Interest is the difference in the valuation of present goods and future goods; it is the discount in the valuation of future goods as against that of present goods.
— Ludwig von Mises: “Planning for Freedom”
Everything is determined, the beginning as well as the end, by forces over which we have no control. It is determined for the insect as well as the star. Human beings, vegetables, or cosmic dust, we all dance to a mysterious tune, intoned in the distance by an invisible piper.
— Albert Einstein was not referring to markets, although he may well have been, since the quote is quite prescient because markets do seem to act as if an ‘invisible hand’ is controlling their unpredictable gyrations.

Most of the lessons have touched on the subject of markets in one form or another. So far we have been building our jigsaw from the middle outward but now it is time to fit in the ‘edge’ pieces and these ‘market’ ones are many and varied, framing the picture and putting the center ones into context. Markets are central to all economies and are really “where the economic rubber meets the global road.” The smooth functioning of markets is crucial for the financial wellbeing of every economy. All markets rely on a degree of trust between the parties.

There can be no trust if there is no truth; how can we trust people who lie to us? We know that the ruling elite and their political slaves, through their ‘captured’ media, issue one self-serving justification after another purely for their own selfish ends. We all know this to be true, but are reluctant to challenge these obvious distortions for the risk of losing our own small advantage in one way or another.  

America in particular has shifted from truths, founded in their constitution, to self-serving distortion reducing belief and trust to deception and manipulation. This spiritual and moral decline will not end well. It is incumbent on each and everyone one of us to guard our heritage against this onslaught of hubris.


How can we trust institutions, whose credibility now rests on the continuation of untruths that are so embedded in our financial sector and the political state that their collapse will bring down the entire edifice of perpetual debt? 

Many years ago, when your Grandfathers were at elementary school, at some point Pokemon cards were the ‘in thing’. They were sought after at great expense in time and effort and became highly desirable, as well as a medium of exchange or barter; yet they had no intrinsic value much like our monetary system today.

These cards came in various shapes, sizes and colors; some being rarely found others were all too common and of little ‘value’. There was no authority dictating to the children what the “price” for any of the cards should be, yet they worked it out all by themselves. Deals were struck in the playground to obtain the most valuable cards and the rare ones could be exchanged for many of the common ones or other useful gadgets and toys. Competitions would take place by flicking the cards against a wall and attempting to ‘cover’ others which would secure a ‘win’ for the player. Risks were taken with the more valuable cards to obtain better ‘returns’ when a win took place.

This ‘market’ emerged from nothing and began to evolve as other ‘fads’ overtook the current one. This experience indicates the natural existence of a free market where everyone is a buyer and seller and everyone trades for whatever perceived worth the market dictates. There is also the kudos associated with being a ‘winner’ in a group which accords a ‘status’ by rising above the crowd and offers a taste of celebrity for as long as it lasts.

This behavior is of course classic ‘herd mentality’ to which we all succumb at some time or another. In the grown-up world of global markets the motivations are no different from those early days at school. The ‘chips’ are different but the gambling spirit prevails against all reasonable odds as market players are drawn into the game and the big players try, and often succeed, at manipulating the outcomes to their mutual benefit. When the game changed to ‘conkers’ in the autumn it wasn’t long before some players figured out that cooking them in the oven for a while made them so hard that they became undisputed winners every time; the market had been ‘manipulated’ unfairly and soon the whole game became useless and the kids moved on to other things.

The point of this short story is that, just as the markets for these various games fade, in the real world the currency of the day, dollars, euro, Yen, whatever will also fade into oblivion as more and more flood the market. In the same way that nobody can foretell the next coming ‘fad’, so too are we unable to predict the coming replacement currency; nevertheless, it will come all too soon and we should all be prepared for a wave of change by investing in the one ‘currency’ that never fails, gold which we covered earlier. More will be discussed about winning investment strategies in the investment strategies course, but ShopSquawk hopes this quote by: Dr Paul Krugman; Economist and Nobel Laureate illustrates the inevitability of the coming turmoil:

So if we could get something that could cause the government to say, ‘Oh, never mind those budget things; let’s just spend and do a bunch of stuff.’ So my fake threat from space aliens is the other route… I’ve been proposing that.


