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By James R. Cook

Once upon a time there was a free market in money, interest rates, gold and the stock market. The free market is the natural order of things, the purest form of freedom. Individuals make choices for themselves. They buy or sell as they please. They select what they want. Prices arbitrate supply and demand. The consumer is king. The buying decisions of the people determine who succeeds and who fails. It’s the way the world works best. Government policies that intervene in the market undercut both freedom and efficiency.

For 6,000 years people selected gold and silver as money. Then governments intervened and abolished gold as money. Next they gave the boot to silver. This was contrary to what had naturally evolved in the free market. But these steps gave government the ability to create new paper money at a greater rate than gold money could be mined from the ground. Getting control of money was government’s most significant intervention into the free market.

The government also manipulates the level of interest rates. In the natural order of things interest rates are set by the free market. By artificially lowering interest rates, governments could expand money and credit far beyond what the free market would allow. The dire consequences of unbridled money and credit creation now threaten to introduce the greatest financial disaster in history. Today the government feverishly engineers a massive new wave of money and credit. As each surge of new money works its way through the system another becomes necessary to forestall a crash. The easy credit of the prior period causes businesses to mistakenly expand, consumers to spend rather than save, and risky speculation to override prudence. The boom caused by low rates inevitablyleads to a bust. A depression liquidates the bad business schemes and misplaced investments brought about by cheap money. But during our recessions a new credit expansion has always thwarted the cleansing process. In fact, poorly conceived business expansion and malinvestments are still hanging around from prior recessions propped up by bad monetary policy. This deadwood must eventually add to the ultimate conflagration.

Our government also intervenes regularly in foreign exchange markets. They support the dollar when it corrects downward and keep it at a high level. These manipulations counter the natural corrective forces of the market. Worst of all, it makes U.S. goods so expensive it kills off domestic production. We can’t compete with foreign manufacturing. All those dollars going overseas rather than to American companies depress profits far more than excessive inventories (supposedly the main cause of weakening profits).

The government also manipulates the gold market. They lease out the government’s gold to keep the price down. This obtuse way of dumping gold aims to eliminate gold as competition to the dollar. In addition, there’s no public anger about peeling off the national patrimony. Gold was confiscated in 1934 to support the dollar. By first prohibiting the ownership of gold and then by holding down its price, the role of gold as an alternative money has diminished. That’s why today’s savers and investors rely solely on paper assets and stand far greater risk of having their wealth destroyed.

Immediately following the stock crash of 1987 the Federal Reserve met secretly. Some people think a regular program of propping up stocks got started back then. The Dow Jones Industrial average never reacted again as it had in the sixties and seventies. Drops in the averages were far milder than the earlier declines. Whenever the market began to fall, a sharp upturn began on the third or fourth day of declines. This kind of manipulation without full disclosure would be tantamount to securities fraud so it’s hard to believe that it’s true. What makes it plausible is the tremendous interventionist tendencies of the Fed and the recent administration.

One thing’s for certain, the excesses in the NASDAQ couldn’t have happened if market corrections unfolded with the severity of those in prior decades. Enough fear and caution would have gripped stock players to prohibit such an exorbitant bubble. So, if government maneuvering held up the Dow, it’s responsible for unheard of valuations, price extremes and painful losses. (There’s always a flip side to intervention.) It explains the relentless pathology of buying every dip and today’s insanely high price earnings multiples. Why didn’t the manipulators hold up the NASDAQ? It’s the Dow that effects public confidence.


Government attempts to control economic outcomes are right out of the socialist playbook. Unfortunately, whenever government sets out to correct what they think is a social or economic problem, it makes matters worse. Over the long run intervention must fail. It runs contrary to the natural state of affairs and smooth harmony of the market. Interventionists try to trump freedom and free choice, but by definition they must fail. What they want contradicts free people exercising free choice.

We can only speculate on how the end of intervention will come about. I predict it will be the colossal failure of the U.S. currency and the U.S. economy. But remember, there will be more and greater attempts at intervention as things fall apart. For example, we have had eleven interest rate cuts and still anticipate further aggressive attempts to push out money and credit.

Look for the greatest failures to occur in those areas most affected by our interventionist monetary policy (loose money). Stocks maintain the greatest vulnerability. Asset inflation feels great while a bubble exists. But with stocks at 40 times earnings and profits and business investment still plunging, there may not be enough new money to keep hot air pumping into this balloon. Anyone who hasn’t been hypnotized by Wall Street can see the crazy valuation extremes for themselves. How long this balloon ride will last depends on how much money the leveraged speculators can borrow for stock purchases. It’s touch and go from here.

The government’s easy credit also fostered a housing bubble, a refinancing bonanza, a new construction boom and escalating housing prices. None of these excesses could ever take place in a market without intervention. A deep slump here would collapse home prices and threaten the solvency of the whole mortgage boondoggle. You might think it’s good to refinance the homestead every couple of years and buy a bunch of stuff with the proceeds. But it’s debt and it must be repaid. It seems fine when houses are doubling in price, but plunging home values and a big contraction will sweep away Freddie and Fannie, the mortgage industry, the financial entities holding the mortgage bag and a host of homeowners. They’ll be talking about the bang from this exploding bubble until the end of the millennium.

Retailing is another area of grotesque over-expansion brought on by money and credit growth. A consumption binge on the part of consumers fostered a retail building boom like no other. Most of this was centered in mall construction and superstores. Shopping became another form of entertainment. Retailing is the ripest area to be obliterated by a slowdown and collapse. It stands to be devastated.


There’s plenty of other bubbles, dislocations, malinvestments, credit nightmares, derivatives, debts, speculative excess and other creepy economic circumstances brought on by intervention. All are ready to dump on us. The magnitude of government inflating makes it possible that an avalanche of bad economic news will threaten the solvency of the U.S. government itself. All the government guarantees, insurance plans, bailouts, subsidies, employment benefits, health costs and spending programs are forms of intervention. Once they all kick in while tax revenues plunge, the deficit will be huge and perhaps unmanageable. It may be impossible to finance it all. The government can be trapped by it’s own exorbitant promises. It can become insolvent.

Frankly, a dead-broke government, a cheap dollar and a stiff depression would clear up a lot of junk. If allowed to run its course without additional government intervention, a depression can have a healthy effect by eliminating the many unsound ventures found in both the private sector and the government. It’s doubtful, however, that we’ll get a chance for a fresh start on a new playing field. Government is a parasite on the productive sector and it will do everything imaginable to keep feeding itself and those who support it. The coming crisis will be big, bad and ugly. It will redefine the nation. We will either embrace more intervention (socialism) and destroy our greatness, or we will shed ourselves of intervention and buy another century of grandeur.

We are at the fulcrum of history. The events unfolding now and over the near term will be ever more astonishing. This is the big one. Whether it takes the form of a monstrous bust or an inflationary blowoff, it’s all part of the same script. There’s no way we can get a handle on it, no way we can see it clearly. But it’s out there, it’s formidable and it’s scope and size dwarf anything that’s gone before.

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