Click amount to donate direct to CounterPunch
  • $25
  • $50
  • $100
  • $500
  • $other
  • use PayPal
Keep CounterPunch ad free. Support our annual fund drive today!

The Myth of the Rational Market


One of the great economic myths is that markets are rational. Not a day passes without this myth being disproved scores of times, but the myth persists.

For example, on March 14 Bank of America/Merrill Lynch reported that “yesterday US markets started the day off with a strong rally after the solid retail sales report. . . .  tailwinds are helping boost global equity markets today.”

The “solid retail sales report” for February consists of a 1% nominal gain.  That is, the increase is not deflated by the month’s inflation rate, which will be released on March 16. In other words, if very much of the 1% nominal gain in retail sales is due to higher prices, the inflation adjusted gain will not be statistically significant.  The “rational market” took off without waiting to find out whether the gain was real.

Moreover, as statistician John Williams has established, the official Consumer Price Index (CPI) understates inflation. If an honest measure of inflation was used, retail sales could be in negative territory.

The “rational market” loves deception as long as it provides an excuse for equities to rise. The Federal Reserve’s focus on “core inflation,” which does not include rising food and energy prices, allows Federal Reserve officials to maintain that the inflation rate remains below target. By pretending that there is no inflation, the Federal Reserve continues to support banks with near zero interest rates while depriving savers and retirees of interest income. With no income from savings, people are forced to consume their capital. Thus, the Federal Reserve’s policy makes bankers richer and the country poorer.

Meanwhile, those whose old age security is based on pensions are confronting insecurity. Many with private pensions were harmed by the financial crisis.  Those dependent on Social Security and Medicare are finding that these programs are being blamed for budget deficits caused by multi-trillion dollar wars of choice.  Those expecting pensions from state and local governments are finding that governments are unable to make good on underfunded pension benefits.

State and local governments counted on a growing economy and rising consumer incomes to provide the tax base to make good on underfunded pensions. These governments did not foresee that US corporations would destroy their tax base by moving manufacturing, engineering, IT, research and design jobs overseas. The absence of growth in real incomes for the vast majority of the people and the capture of productivity gains by capital at the expense of labor have added to the budget woes of most state and local governments.

John Rauh at Northwestern University estimates that the unfunded obligations of state and local governments amounts to $4,400,000,000,000, an amount that is within the ballpark of Joseph Stiglitz and Linda Bilmes’ estimate of the cost of the Iraq and Afghanistan wars.

Money that could have saved Americans’ pensions instead was allocated to profits for armament corporations and to advance Israel’s territorial hegemony.

When the Occupy Wall Street movement says that Washington rules for the benefit of the 1%, OWS is not far off the mark.

PAUL CRAIG ROBERTS was an editor of the Wall Street Journal and an Assistant Secretary of the U.S. Treasury.  His latest book, HOW THE ECONOMY WAS LOST, has just been published by CounterPunch/AK Press. He can be reached through his website

Paul Craig Roberts is a former Assistant Secretary of the US Treasury and Associate Editor of the Wall Street Journal. Roberts’ How the Economy Was Lost is now available from CounterPunch in electronic format. His latest book is The Neoconservative Threat to World Order.

More articles by:

2016 Fund Drive
Smart. Fierce. Uncompromised. Support CounterPunch Now!

  • cp-store
  • donate paypal

CounterPunch Magazine


October 27, 2016
Paul Street
An Identity-Politicized Election and World Series Lakefront Liberals Can Love
Matthew Stevenson
Sex and the Presidential City
Jim Kavanagh
Tom Hayden’s Haunting
CJ Hopkins
The Pathologization of Dissent
Mike Merryman-Lotze
The Inherent Violence of Israel’s Gaza Blockade
Robert Fisk
Is Yemen Too Much for the World to Take?
Shamus Cooke
Stopping Hillary’s Coming War on Syria
Jan Oberg
Security Politics and the Closing of the Open Society
Ramzy Baroud
The War on UNESCO: Al-Aqsa Mosque is Palestinian and East Jerusalem is Illegally Occupied
Colin Todhunter
Lower Yields and Agropoisons: What is the Point of GM Mustard in India?
Norman Pollack
The Election: Does It Matter Who Wins?
Nyla Ali Khan
The Political and Cultural Richness of Kashmiriyat
Barbara Nimri Aziz
“It’s Only a Car!”
October 26, 2016
John W. Whitehead
A Deep State of Mind: America’s Shadow Government and Its Silent Coup
Eric Draitser
Dear Liberals: Trump is Right
Anthony Tarrant
On the Unbearable Lightness of Whiteness
Mark Weisbrot
The Most Dangerous Place in the World: US Pours in Money, as Blood Flows in Honduras
Chris Welzenbach
The Establishment and the Chattering Hack: a Response to Nicholas Lemann
Luke O'Brien
The Churchill Thing: Some Big Words About Trump and Some Other Chap
Sabia Rigby
In the “Jungle:” Report from the Refugee Camp in Calais, France
Linn Washington Jr.
Pot Decriminalization Yields $9-million in Savings for Philadelphia
Pepe Escobar
“America has lost” in the Philippines
Pauline Murphy
Political Feminism: the Legacy of Victoria Woodhull
Lizzie Maldonado
The Burdens of World War III
David Swanson
Slavery Was Abolished
Thomas Mountain
Preventing Cultural Genocide with the Mother Tongue Policy in Eritrea
Colin Todhunter
Agrochemicals And The Cesspool Of Corruption: Dr. Mason Writes To The US EPA
October 25, 2016
David Swanson
Halloween Is Coming, Vladimir Putin Isn’t
Hiroyuki Hamada
Fear Laundering: an Elaborate Psychological Diversion and Bid for Power
Priti Gulati Cox
President Obama: Before the Empire Falls, Free Leonard Peltier and Mumia Abu-Jamal
Kathy Deacon
Plus ça Change: Regime Change 1917-1920
Robin Goodman
Appetite for Destruction: America’s War Against Itself
Richard Moser
On Power, Privilege, and Passage: a Letter to My Nephew
Rev. William Alberts
The Epicenter of the Moral Universe is Our Common Humanity, Not Religion
Dan Bacher
Inspector General says Reclamation Wasted $32.2 Million on Klamath irrigators
David Mattson
A Recipe for Killing: the “Trust Us” Argument of State Grizzly Bear Managers
Derek Royden
The Tragedy in Yemen
Ralph Nader
Breaking Through Power: It’s Easier Than We Think
Norman Pollack
Centrist Fascism: Lurching Forward
Guillermo R. Gil
Cell to Cell Communication: On How to Become Governor of Puerto Rico
Mateo Pimentel
You, Me, and the Trolley Make Three
Cathy Breen
“Today Is One of the Heaviest Days of My Life”
October 24, 2016
John Steppling
The Unwoke: Sleepwalking into the Nightmare
Oscar Ortega
Clinton’s Troubling Silence on the Dakota Access Pipeline
Patrick Cockburn
Aleppo vs. Mosul: Media Biases