Markets are not only ‘discovered’ by entrepreneurs and traders but can be ‘made’ artificially by unscrupulous opportunists as this sorry tale of exploitation illustrates:

Two prospectors were searching a jungle for rare-earth metals when they came upon a tribe of hunter-gathers far from civilization. They observed that these hunters were catching monkeys and using them as currency to trade for other products between themselves and other local tribes as well as for consumption. One prospector offered to buy monkeys for $1 each, a good price for any tribesman. The jungle was full of monkeys and the hunters had no trouble providing a good supply which the prospectors placed in cages ready for export. Soon enough the monkey population began to fall and the hunters were finding it more difficult to meet demand, and so with a limited supply, negotiated for more money. The prospectors offered $5 per monkey and the hunters went off again with increased enthusiasm. After a while, again the hunters were finding fewer monkeys and asked for yet more money to which, in response, the offer was increased to $10 each. When all the cages were full to overflowing one prospector announced that his colleague would be taking a trip up river to the nearest market where he had a buyer for the monkeys at $25 each and would return to split the profits amongst the tribe. A while later the remaining prospector told the tribe that he had heard from his friend that he had sold the monkeys for $50 each but there would be a delay before he returned with the money. In the meantime he had to make an important meeting with a business colleague and didn’t want the tribe to miss out on all the extra profits to be made. So he was willing to sell all the monkeys to the tribe for $25 each and they would make great profits when his friend returned. The tribe were overjoyed at this man’s generosity and quickly closed the deal, allowing the prospector to leave for his meeting. The tribe waited and waited but the two men were never seen again! Yes, the world is full of trickery and made possible, generally, through greed or fear which drives all markets up and down according to the prevailing atmosphere and a herd instinct which it follows as trust fails and disappointment, even rage, remains.

ShopSquawk decided to re-use this market picture from another lesson.

ShopSquawk decided to re-use this market picture from another lesson.

Events following 2008 have inadvertently created a high degree of mistrust between not only traders and institutions themselves but also from the general investors point of view who provide essential capital for the smooth running of markets. Unsurprisingly, trust in the financial sector has eroded, whether individuals realize it or not, and is a major reason for the increase in ‘moral hazard’: “Governments, by guaranteeing or underwriting the prices of investments, have thus relieved the market participants of their individual responsibility for any losses”. It has converted the primary function of markets, freely trading between parties to discover prices, into casinos for ‘speculators’ who take winning profits leaving losses to the public purse. When a government guarantees a price there is no need for trust.

The function of any market place is to allow players to come together and, through free negotiation, discover the ‘market price’ of a product or service. This is the essence of ‘capitalism’ and the system under which global markets are supposed to operate today. However, when market participants become large enough they will influence normal supply and demand, manipulating prices which then become unrealistic. There are many recent examples of this effect which has been the case for as long as markets have existed and is used as an argument against capitalism by, in general, the socialist ‘left’. Certainly current events seem to support the view that repeating crises occur during ‘market dysfunction’ which was the case during the last catastrophic disruption in the early 1930s Great Depression. The current debate is fierce and centers around the question of whether ‘free markets’ would naturally cause major crises or whether it is government intervention artificially adjusting prices and risk that is the cause. This is what an eminent and well respected economist had to say about this issue.

Ludwig von Mises, one of the founders of the ‘Austrian’ economics school, considered the question of whether economic crises are created by the unencumbered actions of free markets back in 1931 in the wake of the worst global economic downturn of the twentieth century and quotes from the period add color to the argument:

“It is almost universally asserted that the severe economic crisis under which the world presently is suffering has provided proof of the impossibility of retaining the capitalist system. Capitalism, it is thought, has failed; and its place must be taken by a better system, which clearly can be none other than socialism.” 

