Perseverance: Looking for Signs of Free Market Activity on Earth
“Beyond a critical point within a finite space, freedom diminishes as numbers increase. This is as true of humans as it is of gas molecules in a sealed flask. The human question is not how many can possibly survive within the system, but what kind of existence is possible for those who so survive.”
Frank Herbert, Dune
Edward Bernays is known as “the father of public relations.” In 1928, he wrote a famous book called Propaganda , explaining that collective decisions are not the sum of independent individual choices, but rather the result of complex intersubjective interactions that a few “invisible” people can influence to rule over the masses. According to him, “engineering consent” of the general public would even be vital for the survival of democracy.
However, his book is not only about politics, as his central hypothesis seems also valid to analyse the commercial success or failure of corporations. More interestingly, Bernays explained that such ideas even apply to investing: “A man sits in an office deciding what stocks to buy. He imagines, no doubt, that he is planning his purchases according to his own judgment. In actual fact his judgment is a melange of impressions stamped on his mind by outside influences which unconsciously control his thought.”
In other words, the theoretical idea of “free capital markets,” in which prices would be the result of the independent decisions of agents, does not fit with reality. Keynes also stated that investors were not making their decisions upon the study of so-called fundamentals. Indeed, he introduced the idea of a “beauty contest” in which individuals are trying to guess the choice of other participants .
More recently, it has been suggested that intersubjective narratives might play a significant role in markets self-organization, as the spontaneous response of a system characterized by growing uncertainty, and in which individuals need to interact with each other to maximize their chances of survival despite limited information and bounded rationality .
Most of the time, narratives are pure endogenous objects. They spread and evolve over time, depending on feedback loops, and they compete with other narratives. Nevertheless, according to Bernays, a small group of “invisible” persons may still be able to influence the market, by manipulating the crowd and thus reinforcing a narrative at the expenses of the others.
“The Fed Has Our Backs.”
So, what if this small group of “manipulators” was the Federal Reserve? And what if the dominant narrative was the fact that “yields will never go up again,” or its corollary “stocks only go up?”
Most investors, including professional hedge funds or asset management firms, have been more and more influenced by the idea that every stock market dip should be seen as buy opportunity, as “central bankers will never let equities crash.” Even if, some of them still question the rationality behind that belief, most of them have caved to the narrative (see The Fed Put Narrative Era).
Of course, some people argue that lower interest rates are fundamentally positive for stocks, because of “an attractive equity risk premium”, TINA, and whatsoever. The truth is, there has never been any evidence of a strong and stable relationship between money supply and equity prices. Indeed, one could also (and maybe should) treat ZIRP as a symptom of economic depression.
But the power of narratives implies that the Fed has managed to make participants believe that any additional intervention should be seen as a bullish message. As that conviction has been reinforced by numerous positive feedbacks for years, almost everyone is now convinced that somehow it might be true, or at least that it is useless to fight the trend, leading to Pavlovian panic-buying rallys whenever Jerome Powell speaks. The more people follow the Fed put narrative, the more prices go up, and so on. This is what George Soros calls reflexivity .
It does not really matter whether the narrative makes sense from a rational perspective, since a lie told enough becomes the truth.
Even if narratives could be seen as a form of “collective intelligence,” one should not consider that they lead to “intelligent markets” in the sense of “wisdom.” Indeed, a dominant narrative can generate severe disconnects vs fundamentals, also known as “speculative bubbles.”
Of course, the Fed and the Treasury keep telling fairy tales to the general public, claiming that “it is hard to see a bubble.” But there is no doubt that we are experiencing one of the craziest manias ever and that they have played a significant role in that. For French readers, I recommend a book of Sebastian Dieguez about the extensive use of bullshit in politics and in the media , as you will easily note that it perfectly applies to the Fed’s communication.
Central bankers are not the only persons mastering the art of collective persuasion in finance. Former president Donald Trump was also an expert in pushing equity indices higher with his tweets. So is Elon Musk, when it comes to Tesla’s share price, bitcoin, dogecoin, or even NFTs. As we are living in the FOMO era, it seems quite easy to manipulate the crowd and create the conditions for a panic short squeeze.
Why are all those people fueling extreme narratives? And why has the Fed been involved in that pump scheme since the end of the 1990s?
The Great Disillusion
In my opinion, America faces a structural problem, as this country is actually getting poorer from an economic perspective. There has been almost no organic growth for years (i.e. GDP growth that was not fueled by debt), the trade deficit has kept widening, and the Fed’s balance sheet is going to the moon, just like public and private debt.
Nevertheless, the idea that domestic shareholders, bondholders, or property owners might experience wealth compression seems highly unacceptable for a country built upon the idea of infinite individual prosperity. In this context, a stock market crash is likely to be a collective disaster for the US.
