The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick
“So the challenge of our day is to distinguish the fake contemporary versions of crony or corporate capitalism from the real. Capitalism is in the crosshairs because the genuine article is misunderstood. Freedom expressed in the allocation of savings by an individual, in pursuit of their greatest good is the heart of capitalism. I contend that the free markets never die.” – David McAlvany
Kevin: The question persists, Dave, and we talked about this last week. Do the free markets still exist? Is there any hope for free markets? Is there a possibility that we are going to see a return of the free market?
David: When you look at the asset price levitation, when you look at the suppression of interest rates, when you look at the occasional drubbing of gold at really critical junctures in the last two to three years, I think it is reasonable to ask the question – does the free market exist? And you will recall that was what we put out there as sort of a confessional question, if you will, several weeks ago. I have assumed that it does, and will continue to, and today we will talk a little bit about why I have come to that conclusion.
It is interesting, last week after our commentary there was a radical shift in the German bond market. We went from 8 basis points on the 10-year German treasury, to what is today over 45 basis points. You may think we are still under 1%. Does it really matter? Well in point of fact, in a 10-day period, you have given up 10-15 years’ worth of income at those paltry levels just in the loss of principle, because of the move in interest rates.
Kevin: It shows you the vulnerability of these controlled markets. Bill Gross had pointed out ahead of time that this was probably going to have to happen because there were market forces that were going to cause it.
David: Reuter’s pointed this out. They said the price of German 10-year government bonds plunged this week, triggering the biggest rise in yields in over two years. Some analysts blame the sell-off on a lack of liquidity. You remember we talked about that a few weeks ago, with Commerce Bank going so far as to call it a flash crash. We talked about that being the explanation and justification, not really looking at the market dynamics of illiquidity, which is, in fact, exactly what we are dealing with. This Reuter’s article goes on to say, “liquidity is an amorphous concept and impossible to measure accurately. Its scarcity is only exposed in times of crisis.” I think that is worth searing into your brain in terms of – what is the function, what is the working nature of liquidity? Its scarcity is only exposed in times of crisis.
Kevin: And usually, that is at the top or the bottom of the market, isn’t it Dave? When we find a complete lack of liquidity or buyers in the market, a lot of times that can signal the very top of a blow-off market.
David: As it has been pointed out in The Economist, and other news sources, as well, this is not just a market top or bottom, you are exactly right about that. There is another fundamental reason why there is extra illiquidity in the bond market, and that is that banks have given up the role as market-maker because of their various capital requirements following the financial crisis. So, you have a much smaller wholesale pool to sell bonds into because banks no longer serve as a part of the backstop network of financial intermediaries who are willing to take on that product in the inventory, because again, they have capital requirements they have to pay attention to.
Kevin: Is that like governments becoming the lender of last resort because there is no one to buy sometimes, like we saw back in 2008?
David: And it gets awkward when governments are the lender of last resort, but you are talking about governments being the point of the spear, if you will, in terms of a problem in the bond market.
Kevin: Dave, the older I get, the more I am astounded at how non-intuitive certain critical things are in my life, that I have to have other things to prove what it is that I am actually supposed to believe because my eyes don’t believe it. You talk about liquidity. We think of this huge world of lots of liquidity, the bond market, there is always money ready to go, buy at the right price, what have you. Yet, we see these periods of time when no one is buying. You brought that out last week. There is another non-intuitive fact that you brought up to the staff here at the office this morning that just blew my mind, and it had to do with movement of the stock market, the seasonality. There is an old saying, “Sell in May.” Why don’t you give us those statistics? It is amazing.
David: “Sell in May and go away.” If you look at the seasonal effects of investing, Alan Newman put these together in his magazine, Crosscurrents. From 1950 to the present, $10,000 invested in the six months from November through April – and this is worth writing down if you are listening and you have a pen in hand — $10,000 invested in stocks, only in the six months of November through April, you would have a portfolio worth $828,000.
Kevin: That is if you kept it in from November to April, and then took it back out?
David: Correct. And you only did that, from 1950 forward.
Kevin: Put it back in in November, take it back out in May.
David: That is correct. Now, the same timeframe, 1950 to the present, if you instead invested only in the six months of May through October – and this goes back to that phrase, “Sell in May and go away” – you would have $9,832 remaining. So, after 65 years, you have less money than you started with, ex dividends, says Alan Newman. That, to me, is a pretty profound thing.