“That the currently dominant system has failed can hardly be contested. But it is another question whether the system that has failed was the capitalist system or whether, in fact, it is not anti-capitalist policy of interventionism, and national and municipal socialism that is to blame for the catastrophe”.

“The structure of our society resets on the division of labor and on the private ownership of the means of production. In this system the means of production are privately owned and are used either by the owners themselves–capitalists and landowners–for production, or turned over to other entrepreneurs who carry out production partly with their own and partly with others’ means of production. In the capitalist system the market functions as the regulator of production. The price structure of the market decides what will be produced, how, and in what quantity. Through the structure of prices, wages, and interest rates the market brings supply and demand into balance and sees to it that each branch of production will be as fully occupied as corresponds to the volume and intensity of the effective demand. Thus capitalist production derives its meaning from the market. Of course, a temporary imbalance between production and demand can occur, but the structure of market prices makes sure that the balance is reestablished in a short time. Only when the mechanism of the market is disturbed by external interventions [by government or central banks perhaps] is the effect of market prices on the regulation of production prevented; they are disturbances that no longer can be remedied by the automatic reactions of the [free] market, disturbances that are not temporary but prolonged”.

In a free market, rooted in private property, the only way entrepreneurs are able to sustain profits is by serving customers better than anyone else. It is only when they receive special privileges through preferential regulation, subsidies, bailouts and political indulgence that they are able to reap the profits of that which they have not sown. A fine example of how the financial industry is becoming nervous about the very nature of the current system of government intervention is illustrated by this quote:

Extracted from the 2012 Institute of Chartered Financial Analysts (CFA) Annual Report was the following warning:


“The Global Financial Crisis has damaged the social contract between finance professionals and those we serve, causing a corrosion of trust that is eating away the industry’s foundation. Our businesses are not given a divine right to exist—that right is granted by consumers and based on the social utility of the services they receive.

Although global equity markets have largely recovered from their 2009 lows, the confidence in investors has not. As troubling as this is for the finance profession, the real impact is much larger. The true harm that comes from a breakdown in trust is more insidious and harder to see today. Families in our communities have been displaced, home values have dropped, and ordinary investors are reeling from immense losses.

Our families and friends who are investing to secure their future are now defensive and confused. Their retirement plans that counted on an 8% [annual] return on investments are now dealing with the reality of a 2% world. In turn, these families are now challenged by a savings gap, which means longer working lives, lower quality of life, and the attendant changes that are already affecting our children and grandchildren.

Over time, the defensive crouch of ordinary investors can become ingrained and lead to a savings gap that can take 10, 20, or even 30 years to show up. In essence, people are “borrowing long and lending short”—a recipe that any banker can attest leads to disaster over the long run.”

(CFA Institute, 2012)


The worldwide consulting firm Edelman Berland publishes a “Trust Barometer” each year and looks at various issues dealing with trust in both the U.S.A. and globally. One question that is asked: “How much do you trust businesses, in each of the following industries, to do what is right?” The two industries at the bottom of the list are “Financial services” and “Banks”—both at 50% in the last survey and were also at the bottom of the heap in the earlier surveys. Clearly little or no progress has been made as far as global public perception is concerned.

The public have become aware of banking and financial services scandals (such as mortgage fraud at American banks, drug money laundering at HSBC, rogue traders at UBS, Libor manipulation at several banks, including Citi Group and Barclays) and the ‘interest rate swap’ scandals.

Below are the Results from Edelman Berland’s Trust Barometer Concerning the Financial Industry.


If you guess the % correctly, you win a barnyard animal of your choice!

Corporate corruption
25% – If you guessed correctly, please fill out our winners form (in triplicate) to receive your Rhode Island Red Chicken.

Corporate culture driven by compensation
23% – If you guessed correctly, please fill out our winners form to receive your feeder hog.

Lack of regulation and oversight
20% – If you guessed correctly, please fill out our winners form to receive your choice of Bantam or Leghorn chicken.

Banks being too large
13% – If you guessed correctly, please fill out our winners form to receive a goat (not available in some areas).

