Free Market Versus Government Intervention

The Importance of Free Markets


A free market is a competitive market where prices are determined

by supply and demand.

Free markets differ from situations encountered in controlled markets or a monopoly, which can introduce price deviations without any changes to supply and demand. 

Advocates of a free market traditionally consider the term to imply that the means of production is under private, and not state control or co-operative ownership.  This is the contemporary use of the term "free market".

A free-market economy is one within which all markets are unregulated by any parties other than market participants. 

In its purest form, the government plays a neutral role in its administration and legislation of economic activity, neither limiting it (by regulating industries or protecting them from internal/external market pressures) nor actively promoting it (by owning economic interests or offering subsidies to businesses or R&D).

The theory holds that within an ideal free market, property rights are voluntarily exchanged at a price arranged solely by the mutual consent of sellers and buyers. 

By definition, buyers and sellers do not coerce each other, in the sense that they obtain each other's property rights without the use of physical force, threat of physical force, or fraud, nor are they coerced by a third party (such as by government via transfer of payments) and they engage in trade simply because they both consent and believe that what they are getting is worth more than or as much as what they give up. 

Price is the result of buying and selling decisions en masse as described by the theory of supply and demand.

Free markets contrast sharply with controlled markets or regulated markets, in which governments more actively regulate prices and/or supplies, directly or indirectly, which according to free-market theory causes markets to be less efficient.

Why now, things really are different this time.

No doubt, you’ve probably heard this annoying, widely overused 

and usually incorrect phrase:

“Things are different this time.

Normally, that’s simply untrue – as human nature remains the same (which it always has and always will), overall market behavior will generally remain the same.  

As Mark Twain had so cleverly observed

“History does not repeat, but it sure does rhyme.”

Other than the massive – and never before witnessed – global debt (money for nothing…), we now are seeing Federal government market intervention both in the US and abroad, changing the general “dynamic” of market behavior.

This, however, is a temporary change / fix – or the equivalent of  putting a Band-Aid on a bullet wound – if you will.

Danger of Federal Reserve Intervention

Quantitative Easing & Artificially Low Interest Rates


The Quantitative Easing programs (QE1, QE2, Operation Twist, QE3, etc.) is simply creating more debt to solve current debt problems.  We’re also seeing it on an ever growing scale in Europe as the International Monetary Fund (IMF), European Union (EU) and European Central Bank (ECB) are throwing over $1.2 trillion to stabilize failing European banks holding billions in toxic assets (see "Collapse of the Euro" page).

On the surface, that sounds absurd – that’s simply because it is!

It’s like pouring gasoline on a raging fire thinking that the liquid will put the fire out.

To quote George HW Bush:  “Not gonna happen.”

This, combined with rapidly growing government regulations / restrictions on private sector businesses, is creating volatility never seen before in the global equity markets – not to mention the global currency and bond markets.

The bottom line:  No entity (global governments, international banks, etc.) are more powerful than the free market.  Attempting to control the free market has proven throughout history to result in a miserable epic failure.

That is one thing that is NOT DIFFERENT THIS TIME!

Despite these “Band-Aids” and quick fixes, which are simply “kicking-the-can-further-down-the-road", eventually the free (Laissez-faire) markets will dominate over these artificial / man-made interventions and stimuli and the resulting corrections will be much more painful and dramatic than if the governments had initially just “left the markets alone”  - the meaning of Laissez-faire - to “do their thing” / run their natural course.

Don’t get sucked in by these massive rallies – although things may temporarily look good / bullish on the water’s surface, the more important / underlying tide is still quite bad / bearish – and decades of abuse in the financial markets are certainly not going to repair themselves overnight!

Sure, if we had let the free markets “run their natural course” back in 2007 – 2009,  it would have been painful for awhile, but when these chickens come home to roost this time (because of government intervention / abuses), things will be much more painful and last a heck of a lot longer.

So, despite our recent 2.5% GDP growth in Q3, don’t be fooled by these “Happy Days are Here Again” chatter being shouted by the mainstream financial media – our overly indebted society will eventually have to “pay the piper” and it will get pretty ugly before it gets better.

Eventually, once all the abuse and corruption is washed out of the system, things will get much better, but not before some harsh and enduring economic pain, which could last several years or more.

Don’t be a victim – stay informed and invest accordingly – and you’ll not only survive this economic “reboot”, but you will prosper immensely from it.

Most of the biggest fortunes in the last several centuries have been made in times of financial crisis!

Join Trader Screen in taking advantage of these once-in-a-lifetime opportunities!

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