From the dictionary: “A free market is a system in which the prices for goods and services are self-regulated by buyers and sellers negotiating in an open market without market coercions.”
Also from the dictionary: “Santa Claus is a character in Western Christian culture who is said to bring children gifts on Christmas Eve.” Note that both the “free market” and “Santa Claus” are myths. Neither truly exists.
A child thinks that there is a Santa Claus because he or she may find presents on Christmas day. A consumer or producer might believe that there is a free market for goods and services because—as with the Christmas presents—they never see the unseen hand moving prices.
We are told that ultimately it is demand and supply that moves prices, and that is true. However, just because a cartel or government does not put up a public notice as to where prices are going does not mean that they are not the unseen hand, government especially.
The most economically ignorant fools (“fools” because they are used and manipulated) are “socialists” of any type. They believe that some sort of collective ownership will solve the problems of wealth and income disparity. They believe that the pizza can be cut into eight equal slices and that everyone will get one piece.
There is a rule that firefighters have where they take turns cooking their own meals. The person that plates the food gets the last plate after everyone else. That way, the person who plates the food makes sure the servings are equal.
That is genuine “socialism,” but which does not exist in national economies. Operative socialism is governments—just like drug cartels and corporations under fascism—picking winners and losers for both companies and industries. September 6, 2019, Joe Biden: “I guarantee you we’re going to end fossil fuels.”
When Biden said that, Brent oil was $61.50. Ten days later on September 16, oil was priced $71.95. The price subsequently fell to the $30 range seven months later but that was genuine market forces in the early days of Covid lockdowns.
How bad can government policies become? The International Renewable Energy Agency tracked some $634 billion in energy-sector subsidies in 2020 and found that around 70 percent were fossil fuel subsidies. About 20 percent went to legitimate renewable power generation.
The genuine free market is not perfect as it responds to supply/demand changes. We are seeing that now with the “bullwhip effect.” That is when increased demand causes over-production as prices move higher, which then causes prices to decrease rapidly.
But even then, the biggest loser from the “bullwhip” is government when it tries to manipulate the “sort-of-free market.” There is a good chance that the US may experience a rapid “deflation” in prices as consumers are being killed with high oil prices, the economy is slowly faster than expected, and recent and future interest rate increases will stop consumer credit.
US retail inventories have been growing at the fastest pace in history (up 16 percent in April from last year) as producers are reducing prices to move merchandise and retailers are seeing lower sales. The “Big Short” investor Michael Burry said that the “bullwhip effect” happening in the retail sector will lead to the Federal Reserve reversing rate increases.
It is not optimism. T.G.Y.F. is reality. The storm of the next six to 12 months will substantially pass by the Philippines with some but very manageable damage.
E-mail me at email@example.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis provided by AAA Southeast Equities Inc.