Conflicts of interest
11% – If you guessed correctly, please fill out our winners form to have your very own piglet delivered by drone.

Changes in the economy
06% – If you guessed correctly, please fill out our winners form to have your very own draft horse delivered by crane to you or a friends backyard.


A not so vigilant eye...

A not so vigilant eye...

These indicators make an important point for advisors and their clients. Financial planning goes beyond just investing in securities. Advisors should take a broader view of a client’s needs keeping a vigilant eye on the moving targets that are the markets. There are so many different types of markets that it is impossible to cover all of them in one course. We will consider some the largest and most common ones that pervade the global financial world and which are likely to be experienced by most people at some time in their lives.

The stock markets are probably the most well known of all financial markets and are represented in most countries around the world; London Stock Exchange (LSE) reported through the FTSE indexes, New York, the New York Stock Exchange (NYSE) measured by the popular DOW and S&P500 indexes, and many in Europe, such as the DAX index in Germany. They all provide a central exchange for investors to meet, agree prices for various companies and organizations, and finalize deals.

Securities markets took centuries to develop. The concept of debt dates back to the ancient world and is clearly indicated by ancient Mesopotamian clay tablets recording interest-bearing loans. There is little consensus among scholars as to when corporate stock was first traded. Some see the key event as the Dutch East India Company’s founding in 1602, while others point to earlier developments and it is argued that a share/stock market even existed as far back as ancient Rome.

Interest bearing loans through history. You’re going to need a chisel to sign this contract!

Interest bearing loans through history. You’re going to need a chisel to sign this contract!

A stock exchange provides services for stock ‘brokers’ and ‘traders’ to deal in the buying and selling of various securities, the payment of interest income and dividends including those of shares issued by companies, unit trusts, derivatives, pooled investment products and bonds. Trading is increasingly less centered on a location, rather most modern markets are electronic networks, which offer advantages of increased speed and reduced cost of transactions. All free markets are driven by supply and demand where prices are fixed according to the degree of desire that investors have for a particular company or enterprise. There is always a risk attached to these investments… which can go down in price as well as upward.  

It requires a good deal of experience to trade in these markets and an average person, who wishes to have some of their savings in such a market, will generally be guided towards mutual funds, such as investment or unit trusts and compound funds.

These investments consist of many different companies collected into one unit or trust and therefore they spread the risk associated with shares in only a single company. However a breed of speculator has emerged over recent decades called ‘Day Traders’ who use the internet to trade directly on an exchange, often minute by minute, and seek to ‘score’ wins through short-term price movements on shares, indexes, mutual funds etc. It may sound an attractive way to ‘earn’ a living, but beware, the downsides are considerable.

The risks for traders in the markets are really quite forbidding because good results rely on good information, and there is never enough information to guarantee positive moves for the trader. Charts and projections abound and, in the electronic internet age, some would say there is too much information which adds to confusion. Perhaps a quote from a well known book from the 1940s about trading will illustrate how this nerve-racking occupation has remained so tenuous even today.

Robert Edwards and John Magee are authors of the ‘Bible of Technical Analysis’ which tells all about using charts to judge market movements. In 1948 they wrote ‘Technical Analysis of Stock Trends’ and the words therein remain a caution today:

“It has often been pointed out that any of several different plans of operation, if followed consistently over a number of years, would have produced consistently a net gain on market operations.   The fact is, however, that many traders, having not set up a basic strategy and having no sound philosophy of what the market is doing and why, are at the mercy of every panic, boom, rumor, tip, in fact, of every wind that blows. And since the market, by its very nature, is a meeting place of conflicting and competing forces, they are constantly torn by worry, uncertainty, and doubt. As a result, they often drop their good holdings for a loss on a sudden dip or shakeout; they can be scared out of their short commitments by a wave of optimistic news; they spend their days picking up gossip, passing on rumors, trying to confirm their beliefs or alleviate their fears; and they spend their nights weighing and balancing, checking and questioning, in a welter of bright hopes and dark fears.

