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RAHN: Raising stock prices

By Richard Rahn | Wednesday, November 12, 2008

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COMMENTARY:

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.

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.

The advent of international commodity cartels, such as the Organization of Petroleum Exporting Countries (OPEC), has also added uncertainty in that forecasting the demand and supply of a commodity such as oil is no longer enough, but traders now also must guess what the government leaders who control OPEC are likely to do.

As politicians become more prone to fiddle with the tax code, particularly taxes on business and capital gains, risk is also increased. And finally, the huge growth in both existing and proposed regulations and regulatory costs is adding another great element of uncertainty to estimating the value (future profitability) of any company.

The specific reasons for the current volatility are: