Wednesday, April 29, 2009

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
Excess speculation or excess money? (June 29,2008)
How to Turn a Recession into a Depression 
Did the Fed, or Asian Savings, Cause the housing bubble ?
Deepak Lal: The global financial crisis
The Fed Didn't Cause the Housing Bubble
Petro dollars Vs Petro Euros
Anbudan / அன்புடன்

K.R.Athiyaman  / K.R.அதியமான்

Chennai - 96

1 comment:

dnjoshi said...