86 The Solari Report / 2018 Annual Wrap Up / Part Two Managed Markets The U.S. stock, bond, and commodities markets—and, therefore, global markets—are all deeply dependent on cash flows and credit flowing from the federal budget and, in turn, cash flows from fraudulent and criminal activities. Agricultural subsidies set the cash flows for all of the farm futures. Government contracts and purchases set the income for an endless series of corporations with stocks and bonds trading in those markets. The U.S. government is the largest issuer of currency and debt in the world, with those markets organizing around its actions and the actions of the Federal Reserve, which functions as its agent in these areas. The federal credit insures directly or indirectly most U.S. mortgage credit and a significant por- tion of U.S. bank deposits. The U.S. Treasury Exchange Stabilization Fund, managed by the New York Fed, has broad au- thority to intervene in the markets, backstopped by U.S. government credit. In one sense, the capital markets have become a securitization of the U.S. federal budget. This situation is further complicated by the fact that all the major markets have become significantly dependent on interest rate derivatives to help engineer a low cost of capital across many markets. Consequently, reengineering the federal budget means having to reengineer the capital markets and a highly unregulated, complex derivatives book of many trillions of outstanding derivatives, much of which the U.S. government appears to be financially backstopping whether through the Exchange Stabilization Fund or through bailouts. If the ability of the interest rate swap market to hold down interest rates should blow up and/or interest rates should rise significantly, the U.S. budget as well as budgets throughout the devel- oped world have the potential to blow wide open in scenarios that could easily lead to a financial meltdown more serious than what we experienced in 2008 or World War II. These risks inspire advocacy for continued market management by the federal government and global central banks and tight coordination between that management of markets and the management of the federal budget. In 2008, with the collapse of AIG, the U.S. Treasury had to confront the risk of not bailing out a company that was intimately involved in the black budget, mortgage fraud, and the derivatives market. While managed markets have served a number of strategic geopolitical goals (for example, see the excellent interviews on The Solari Report with Jim Norman on the management of the global oil price) and have advantaged large banks and corporations “in the know” (see our Solari Report interviews on the management of the gold price), they have been exceptionally damaging to household and small business productivity and wealth. Managed markets misallocate capital, create perverse incentives, and break down trust.