A part of it is, you have the other part of the year, disproportionately drawing capital into the stock market via mutual funds. Why? January ends up being a huge month and April ends up being a huge month because people make a lot of IRA retirement account contributions. So, mutual fund inflows spike in January and April, and then basically, you move into what Newman describes as a dead zone between May and December, very little money coming in, and in fact, on average, you have five of those months which have net negative outflows from mutual funds.
So, this is kind of an interesting thing to think about. We are in May. We are at all-time highs in the stock market. We have 474 billion dollars, the most leveraged money in the stock market we have ever had. It is not unreasonable to see hiccups occur in a period where you have very little dollars flowing into the market, so the period where accidents happen is typically the period where you have a perfect setup and that would be this period between now and the end of the year.
Kevin: And that seasonal cyclicality is a factor of what was the free market. But I am going to go back to the question now, Dave – is there a free market? We have seen so much manipulation of the interest rates, we have seen so much manipulation of gold, we have seen, actually, so much manipulation of the stock market. When it looks like we are about to have a crash, somehow, someway, someone steps in right at the end and pulls it up. We had a reader respond to last week’s program. He said, “We’re not really questioning price discovery. What we are really questioning is market integrity.” Now, I think they are the same thing, but it is true – do we have integrity in the market? Do we have a free market?
David: And this goes to, perhaps, an overlay of the cycles of freedom, where over a long enough period of time you see a social and political shift from freedom to bondage, and back to freedom again. And I think the same thing, you could say, is true of markets. If you remember Richard Duncan’s book a few years back, The Corruption of Capital, it is a reminder that free markets have, and will always, exist, regardless of the form capitalism takes. Duncan makes the case that we have shifted from capitalism as we understood it 100 years ago, to debtism, meaning that the growth of the current era has come, not from investment, but from credit expansion. Debtism, Jim Grant describes like a book on loan from the library versus the one you own outright. In the end, the book has to be returned. The library book isn’t yours.
Kevin: Pippa Malmgren talked about the perfect circle over the last 40 years. We have been able to continually go into debt because of China and other countries, so we have had the perfect circle. We seem to feel like we have had capital growth, but actually, what we have really seen is more in the line of debt growth. That is the debtism.
David: And Duncan’s more ominous argument is that debtism has run its course, and we are now shifting to statism. I grant you, there is very little in common between capitalism and statism, but what I will conclude as we talk about this today, and in a moment, is that the experiment with statism is doomed to failure, and the emergence of free market dynamics will re-emerge again, perhaps because of the cyclicality we see in human nature, and the repetitive nature of making mistakes, learning from them, and forgetting what we learned, and making the same mistakes again.
Kevin: I think it is a good time for a definition of terms, then, because we hear the words free market, we hear the words laissez faire, we hear the word capitalism. Let’s go ahead and define what you would say capitalism is.
David: The formal concept of capitalism grew out of the idea that freedom finds expression, in economic terms, by the way we allocate our savings. The individual works, the individual saves, and then chooses how best to allocate capital to achieve his or her personal goals. So capitalism is merely a formal explanation or title given to what individuals choose to do with their savings when they are not coerced, corralled, or controlled.
Kevin: That would be what I would call free-marketism. Capitalism has gotten a bad rap over the last few decades because it is being blamed for what I would say is monopolism of corporations.
David: The “ism” is, of course, just the formal dogma. There are ideas related to the ism which complement it and give it structure. For instance, we work of our own choice, and we are compensated for it. If we don’t like what we do, we can retrain ourselves with a different skill set. Education is not something that someone gives us. We don’t receive an education, what we do in the course of learning is, we gain the tools of learning in order to approach all of life and become educated using those tools. And this is where, again, I think that you gain a set of tools, then you use those tools to acquire the needed skills or the knowledge to do a certain job. Or if it means changing jobs, then by all means do it. There is freedom to do that, assuming that you have the tools of learning.
Kevin: And up to this point, this country has been a good place to exercise those rights.