Furthermore, a trader of this type is in continual danger of getting caught in a situation that may be truly ruinous. Since he has no fixed guides or danger points to tell him when a commitment has gone bad and it is time to get out with a small loss, he is prone to let stocks run entirely past the red light, hoping that the adverse move will soon be over, and there will be a ‘chance to get out even,’ a chance that often never comes. And, even should stocks be moving in the right direction and showing him a profit, he is not in a much happier position, since he has no guide as to the point at which to take profits. The result is he is likely to get out too soon and lose most of his possible gain, or overstay the market and lose part of the expected profits.

On the other hand, if you have satisfied yourself that the charts are, for you, the most dependable indication of the probable future course of stock prices, then you should follow explicitly the signals given on your charts…according to the rules and modifications as your experience dictates. But while you are following any set of rules and policies, follow them to the letter. It is the only way they can help you.  

If you do this…all of this means that you will have peace of mind. You will (a): never be caught in a situation where a single stock commitment can wipe out your entire capital and ruin you; (b) not find yourself frozen in a market that has turned against you…so that you cannot use it in the reversed trend to make new and potentially profitable commitments; and (c) make your decisions calmly, knowing exactly what you will be looking for as a signal to take profits, and knowing also that your losses, at the very worst, will be limited to a certain definite amount. You will take losses and you will make gains. In neither case will you have to take your notebooks home and lie awake worrying. You will have made certain decisions. If developments prove you were right, you will, at the proper point, take your profit. And if it turns out that you were wrong, then you take your comparatively small loss, and start looking at a better situation, with your capital still largely intact, liquid and available.”

The performance of all markets is an essential measure of the financial health of an economy because if markets are improving (going up in price) this indicates a growing economy and is generally considered a good sign for the country; the opposite is negative for growth which is the stormy waters that economies have floundered in since the crisis of 2008. One way to illustrate the workings of markets is to use an old favorite of mine, the thought experiment.

Imagine, if you will, a five mile long, rising street lined with market stalls on each side selling a vast array of produce and services. The market has been in existence for many years and the people walk around viewing offerings and bargaining for prices as the underlying demand and supply alters over time. Psychology is a large part of the decision-making process and also laziness come into it too because people are reluctant to travel very far on foot in order to examine the whole market and obtain complete information. They may not know what is going on in the more remote parts of the market and they have also failed to notice the innovation of a new and improved transport method.

NOT the bicycle we’re talking about.

NOT the bicycle we’re talking about.

You, however, have a massive advantage: you have spotted the innovation of a bicycle by which means you can travel much faster than the others and obtain much more information very rapidly giving you a significant advantage over your competition. You start at the bottom of the street and notice that a stall is selling apples for $5 per pound, but obviously you are unable to discover the price at which he buys them. Noting this sale-price information you pedal fast and furious five miles to the top of the market. Here another trader is selling apples, but for much less, $3 per pound because at the top of the market there are less buyers and therefore less demand. You ask the trader what he will sell apples for in bulk, say, 100 pounds, judging that the first trader would be buying in this quantity, at least, given that apples are a perishable product and he has relatively rapid stock turn.

You strike a deal at 33% discount (a normal wholesale rate), buying apples at $2 per pound and obtain a contract to purchase (and deliver) for delivery in three days time to the address of the first trader. You scoot down the hill, covering five miles quite quickly, and calmly engage the trader in conversation about supplies of apples, indicating that you have 100 lbs for sale. You have already calculated that the normal wholesale price for this market equates to 50% of the sale price, $5, (that is: 100% ‘mark up’ on cost price– which is $2.50 or 50% profit on the retail sale price of $5 – ShopSquawk will leave the reader with the math), trust me, it is correct. [Note; competence in quick mental arithmetic is a major requirement for any successful trader]. Thus we know that $2.50 is likely to be the trader’s current buying price.