This is why authorities are doing “whatever it takes” to maintain that illusion of wealth, using well-known tricks like monetary policy and collective manipulation.
Of course, the beauty of that situation is that we are only talking about a small part of the population, aka “the Haves,” as a majority of Americans have not really seen their net worth increasing with QE. But who cares?
Today, the key question is, can monetary illusion last forever? Indeed, even if it is possible to bullshit the masses, there have a to be a few consequences.
Many of us have already exposed undesirable effects caused by ultra-dovish policies, such as asset hyperinflation which is responsible for the squeeze of working and middle classes (see There Ain’t No Such Thing as A Free Lunch – Part 1), or the problem of bad capital allocation (see Part 2).
COMEX and the Art of Manipulation
But the critical point is the ability for America to stick to such policies without destroying the almighty US dollar system. And this is precisely where a second axis of market manipulation has taken place for years, as the BIS and other commercial banks have been said to pressure market prices of paper gold and paper silver.
My apologies to bitcoin lovers, but the biggest threat for the dollar has always been the price of precious metals, meaning that it has always been important for the survival of the system that gold and silver do not get hyperinflated. Indeed, if the value of the dollar collapses with respect to metals, then foreign central banks could finally decide to settle trades in another currency backed by gold and/or silver. Like it or not, but those institutions hold metals, not cryptocurrencies.
To sump up, the Federal Reserve and the Treasury are going all-in to hide wealth compression in the US, while making sure that they still control the world’s financial system despite severe distortions created by infinite QE.
Why are other countries accepting that? Probably because they do not really have the choice, or they do not have the courage to denounce that unfair situation. Some of them, like European countries, even benefit from that situation.
Contrary to common belief, we have never lived in a free global system, where each nation could benefit from free trade and free capital mobility. It has always been a system designed by the US, and for the US and their main allies.
Somehow, the balance of power in the world may be ruled by the second law of thermodynamics, which means that a group of individuals cannot only get “freedom” and prosperity at the expenses of the others. If you are rich, then other persons have to be poor somewhere.
An Offer You Can’t Refuse
Remember what John Connally said: “The dollar is our currency, but it’s your problem.”
In 1985, the Japanese government almost committed hara-kiri, as the Plaza accord was about to destroy the value of investments made by Japanese agents in the US. The objective of the American administration was to stop the dollar bull run, fueled by Paul Volcker’s aggressive rates policy to counter inflation, restore their manufacturing competitivity, and also weaken their main economic rival (i.e. Japan).
Japan did not really have the choice, as this country has relied on the US for its military protection since the defeat of WW2. And even at that time, it was clear that the West was far from the theoretical ideas of free trade and perfect floating exchange rate mechanism. One country is deciding, and the all the others must comply with its decisions.
Brave New World
Bernays suggested long ago that democracy does not necessarily mean that people decide on their own. And the concept of “progress” can be very tricky. In fact, as Harari wrote in Sapiens: “There is no way out of the imagined order. When we break our prison walls and run towards freedom, we are in fact running into the more spacious exercise yard of a bigger prison.” 
The present post might be labelled as “conspiratorial” by people such as Neel Kashkari. But who is still listening to those who have claimed for years that unconventional measures were “temporary” and that they had “nothing to do with the stock market,” while panicking whenever the S&P 500 was dropping by more than ten percent?
Follow the White Rabbit
At this stage of the “Everything bubble,” even though the concept of “freedom” can be misleading, we all have an important individual choice to make:
Either we take the blue pill, and we stay in a fantasy bubble fueled by the “invisible hand” of the Federal Reserve, dreaming of becoming rich thanks to the Nasdaq, YOLO trades, SPACs, cryptos, NFTs, and whatsoever.
Or we take the red pill, and we accept the hard truth about wealth in America and Europe, and what it means for the future of the world.
Should we be more optimistic for the West? Well, remember what Morpheus told Neo: “Many of them are so inured, so hopelessly dependent on the system, that they will fight to protect it.”
After all, people keep saying that “it’s the future” and that we are going “to the moon.”
 Bernays, E. (1928) Propaganda. Routledge.
 Keynes, J.M. (1936) The General Theory of Employment, Interest and Money. Harcourt Brace and Co, New York City.
 Bocher, R. (in press) The Intersubjective Markets Hypothesis. Journal of Interdisciplinary Economics.
 Soros, G. (2013) Fallability, Reflexivity, and the Human Uncertainty Principle. Journal of Economic Methodology.
 Dieguez, S. (2018) Total Bullshit ! Au cœur de la postvérité. Presses universitaires de France, Paris.
 Harari, Y.N. (2014) Sapiens: A Brief History of Humankind. Harvill Secker, London.