FacebookTwitterGoogle+RedditEmail

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

More articles by:

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.

Weekend Edition
April 20, 2018
Friday - Sunday
Paul Street
Ruling Class Operatives Say the Darndest Things: On Devils Known and Not
Conn Hallinan
The Great Game Comes to Syria
Jeffrey St. Clair
Roaming Charges: Mother of War
Andrew Levine
“How Come?” Questions
Doug Noble
A Tale of Two Atrocities: Douma and Gaza
Kenneth Surin
The Blight of Ukania
Howard Lisnoff
How James Comey Became the Strange New Hero of the Liberals
William Blum
Anti-Empire Report: Unseen Persons
Lawrence Davidson
Missiles Over Damascus
Patrick Cockburn
The Plight of the Yazidi of Afrin
Pete Dolack
Fooled Again? Trump Trade Policy Elevates Corporate Power
Stan Cox
For Climate Mobilization, Look to 1960s Vietnam Before Turning to 1940s America
William Hawes
Global Weirding
Dan Glazebrook
World War is Still in the Cards
Nick Pemberton
In Defense of Cardi B: Beyond Bourgeois PC Culture
Ishmael Reed
Hollywood’s Last Days?
Peter Certo
There Was Nothing Humanitarian About Our Strikes on Syria
Dean Baker
China’s “Currency Devaluation Game”
Ann Garrison
Why Don’t We All Vote to Commit International Crimes?
LEJ Rachell
The Baddest Black Power Artist You Never Heard Of
Lawrence Ware
All Hell Broke Out in Oklahoma
Franklin Lamb
Tehran’s Syria: Lebanon Colonization Project is Collapsing
Donny Swanson
Janus v. AFSCME: What’s It All About?
Will Podmore
Brexit and the Windrush Britons
Brian Saady
Boehner’s Marijuana Lobbying is Symptomatic of Special-Interest Problem
Julian Vigo
Google’s Delisting and Censorship of Information
Patrick Walker
Political Dynamite: Poor People’s Campaign and the Movement for a People’s Party
Fred Gardner
Medical Board to MDs: Emphasize Dangers of Marijuana
Rob Seimetz
We Must Stand In Solidarity With Eric Reid
Missy Comley Beattie
Remembering Barbara Bush
Wim Laven
Teaching Peace in a Time of Hate
Thomas Knapp
Freedom is Winning in the Encryption Arms Race
Mir Alikhan
There Won’t be Peace in Afghanistan Until There’s Peace in Kashmir
Robert Koehler
Playing War in Syria
Tamara Pearson
US Shootings: Gun Industry Killing More People Overseas
John Feffer
Trump’s Trade War is About Trump Not China
Morris Pearl
Why the Census Shouldn’t Ask About Citizenship
Ralph Nader
Bill Curry on the Move against Public Corruption
Josh Hoxie
Five Tax Myths Debunked
Leslie Mullin
Democratic Space in Adverse Times: Milestone at Haiti’s University of the Aristide Foundation
Louis Proyect
Syria and Neo-McCarthyism
Dean Baker
Finance 202 Meets Economics 101
Abel Cohen
Forget Gun Control, Try Bullet Control
Robert Fantina
“Damascus Time:” An Iranian Movie
David Yearsley
Bach and Taxes
FacebookTwitterGoogle+RedditEmail