Shadow Markets: Danger Ahead for the U.S. Economy
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The Fiscal Times
September 27, 2010

Dial back the investment clock and it’s clear that the markets — stocks, bonds, commodities and a host of acronymic financial assets — are not traded on a level playing field. Think Enron, Madoff, and our current financial crisis. Shadow markets are vehicles for money manipulation, according to  Eric Weiner, whose new book, Shadow Market: How a Group of Wealthy Nations and Powerful Investors Secretly Dominate the World (Scribner, $26), exposes the banking underworld and how it has created a powerful network of super-rich investment vehicles, including wealth funds, government-run corporations, private equity funds, and hedge funds while quietly buying up the world, piece by valuable piece.

While the American economy was taking a nosedive over the past several years, cash-rich nations like China, Singapore, Saudi Arabia and others began using their money to grab “geopolitical power,” Weiner says. And now this loosely configured, unregulated market is supplying the money that the world needs to grow. Weiner, who’s covered business and economics for Dow Jones, argues that the rest of the globe will have to contend with this elusive force for decades to come.

The Fiscal Times talked with Weiner about his book and the economic ramifications for investors and the economy.

The Fiscal Times (TFT): How is the shadow market manipulating the economy in a way that investors don’t know about?  What makes it so ‘shadowy’?

Eric Weiner (EW):  There’s a change in the way capitalism is being used. State capitalist countries are basically controlling liquidity in the financial world.  People often ask how this is different from what Japan did in the 1980s. Well, it’s totally different. First, Japan itself didn’t actually buy Rockefeller Center. Mitsubishi bought Rockefeller Center because they thought it would be a good deal for them. It’s a publicly held company closely tied to Japan, but not owned by the government.

Countries are now creating shell companies to do this work for them and control liquidity, and we don’t know what their motivations are. Countries can loan money to African nations in order to gain access to their resources. They could give them non-forgivable loans that are worth more than the land itself. But access to the resources is important to them, and even more important, they want to block other countries from having that access. So something that used to be a fairly predictable private-sector activity is no longer that.

As far as hedge funds and private equity funds, they may be small, but their influence far outstrips their size, as they’re the ones guiding what the shadow market countries are doing. This is potentially dangerous. Money suddenly doesn’t matter, because they have piles of it, but the company matters. So countries can use sophisticated methods for moving currencies, bonds, and so forth. But the real key is that there’s no disclosure whatsoever.

TFT: What does this so-called ‘shadow market’ mean for the U.S. economy?

EW: We must engage with the rest of the world as investors. We’ve got to be aware of these countries and of the U.S. companies that do business with them, and we have to be aware of these markets as investment markets. We also must look at the people who live in these countries as our consumers. The world is our market, and opportunities are all over the place. The world has shrunk from an information standpoint, and we have to be major players in it.

TFT: You’re saying we need to better understand the political power that accompanies money?

EW:  There’s a symbiotic relationship between liquidity and power. The Treasury is trying to deal with China’s manipulation of its currency and how to talk to them about that. And they’re getting pushed from the left to be aggressive with them, and pushed from the right to sort of leave it alone, and in between is where things really need to happen. So the question is: Does the U.S. still have the authority and the ability to tell China what to do? Washington has figured out that we pretty much don’t, at least not now. So until we can get a western solution, with many countries involved, and put a lot of pressure on them, China is going to do what it wants to do.

TFT:   For the record, your term ‘shadow market’ is not to be confused with shadow banking.

EW:   Shadow banking, which is now a term of art in economics is used by the Fed and others to explain how money moves around the U.S. in ways that we don’t always know about. The shadow market is not the same thing. And actually, had I known that term would gain so much currency, I probably would have changed the title of my book!

Managing Editor Maureen Mackey oversees scheduling and work flow and also writes and edits features and reports. She spent more than 20 years as a senior book and features editor at Reader’s Digest.