How Markets Control Everything - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 11 October 2013
How Markets Control Everything A  A  A

- By Asad Dossani, Author, The Lucrative Derivative Report

Asad Dossani
The latest crisis affecting global markets is the debt ceiling crisis in the US. If the US government does not raise the debt ceiling next week, they risk defaulting on their debt. Given the size and importance of the US economy, this affects all markets around the world.

What is peculiar about this crisis is that it is has been manufactured entirely by politicians. The crisis is the result of failed negotiations between the two main political parties in the US. The US may default on its debt, even though the fundamentals of the US economy are just fine.

Recently, there are signs that a deal to raise the debt ceiling is taking place. Why is this occurring now? For months until now, there have been no negotiations on the debt ceiling. After the politicians spent weeks trading insults, they are now ready to talk to each other. Why?

The answer of course is the markets. Markets have a lot of power. Politicians don't seem to listen to voters, but they definitely listen to the markets. Over the last month, stock markets have been falling significantly, especially in the US. The markets were falling due to the brewing debt ceiling crisis. In the last week, markets fell significantly, and rose only after news that a deal was soon to occur.

The fact is that politicians are acting because the markets are forcing them to. In addition to stock markets falling, US bond yields were rising, indicating greater risk of holding US government bonds. The cost of insuring against a US default rose significantly too. The markets would continue to get worse unless this got solved. And so US politicians have finally stepped up and are making an attempt to solve this crisis.

This is not the first time that market actions are making politicians act. During the Greek debt crisis, Greece and other indebted Eurozone countries were forced to implement austerity measures and sort out their public finances. Why did this occur? Once again, the markets made politicians act. Greek bond yields soared to extremely high levels, and this forced them to seek a bailout and implement austerity measures.

This has happened in India too. In 1991, we faced a balance of payments crisis. It was the market crisis that led to government reforms towards liberalization. Over the month of August, the rupee crashed. This has spurred the RBI to enact new reforms that are good for the economy.

What is good about all these examples is that adverse market reactions tend to make politicians do the right thing. Markets are powerful and exert significant control over the actions of elected officials. And this is definitely a good thing.

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is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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1 Responses to "How Markets Control Everything"

Nabarun Halder

Oct 13, 2013

Thanks for the brilliant discourse.

The question that remains unanswered is if the growing US deficit and their Continuing Resolutions to push all the financial woes under the carpet are good or bad for the long term health of the country and global financial system.

For a trader in currency, equity or debt market, the responses are quite predictable as these are based on following the trend whatever it may be. But I wonder if there are long term implications in the series of actual and potential defaults we are watching in the developed countries, their bloating deficits and the effect these have on the emerging economies.

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