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Wednesday, March 7, 2012


There are still many many analysts, brokers, traders, investors who profess not to believe in market manipulation - and trade, analyze, invest as though manipulation does not or could not exist.  There are even many, like Dennis Gartman, who regularly ridicule the very idea that manipulation could exist.

Let me point out that the Federal Reserve Bank has a license to print money.  They can use that money in any way they like to accomplish any purpose.they like.  And nobody can legally audit or monitor their activities.  So clearly they have the ability to manipulate the markets simply by dropping unlimited cash to buy unlimited contracts on any futures exchange through any member bank or dealer.

Why on earth would anyone believe they don't do this thing that they can do?

Why would anyone believe they would refrain from an activity that clearly benefits them - in the short run.

Their stated goal is to support the stock market.  Bernanke sites the stock market level continually as a proof that his policies are working.  Why wouldn't he then support the stock market?

On the other hand, Gold is widely regarded as the most effective measure of the efficacy of Fed policy.  A high gold price is regarded as proof the Fed is failing.  Bernanke and everyone else understands this.  Why then would he not cap the gold price?

Apart from the mountains of anecdotal evidence of market manipulation - there's this simple common sense test: Why would someone with the power and motive to easily do something not do it?

And why not do it?

The answer is that manipulation is a very temporary fix for complex structural problems.  And manipulation of prices only encourages those contributing to the structural problems to continue their destructive practices.  In fact it rewards them for practices that ultimately destroy the economy.

Specifically: Manipulation rewards bank and Hedge Fund traders for continuing to use debt to leverage enormous bets through complex derivative instruments in order to make large trading gains.  This continually increases the amount of debt in a system that is already drowning in debt.  And this directs the energies of the banks towards trading gains rather than towards the efficient distribution of capital. 

And worst of all, ultimately, manipulation always fails.  It's only a matter of when.  And when it does, manipulated markets catapult in the exact opposite direction.

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