You now negotiate the sale of 100 lbs of apples for a price of $2.25 per lb, a saving of 0.25 cents per lb for the trader, close the deal assuming quality and other parameters being equal, and an acceptable ‘sample’ having been agreed. All you need to do is exchange your contract for the sale agreement and request delivery in 3 days. This is a classic ‘win-win’ situation which all good trades engender. The trader is making $25 more profit and you have made $25 clear in less than an hour without moving, storing, insuring or delivering the physical apples; it’s all done on paper and with little effort or expense.

Nice work if you can get it! Perhaps you would like to speculate on the short-comings, risks and possibilities of failing to make a profit because this is where experience and expertise are needed to ensure a successful deal. There are many lessons to be gleaned from this experiment and will be discussed in other courses on ShopSquawk.

There is much more to this scenario than is seen at first sight because there are many options available than just exchanging contracts for a one-off sale. Now that you have more information about the market you could ‘double-up’ your trading by, say, buying many more apples on credit (this is known as (‘leverage’) than you could using your original, limited, $200 initial investment in the first purchase. This is where trading markets gets interestingly complex, known generally as ‘derivatives’ and will be explored further in the next Lesson on the subject of ‘Financial Engineering’. Also there are many different global markets to exploit and here are some of the main ones:


  • Equities markets which trade stocks and shares
  • Currency trading and foreign exchange markets are massive dealing in currencies
  • Treasury bonds for government securities
  • Interest rates are highly complex, high in volume with massive derivative products
  • Credit markets for Corporate bonds, Municipalities and other financial institutions
  • Commodity markets for raw materials, finished products and precious metals and oil
  • Utilities including power, water, waste processes and electricity markets
  • Transport markets including air, rail, shipping and road haulage
  • Pharmaceutical and Agricultural products


We have already touched on a few of these market areas such as bonds, which are a large proportion of global trading and are heavily influenced by interest rates which at present are so artificially low that the normal operation of these markets has been compromised to a large degree and where pricing is distorted beyond economic rationale. The biggest bond market is that of US Treasuries which are many and varied and quoted on all the main exchanges like the NYSE in the same way the UK bonds (called gilts) are quoted on the LSE (London Stock Exchange). Because America is by far the largest global financial player the influence of US Treasury bonds leads the world and causes interest rates to be set according to the US government’s requirements.


This Bond went to the market

This Bond went to the market

Interest rates rose during June and July 2013 and it seems that recent years of falling interest rates have encouraged global economies to use debt financed by ‘variable rate interest’ (the rates move) rather than ‘fixed rates’ (rates don’t move). When interest rates increase, the effect is quite shocking because it affects everybody by increasing their costs across the board from mortgage rates to credit card and student loan debt. For example, the interest on an Adjustable Rate Mortgage (known as an ARM in the USA) jumped from 3.5% to 4.5% in just one month, which means discretionary spending falls, and you can buy less hotdogs, Corn nuts, and Slim Jims; the economy slows down and becomes serious for an economy when approaching a recession.

This Bond stayed home

This Bond stayed home

Another victim of increases in interest rates is the long-term Treasury bond (20 -30 years). Retail investors (anyone not actually in the industry) have poured about USD1Tn into bond funds between 2009 and 2012, because the price of bonds have been rising for many years and have always been considered zero risk and a very safe place to invest savings. Because these bonds offer a fixed rate of interest (called a coupon) over a fixed period, the effective interest rate varies inversely to the quoted bond price on the market at any one time – as bond prices increase, interest rates fall and vice versa. Rising bond prices have helped individuals, institutions and pension funds rebuild their capital which was lost during the 2008 crisis. However, in the first half of 2013, US bonds have lost $60 billion from withdrawals and prices have fallen dramatically. In effect this means that the ‘safe’ part of a person’s savings in now more risky and worthy of higher interest payments in the future.

Again, remember that as bond prices increase, interest rates fall and vice versa! Tricky, we know ; )
This Bond cried all the way home...

This Bond cried all the way home...

