Vijay Kumar Gaba

 One of the most important and fundamental principles of economics is that “in a ‘free market’ current price of anything having an economic value is a function of demand and supply of such things at that particular point in time.” Of course there could be multiple factors that may impact the demand and supply of a thing; but usually nothing impacts the “price” directly other than the factors demand and supply.

In a ‘controlled and/or manipulated market’ the prices of things are fixed by the controlling authorities (or forces); regardless of the demand and supply for such things. In such markets, usually demand and supply of things are controlled and/or manipulated; or demand and supply duly get adjusted to the fixed/manipulated prices.

If we apply this core principle of economics to the world around us, we may discover that a significantly large part of global markets is presently either controlled or manipulated. The free market may only be prevalent in textbooks, policy documents and political speeches.

In the modern world, money is arguably the largest factor of production in the world. The price of money (interest rate) should ideally be a function of demand and supply of money. In case of excess supply the interest rates should be lower and vice versa.

In the past three years (2020-2022), nominal world GDP is estimated to have grown by less than 19%; whereas the money supply has increased by more than 50%. In spite of recent marginal contraction in money supply, the supply must be exceeding demand. Thus, there is no economic case for rise in interest rates; but it is happening. Obviously the money market is a controlled/manipulated market where central bankers and other major lenders may be controlling/manipulating the price of money to meet their other economic, political and/or geopolitical goals. (I refuse to accept the argument that money supply manipulation is happening to control inflation. There is no evidence of money supply impacting inflation in the past 15years at least. Else we should have 10% CPI inflation in 2010-12.) 

This distortion in the price of money has material repercussions in the market for goods and services across the world. It is impacting demand and supply (and therefore prices) of almost everything.

A significant part of the global trade is priced in terms of US dollar (USD). In a free market the price of USD (exchange rate) should also be a function of its demand and supply. In the past 33 months the supply of USD (M2) has increased by more than 50%, from $15.5trn at the end of 2020 to 21.7trn at the end of September 2022. In this period, we have seen global demand for USD diminishing, as reflected by the fall in global forex reserves. As per IMF the demand for USD by global central bankers is down to 25yr low. (see here) 

Under these circumstances the price (exchange rate) of USD must fall materially. To the contrary it has strengthened against most currencies. Obviously, the price of USD and some other dominant currencies is also manipulated.

Same argument could be extended to the prices of energy, gold, travel, wages in many jurisdictions, communication, education etc.

Under these circumstances I do not find it hard to believe that in the extant global order, ‘free market’ is a myth; and if we earnestly accept this premise, few things will remain the same insofar as the investment strategy and valuation methods are concerned.

I believe that we might soon need to adjust valuation models and investment strategy to factor in probabilities of frequent and strong state interventions; diminishing competition; radical policy shifts and sudden collapses.