The Wall Street Journal began its 9 July 2012 article "Libor and the Destruction of Trust" with these discouraging words:
“That investors shouldn’t trust the capital markets to safeguard their investments has been made painfully and abundantly clear the past decade. That investors have little choice but to put their money on those same markets is just as clear. Therein lies the dilemma.”
The author, Paul Vigna, then went on to recount some of the decade’s worst moments in the financial industry:
“[The] misleading market research during the dot-com bubble, the insider trading scandals, high-frequency trading that freezes out average investors, Goldman’s double-sided Abacus trade, the Flash Crash, even Facebook’s IPO to some extent. It all points to one conclusion: The market is rigged and it’s not a safe place to put your money.”
Take notice of that last sentence.
As a follower (and teacher) of the Austrian school of economics, I take it for granted that the market is rigged. Not rigged in the conspiratorial sense – although there may be some instances of that – but rigged in the sense that you can no longer call it a “free market,” because our governments are constantly intervening in them.
Take the issue of money, for instance. In the early to mid-20th century, all US dollars were redeemable in gold. Gold was money, while dollar were merely paper claims on said money. The late Congressman Howard Buffett put it this way:
“In a free country the monetary unit rests upon a fixed foundation of gold or gold and silver independent of the ruling politicians. Our dollar was that kind of money before 1933. Under that system paper currency is redeemable for a certain weight of gold, at the free option and choice of the holder of paper money.”
Congressman Buffett spoke these words in 1948, at a time when fiat currency was in the ascendency, and “gold money” was increasingly viewed as a relic by fashionable economic opinion.
The reason why he was so concerned with the country’s situation was because he knew history and understood economics. Buffett recognized one thing above all else: that all paper currencies eventually end in collapse and economic chaos – the roll call including but not limited to the French livre in 1720 and the assignat in 1795; the German mark in 1923; and the American continental dollar in the late 1770s.
Buffett also understood the fundamental power that a gold-backed currency held on government – that is, so long as the people could redeem their bank notes in gold, government had to closely monitor how much currency it issued and spent. Too much currency issuing and spending by the government always resulted in the people turning their notes in for gold because of their fear that paper money would become worthless. In that sense, gold-backed currency was the sine qua non of democratic government – the ultimate “check” on government by the people.
Fast forward to today. We are faced with serious economic problems. We have governments that have over-spent into the trillions and markets which by some measures of derivative value are leveraged in terms of quadrillions of dollars. In addition, we have huge financial institutions which have misappropriated client funds and mega banks that have manipulated market interest rates. Zero-interest rates and central bank money printing is the only thing propping up a fundamentally flawed system.
There are precious few “safe” investment options now, but people would be wise to heed more of Congressman Buffett's words:
“Before 1933 the people themselves had an effective way to [fix the] economy. Before 1933, whenever the people became disturbed over Federal spending, they could go to the banks, redeem their paper currency in gold, and wait for common sense to return to Washington.”
One could say the same thing now. It is time that we buy precious metals and wait for common sense to return to Washington (and other capitals) as well as the financial industry. In the words of another American, Texan hedge-fund billionaire Kyle Bass: “Buying gold is just buying a put against the idiocy of the political cycle. It's that simple!"