Even more concerning is the systemic risk associated with ‘sovereign debt’ – the debt of governments. One way a government can hide the effects of their mounting debt is by arranging for their borrowing to be short-term, say, a few months to one year, when rates are close to zero and money is effectively free. When long-term rates start rising governments have a choice on how to manage their portfolios. When a Treasury bond ‘matures’ it means that the government has to pay the investors back their original money so they will generally roll over their maturing long-term debt by issuing more debt as we have discussed in previous lessons. If they chose to issue short-term ‘bonds’ (confusingly known as ‘Bills’), this would have the effect of keeping interest costs down but making it necessary to roll over even more debt each year. Otherwise they can keep the maturity (that is: date of redemption) of the new debt the same period of 20-30 years but will experience an increase in their interest costs. Another alternative is to have their central bank buy up even more debt (by printing more money) and then ‘write off’ the interest (known euphemistically as retiring the interest or debt) but at the risk of a tidal wave of newly-created money devaluing the currency even more.

We’re going to say it again, repeat after us: “Bond prices increase, interest rates fall and vice versa!” Bet you didn’t think we’d go this far to pound it into your head ; )
Meet Jaime Bond, the next in the series... aye aye aye!

Meet Jaime Bond, the next in the series... aye aye aye!

There is another massive risk associated with rises in interest rates which cause banks, investors and financial institutions to lose money on their ‘derivative’ products which they have issued in the hundreds of trillions of dollars around the world. These are known as ‘interest rate swaps’, in which holders of a security which pays a fixed rate of interest exchange their income stream for a variable rate if interest based on a base or ‘benchmark’ interest rate. The players on the variable-rate side of the bet can lose big if interest rates keep rising and were part of the cause of the last financial debacle in 2008. This subject is discussed more fully in the next lesson on the subject of Financial Engineering when we will continue with our thought experiment using the ‘apple’ analogy described above. Because all these markets are linked together a small increase in interest rates generally can cause a large disruption to all the interlinked markets at the same time and is what governments fear the most.

We’re going to say it again, repeat after us: “As tickets for James Bond movies prices increase, your rate of interest falls… and vice versa!” Huh? Oh, wrong Bond.

So far we have discussed ‘financial markets’, however this lesson would not be complete before we looked at one of the most important markets which affect all of us each and every day from the price of food to oil and energy costs; these are the ‘Commodity Markets’. They represent the ‘real world economy’ and operate in much the same way as financial markets where buyers and sellers meet, except now we are dealing with raw materials and finished goods of all kinds, involving every country around the world. The underdeveloped countries, often found in the South and East of the globe (‘emerging economies’), tend to be the producers of raw materials whereas the developed countries in the North and West are consumers of raw materials and producers of finished goods. However a trend is developing where emerging economies are beginning to manufacture they own products using their readily available, low-cost labor force.

Commodity markets are managed, again, mainly through American organizations and are represented by institutions such as the ‘The New York Mercantile Exchange (NYMEX)’ and ‘Commodity Exchange Inc. (COMEX)’; owned by the CME Group of Companies and regulated by the ‘Commodity Futures Trading Commission (CFT)’’. From August 2008 both NYMEX and COMEX now operate as designated contract markets (DCM) of the CME Group. The other two designated contract markets in the CME Group are the Chicago Mercantile Exchange and the Chicago Board of Trade (CBT). The New York Mercantile Exchange handles billions of dollars worth of energy products, metals, and other commodities being bought and sold on the trading floor as well as overnight electronic-trading computer systems for future deliveries. The prices quoted for transactions on the exchange are the basis for prices that everybody pays throughout the world.

These commodity markets can be unduly influenced by the participating traders and massive financial institutions which have the privilege of being at the heart of the markets; they are known as ‘market makers’. Their inside knowledge can cause immense distortions to global prices and inadvertently cause an artificial inflation of prices as well as shortages of produce around the world. It is a sad fact the world overall can and does produce enough food for all the populations but regrettably our dysfunctional economic system does not allow this food to get into the hands of the people. The annual ‘State of Food Insecurity in the World’ reports over one billion of the world’s population is distressed by food insecurity and subsequent health issues at one time or another.