David: Yes. We can enhance the tools, we can use them liberally to enhance our skills, and the knowledge that we have in an effort to improve our circumstance in life, and if we don’t like the compensation in our employment – you know what? We are free to change our employment. The market determines the ebb and flow of what is being offered, from the prices that we pay, to the jobs that we take. We choose to live here in Durango. You may choose to live in the Midwest because you like the cost of living, knowing full well that compensation will be less in the Midwest than on the coasts. These are the kinds of trade-offs that we, as individuals make. They are the determining factors, if you will, in supply and demand relating to the marketplace of ideas and opportunity.
Kevin: So, that is what you would call capitalism, or at least, the traditional belief of what capitalism is.
David: Right. And capitalism, that is, the allocation of capital or savings, is most successful when those on the street are allocating the capital, not those in the ivory tower.
Kevin: The ivory tower would be considered command economy. That is where they are basically directing it.
David: Anyone who thinks they have a better idea of what you should do with your money than you do. So, again, on the street you find a sensitivity to pricing, and what a consumer perceives as a compelling deal or offering. And so, if the allocation of capital is done from a distance, you end up with discrepancies in value, and those emerge in the place where individuals would have been figuring out, on a very quick, real-time basis, what is or is not in their best interest.
Kevin: Yet, we seem to be in an economy, right now, if you want to call it an economy, of price controls, wage controls, rent controls, interest rate controls, controls of markets, controls of employment based on how the Federal Reserve prints money. It seems like so much is controlled at this point. Is that capitalism?
David: Well, what it is, is a bastardization of capitalism. When you have administered pricing you destroy the normal process of value appraisal and decision-making, so the individual that would choose, on the basis of real-time data, is now dealing with corrupted data, so you know that a computer system doesn’t function well if it is dealing with corrupted data. And an individual consumer can’t make reasonable choices when he or she is dealing with corrupted data, as well. So again, I think that is what you lose when you lose price discovery. Reasonable decisions are made by the masses. When you purposely eliminate price discovery, you are, in effect, engaging the fallacy of false alternative.
Imagine this. I am sure you have done this as a parent, where you say, “Johnny, you can either do A, or you can do B.” The reality is, you stand as a parent in the relationship with the child in a very pedantic position. You know that A and B are not the only options, there is C, D, E, F, G, H, I, J and K.
Kevin: But you are giving the choice, and you’re in control.
David: You’re giving the choice, and you’re in control, and you’re saying, “These are what you are going to choose from.” That is what happens when you are administering prices. Again, it produces the fallacy of false alternative in the marketplace. You will either do this or this. And it means that, essentially, your decisions are being corralled.
Kevin: It is interesting, David, we were talking about this new Jurassic Park movie that is coming out. One of the key messages of the original Jurassic Park, which was an awfully fun movie, was that chaos occurs because of complexity. Malcolm, my favorite character in that movie, basically says, “It’s chaos. When the butterfly flaps its wings over in America, it changes the air currents and ultimately becomes a cyclone somewhere else.”
I was talking to a former client of mine, and he had just gotten back from a seminar on what is new this year in the market in genetically modified seeds. I brought up the fact that isn’t that dangerous? And he said, “You know, Kevin, because of the government control of pesticides and everything else, we couldn’t produce enough of a crop to make a living unless we genetically modified those crops. We’re caught between a rock and a hard place.” What you see is control in one area that seems right, with pesticides, then it turns into control in another area where they have to adapt. The market adapts on the GMO side of things.
Then what we are seeing now is that health care is having to adapt to the people who are becoming sick because of those genetically modified things. The price control seems to do the same type of thing. You control the price here and it has a huge cyclone effect somewhere else in the world.
David: It does have major impacts elsewhere. And yes, we have seen episodes in the past, and clearly there are issues in the present, where, to contrast with Adam Smith’s unseen hand, there is a seen hand which has emerged in the marketplace to coerce choices and dictate decisions. And you can accomplish it through different avenues. You can have monopoly control in the corporate sector. If you recall, we had the LIBOR scandals where banks, and not the market, were dictating inter-bank lending rates, or where Enron, a few years before that, was manipulating energy prices. Again, that is the monopoly control, the seen hand of monopoly, if you will.
The other major influence, arbitrary and external, would be a governmental mandate. Past periods of price controls in the interwar period come to mind, or you have the present environment, best illustrated by the central banks. The significant, significant intervention in the marketplace, the determination of interest rates – that is what Duncan would describe as statism, and we would agree. You recall that one of the key assumptions of a statist is a presumption. It is a presumption of better knowledge, better insight, better decision-making than the common man.
