Richard Rahn makes the case that the volatility is primarily due to government intervention in the market (via Cato):

Why do you think the stock and commodity markets have exhibited record volatility? It is largely because government officials, both in the United States and elsewhere, are disrupting the ability of markets to calculate what prices would bring supply and demand into balance.

The government actors have created additional huge risks and uncertainties for both businesspeople and investors, which are depressing the markets and causing the recession.

In addition to the normal business risks and market uncertainties, the government actors have now added increased uncertainty about: the value of currencies and interest rates; exchange rates; government subsidies and “bailouts”; international commodity cartels; major proposed tax increases; and proposals for very costly regulations.

There is no doubt in my mind that we would not be in our current predicament had the government allowed the market to work. The Fed and Treasury have been fighting the market for almost two years now and the results are plain. As Rahn points out, we already live in a volatile world of fiat currencies:

Monetary and interest rate uncertainties had been growing for decades; however, from the early 1980s onward, the Fed appeared to have gained an understanding as to how to achieve reasonable price level and interest rate stability. But the Fed clearly made major mistakes close to the end of the Greenspan era, and has since given markets little indication it now knows what it should be doing. As a historical note; the U.S. dollar price of gold remained constant at $20.65 per ounce for the century preceding 1932, a period during much of which the United States, the United Kingdom and other major countries were on the gold standard.

The result was that the dollar could buy as much in the early 1900s as it did a century earlier. Once the world went off the gold standard, buyers and sellers faced the additional risks and uncertainties of big changes in the value of the currency, interest rates and major swings in foreign exchange rates. The U.S. dollar is now worth about one-twentieth of its value in 1933 (and also in 1833).

During the period of the gold standard, the price of money – that is, interest rates – also exhibited rather low volatility, and foreign exchange risk was minimal.

As I pointed out in my recent essay, A New Bretton Woods, commodity prices are also much more volatile in a fiat world. Rahn lists several reasons for the recent volatility:

  • Uncertainty over President-elect Barack Obama’s tax and regulatory plans.
  • Continued confusion and uncertainty over Treasury’s bailout policies.
  • Uncertainty over how much OPEC will reduce oil production.
  • Questions about whether the risks of deflation or inflation are greater and what the Fed plans to do in either case.
  • And how far the European and Japanese central banks will reduce interest rates to combat their respective recessions.

While I won’t blame President elect Obama for all the volatility, the lack of clarity on his part about future policy is certainly having an effect. His campaign rhetoric (and I hope that’s all it was) was not market or business friendly and in the current environment he needs to reassure the public that he at least won’t make things worse. The video message he sent to the global warming delegates in L.A. yesterday did not help:

In his message, Obama pledged “a new chapter in America’s leadership on climate change . . . that will start with a federal cap and trade system. We will establish strong annual targets that set us on a course to reduce emissions to their 1990 levels by 2020 and reduce them an additional 80% by 2050.”

Introducing a giant carbon tax (which is all a cap and trade system really is) is not what business or the markets need right now. We can’t afford it, it won’t work, it will kill what’s left of the economy and its based on junk science. Why in the world is this a priority and why did he have to bring this up now?

Getting our economy growing again will not be accomplished by bailing out failing companies. It won’t happen through higher taxes or higher government spending. Obama needs to let someone know he understands at least some of that and he needs to do it soon.

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