Politicians have tried to blame the markets for a series of different but overlapping financial, fiscal and economic crises over the last few years. Their political response has been to curb the markets and plan and regulate even more, writes Prince Michael of Liechtenstein.
Movements in the price of gold, oil and agricultural commodities are worth examining in this context along with analysis of the causes and consequences.
Gold is not only a commodity, it is a currency reserve the world trusts and gold price movements provide a good indicator of the trust people have in their currencies.
A graph from a Commerzbank economist showed that the price of gold denominated in euros had a direct correlation to the total balance sheet of the European Central Bank. The ECB’s balance sheet will grow with its new quantitative easing and so probably will the price of gold in euros.
The more artificial money or ‘fiat money’ - which derives its value from government regulation - is produced by central banks, the more trust decreases.
The drop in the euro’s value against gold does not mean the gold price in American dollars will increase as the euro could continue dropping in value against the dollar.
Oil is the world’s most prominent commodity and its price has fallen dramatically. Superficially, this should make us happy as it helps the economy in many countries. As all oil reserves are full, the price drop could be considered part of normal supply and demand. But this is not the case.
The cost of extraction and oil quality varies. Some producers, such as Saudi Arabia, can still cover their costs at today’s prices, others cannot and should cut production. But most of the oil is produced by state-owned companies, with sales which are driven by revenue rather than economics. Some, such as Russia and Venezuela, continue producing, feed the over-supply and distort the markets to generate revenue.
The US is the only functioning market and these producers are privately owned. Some shale producers have stopped production. Others may follow. But the overall volume of production has not decreased because those making a marginal contribution are increasing production to maximum to cover overheads.
Saudi Arabia is the one country which could influence the price of oil. If the OPEC cartel still functioned it would have cut production. Some people suspect Saudi Arabia is keeping the oil price low to either damage Iran and/or to make American shale production uneconomic.
Mohamed Al-Mady, the Saudi representative on OPEC, has denied this allegation, but he believes that the oil price will remain low. This is logical, looking at the current political situation, and may be confirmed if sanctions against Iran are lifted and their oil production comes on to the world market. The oil price is therefore very political.
Low energy prices are good for the economy in the short term but provide the wrong incentives in the long term.
Agriculture is highly subsidised in many countries. Commodity prices are strongly influenced by climate and subsidies as production is directly subsidised or indirectly by help to farmers. These are also highly political issues.
Such political decisions influence price structures in commodity markets and influence - positively or negatively – global production patterns. Big subsidies in some countries artificially lower prices on the world market and can impede economic production in other countries.
This is another negative aspect of protectionism.
These examples show that price distortions and market excess are not caused mainly by market failures but by outside factors - especially political decisions. These are frequently short term, not thought through, and purely populist or a mix of all these.
This also proves a lack of geopolitical knowledge by governments and leads to unintended consequences.