Signs of Nonfunctional Markets

Free markets are supposed to be very efficient. The general law of supply and demand states that if people want something, the market will provide at the proper cost. This 'cost' includes, at the very least: the cost of the raw materials required; the cost of manufacturing; the cost of delivery to market. Profit usually sneaks in there somewhere, but profit itself is a type of cost. It should suffice to say that the cost of a desired item is typically reflective of the cost to make another, similar/identical item.

When the cost of an item goes below its replacement cost, any number of things may be happening: the market for the item may be saturated, and people don't want to buy anymore; the item might have been so utterly hideous that no one would pay money for it. Most pertinent to our article, though, is when people line up to buy the item, but there is none to be had at the market's price.

A good example of this is in the silver and gold markets. Presently, physical bullion commands a fairly respectable premium over the official market price. Those premiums represent a disconnect, and a rather serious one at that. Healthy demand exists for physical bullion -- perhaps even more than ever -- but that is a demand that cannot be filled based on the official market price. In essence, two markets have developed: the official and the real-world. This is a sign of a serious market break-down, one which will likely have some serious, lasting repercussions.

More than just the bullion markets have been effected, though. One can see a similar situation developing in the oil and natural gas market. The Federal Reserve's zero interest rate policy (ZIRP) is another good example of breakdown. No normal human being can borrow money even remotely close to the Fed's target rate of zero... but yet there it is. This is a disconnect of credit: the official market says no interest, the real-world market has other ideas. Further government intervention and manipulation in markets will result in similar breakdowns, especially as the 2007 Depression progresses.