theoritical utopia)

 

Free flow of goods ,capital, labour and technology

across the world. suppose if there are no

individual nations and trade blocs and cartels

like OPEC. and no central banks and defence

budgets, etc. People of the world are free to

migrate and export / import seemlessly with

no borders / taxes, etc. All transactions are

volunatary free contracts between individuals and

companies, etc with NO govt intervention in

labour. money market, etc. Taxes are very

very minimum to fund govt areas of police,

courts and minimum welfare (?) only

And numerous currencies of private banks

backed by their assets or good will, etc.

No black money, tax havens, carry trade,

negative interest rates created by central

banks, etc. That is currencies are actually

a medium of exchange only and a tool

to extract inderect tax by govts...

 

Then if there is market failure, it

will be a valid argument.

 

Important links :

 

Who murdered the financial system?
by Swaminathan S. Anklesaria Aiyar
http://www.swaminomics.org/articles/20081022.htm

 

Excess speculation or excess money? (June 29,2008)
http://swaminomics.org/articles/20080629.htm

 

How to Turn a Recession into a Depression 

http://cato.org/pubs/policy_report/v31n2/cpr31n2-1.html

 

Did the Fed, or Asian Savings, Cause the housing bubble ?

http://mises.org/story/3203

 

Deepak Lal: The global financial crisis

http://www.business-standard.com/india/news/deepak-lalglobal-financial-crisis/20/08/341241/

 

The Fed Didn't Cause the Housing Bubble

http://online.wsj.com/article/SB123672965066989281.html#

 

Petro dollars Vs Petro Euros

http://web.nps.navy.mil/~relooney/Rel_MEJ_S04.pdf

 

 
--
Anbudan / அன்புடன்

K.R.Athiyaman  / K.R.அதியமான்

Chennai - 96

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