We are now familiar with the Libor manipulation scandal, which extends into other related rates, like Euribor. More recently, we’ve seen the ISDAfix, the reference rate for rates derivatives, make the headlines for the same reasons : large banks getting together to manipulate it. Not too long ago, we learned that JP Morgan and Barclays were accused of manipulating energy prices. The price of gold has been falling for a few months, due to « paper » gold selling, while physical gold buying is on the rise... isn’t this a bit weird? Is there an end to this list?
Or, let’s ask the question another way : Is there still « real » price discovery, today, and in which markets? Unfortunately, the answer is close to a resounding ‘no’. As Ron Paul, the Austrian school american politician and economist, says, this manipulation of interest rates by the central bank affects all prices, the same way price controls do in centralized states, the difference being that, in the latter case, armies of government employees are needed to enforce price control with the businesses, while, in the former, a decision by the president of the central bank is all it takes.
Because, as we know, the short-term interest rate is fixed by the central bank, and mid- to long-term interest rates are influenced by it. The $45B monthly infusion of Fed’s QE (the remaining $40B being used to acquire mortgage-backed securities, or MBS) is helping in keeping them lower than they should be, which is, by the way, Bernanke’s objective.
And the interest rates constitute a price on « time », so to speak. Thus, they affect most everything in the economic process, from production to consumption to savings. The price, or value, of everything is affected one way or the other : your credit, your smartphone, your car, your groceries, your wealth... Consequently, all economic decisions, whether in businesses or in households, are affected somehow. The real estate bubble in the United States, from 2000 to 2007, was due in part to Greenspan taking down interest rates in 2001 (under the pretext of avoiding a recession from the bursting of the Internet bubble in 2000 and the 9/11 attacks). We’ve witnessed the result of that... and the central banks are pushing lower rates still!
Maybe the time has come to take the Fed to court... because it’s certainly not doing any better than those banks that are manipulating LIBOR or energy prices. But, hey, central banks are doing this « for our own good »... aren’t we feeling better now?
Philippe Herlin - Researcher in finance and junior lecturer at the Conservatoire National des Arts et Métiers in Paris / Contributor on Goldbroker.com
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