It was during the 1980s that the International Monetary Fund (IMF) and World Bank in particular began to promote market solutions for food production and distribution; this became to be known as the ‘*Just-in-Time’ (JIT) distribution method with which the student may be familiar. These methods rely more on supply and demand rather than direct government interventions; encouraging local farmers to improve productivity and increasing the efficiency of their distribution. In 2007-08, rises in food prices caused a global food crisis and increased the numbers suffering from hunger by over one hundred million. However, food prices fell back in 2009, due to increased production in response to the 2008 price rises, as one would expect of a market-based system. Following the G8 summit in 2009 food security has remained high on the list of priorities among Western nations in general and the USA in particular and has continued on their agenda for the 2012 G-20 summit meeting.


Just-in-Time means that goods are available for sale immediately to meet demand and the process is used throughout the world both in distribution systems as well as manufacturing. One effect is to substantially reduce the level of stocks, almost to zero, and the risk is that any disruption to the supply chain causes an almost immediate out-of-stock situation whereby shortages can occur within days. 


The efficient operation of world markets is crucial for the maintenance of price stability ensuring a constant supply of materials of all kinds to reach the peoples of our increasingly small planet quickly and in good condition. Our world is beholden to massive markets and banking systems, such as in the USA and the developed northern hemisphere, to constantly provide for our wellbeing and thus each of us should be interested in developments taking place today that could put this in jeopardy in the future.   The Federal Reserve Bank of the USA has a major dilemma which was put so well in James Howard Kunstler’s, ‘Mid Year Digest’:

If the Fed were to reduce its purchases of this debt paper, nobody else would buy it. The reason the Fed buys the quantity it does in the first place ($85 billion-a-month in 2013) is that nobody else would touch it at the offered zero interest rates. The US Treasury and the mortgage ‘bundlers’ could only sell the stuff if they paid higher interest rates; but the US government would choke to death on higher interest rates because its aggregate debt is so huge and the scheduled interest payments so gigantic that a one percent increase would destroy even the fantasy of economic equilibrium.

Woah! Read that one again.

It might be that going forward from 2013 China’s new leaders will reduce the world’s second largest economy’s dependence on an ever increasing and destabilizing debt mountain; this appeared to be following the American pattern including expanding its “shadow banking” system which will be explained in the next lesson. Their new leader, Xi Jinping, recently commented about a “mass line education campaign aimed at addressing problems arising from the “four winds” of formalism, bureaucracy, hedonism, and extravagance” all of which are continuing unabated in the American model.

The greatest economic progress made throughout man’s history has been the harmony created through trading between ourselves, individuals as well as nations. Centralized government tends to fail when forced on people of differing beliefs, political or otherwise; whereas free trade, the free flow of goods and services across borders, has proven highly successful throughout the centuries. Our current crop of multinational and global corporations, consist of people from a wide range of cultures, religions, races and ethnic groups as they work cooperatively producing goods and services to match market demand and profiting therefrom.

The old adage that “we can only help others if we first help ourselves” has remained true and is supported by “charity begins at home”. This is no less true in economics and our own personal financial lives where economic self interest prevails. ‘Producers’, in the form of global corporations making ‘real’ goods, are continually forced by the market to adjust their actions, products and business practices resulting in what we witness in our supermarkets and service outlets everyday. Compared to even fifty years ago the range of products we are offered is extraordinary, and is the measure of success of free market trading in the real economy. Although this activity is facilitated by the indispensable actions of financiers and bankers the concomitant downside is the blatant disregard of the affects on the real economy by financial manipulation; using technology to create an ‘illusory’ economy through ‘financial engineering’, which produces nothing of real value but merely causes distortions in price and supply metrics, ultimately destroying the established natural balances in supply and demand.


These Jigsaw pieces of the ‘Markets’ now frame the coming lessons as we examine how the global financial system has reached the state it has, the attendant risks and what the politicians, financiers and bureaucrats are attempting to do in order to address these on-going difficult-to-solve issues.