Kevin: I am going to have you repeat that, but I want people to picture in their minds, Alan Greenspan, Ben Bernanke, Janet Yellen. Repeat what the presumption is, because we are seeing that presumption played out on a daily basis.
David: Listen, I have a couple of friends that, quite frankly, epitomize this. They consider themselves Plato’s philosopher king “If you will just trust me with these decisions, I am smarter than you, and I am more capable of making these decisions.” It is a very elitist mindset. And yes, they are friends, but this is an area where I would certainly criticize. There is that presumption. It is better knowledge, better insight, better decision-making than the common man. And at root, you know what it is? It is arrogance. And it is arrogance tied to either a position or a title or a pedigree or a degree.
Kevin: “Don’t you know I came from Princeton? Don’t you know?”
David: So, complicating this presumption is that it is always tied into an ideological framework. The error of any ideology, frankly, is to assume that it is totalizing and complete. You have a closed system which offers a perfect picture of reality. From the ivory tower you have ideology driving judgments which displace the individual expression of freedom in the allocation of savings or capital, so you have individual capital allocation-ism, which has today become either corporate capital incentivism, or worse yet, government capital authoritarian-ism, if that is not too much. But all of these “isms” are morphing and capital is still a part of them because money is being spent and allocated, but it is not being done in real time by people who know best.
Kevin: The assumption of a closed system is exactly what I was talking about in the movie, Jurassic Park. They assumed that they had full control and that it was a closed system. But boy, when the fences go down and the dinosaurs get out, I wonder if that is when the free markets come back in.
David: (laughs) Truly. Obviously, there are elements of capitalism still alive today, they are just blended with sort of statist bureaucratic interference and – what is a word for it? Corporate preferentialism. Again, it is not what you know but who you know. Adam Smith, in The Wealth of Nations, marveled at the collective judgment, that is, individual actors making choices which, in aggregate, make a market, and in the process, determine prices most efficiently. It’s his respect for the individual and the aggregation of individual choices that I hear echoed in G.K. Chesterton, pondering the wisdom in one of his essays, a small book called Tremendous Trifles. Chesterton ponders the wisdom of a jury of 12 common men and women in the courts, determining guilt or innocence. And I think you could take it even a step further and say there is the example of the disciples, all of them, 12 common men. They are ordinary in every way, and yet it is the ordinary which ends up being, actually, far more dignified and important in the end.
Kevin: When the jury summons comes in the mail there is always a sort of a sigh, but I try to remind anyone who is sighing and saying, “Oh, I don’t want to do that,” to consider the alternative. The alternative is a command and control government, a tyranny, guilt until proven innocent, instead of a jury. That is really what the free market is, what you are saying, a freely acting jury, if it is a free market.
I am going to ask you a question now, again. Should we be worried by the command and control characteristics we are seeing emanating from the Fed, the Treasury, all the other financial firms that are playing along, and actually benefiting from it?
David: Well, sure. But note that there is a more basic functioning of the free market and it operates freely in every political regime in the world. It doesn’t matter the degree of interference or corruption or external controls. Think of the popular interventionism of the central bank community. You are suppressing interest rates to stimulate aggregate demand. That is a Keynesian way of saying, “We’re not going to pay you interest on deposits, so that deposits will not just sit idle on account in the bank, but you are going to get out and spend them. So again, it is sort of corralling your assets out of the bank and out of a static place, to be spent. That is the idea of popular interventionism.
But then consider this. This is the glory of the free market. And it is just one small illustration of – let’s call it a work-around in progress in a low interest rate environment. As you know, there is a large percentage of global government debt which is now at a negative yield, that is, paying less than zero, and the free market says, well, if it costs me X to just sit there in government debt, if it is just going to cost me to own government debt, why not sit in cash, instead? At least I don’t lose straight out of the gate. You see? There is a proposition – you can be the proud owner of government debt and lose “X” dollars, and the market’s response is, “Thank you very much, I think I will sit in cash.” Which means that the governments have to go to their central banks and say, “Well, then you are going to buy the difference. Can you close the gap between market demand and what is being offered?”
Kevin: Or there is an even more overt response, which is what the Australians are talking about doing right now, which is simply taxing savings. If you decide not to spend your money you are going to start paying tax in Australia.
David: Right. There is the governmental response to moving to a cash position. Australians, this year – “Okay, fine, we will assess a tax on savings and bank deposits.” (laughs) The market responds by saying, “You’re trying to force a loss on me. Here’s the deal. I’m just going to take my marbles out of the game. Give me bank notes, and I’ll put them in the mattress.” So now all of a sudden you have the market’s response saying, “You’re trying to dictate something that is not healthy for me. I’m going to continue to act in my best interest. I’m taking my marbles and going home.”
Kevin: In a way, that is still the free market acting, isn’t it?
David: It is, and it is not ideal, in the sense that it is not a world that is perfectly functioning, but it is a world where you are continuing to see choice exercised, and action taken. Russell Napier, you might recall, last November, six months ago, something like that, suggested that it would be cheaper to rent a warehouse and fill it with bank notes than to sit in government bonds and just be plucked like a chicken, to whatever degree monetary policy dictated. He has gone further in his most recent missive to say, “Listen, I’ve started the Napier High-Yield Fund. It is euros sitting in my basement, yes you will pay me small fee, but the fee that you pay me for the euros sitting there for your benefit is a smaller negative number than what you would have by sitting in government bonds, so it is clearly the better choice.”
Kevin: You were talking about the elite, educated class. Their response to that, Dave, is, “Our detailed research and our many papers have shown that cash, itself, is a barbarous relic. It is only useful to the criminal in our midst.” And so, what do we do about that? At this point, they are wanting to eliminate cash.
David: Isn’t that interesting, that at this point you do have an argument which would say paper money is a barbarous relic. The only useful thing that we can do is move toward a credit and debit card system sufficient for all white market transactions.
Kevin: A pure cashless society.
David: And if, in fact, we are moving toward criminalizing cash activity, think of that. This is the idea that yard sales go the way of the dodo bird, right? Because really, what that is, is criminal activity. If you sell your pair of skis for 50 bucks that you bought years and years ago, and don’t report that as income…
Kevin: Or don’t take a credit card for the transaction…
David: Well, exactly, you are now operating in the black market. You think this is pie-in-the-sky? I am going to list, at the end of the commentary, a website where you can go and read Ken Rogoff’s argument, an economics professor at Harvard, for why we should eliminate cash. And what is fascinating is how widely this opinion is being spread amongst academics and policy-makers.
Again, it is just this notion of, cash is the barbarous relic. And I thought gold is what they used to call the barbarous relic. We know full well why they called gold the barbarous relic. It is the equivalent of tossing an ad hominem attack at a person – an argument against the man, an argument against the relic. Why do we need it? “Well, it’s just so out of date and useless and who wants it?” The reality is, gold represents something more. And although I don’t particularly like fiat cash, it is interesting that statists are so desperate for control of the financial system today that they now popularizing the idea of eliminating cash altogether.
Kevin: And there always is a free market that seems to exist underneath the surface. We talked about Argentina. Last week what they called the blue market, which is just the correct exchange rate for a dollar to an Argentinian peso versus what the government gets. But the free market exists in the black market. Let’s say they take cash away. Dave, there are still things that can be traded back and forth. So, if they do shut down the yard sale, and they shut down the ability to transact in cash, and they shut down every other transaction that is outside of their control, I think the question emerges, what is the nature of freedom? Let’s go back to definitions. What is the nature of freedom?
David: I think that is worth considering, and that is maybe a cup of coffee first thing in the morning if you are going to discuss it, or maybe best suited for a glass of wine in the evening. Listen, before we get there, in response to greater efforts to corral and control you, what you are going to find is, the average citizen is being put to an ethical dilemma, and it is this. You can operate in the white market and I will remind you that that world, “the white market,” is an arbitrarily determined world, or alternatively, you can operate in the gray market or the black market.
And you mentioned the blue market in Argentina. Well, the blue, as we title one of our shows many months ago, the blue is the new black. And that is because the real world exchange rate is so dramatically different than that arbitrarily pegged by the government. And citizens work around it. They work around it every day, because if they don’t work around it, it ruins them financially.
Kevin: And it is not just greed. The government would point out that it is greed, but actually, these people could not eat if they were actually transacting on the government’s prescribed level of exchange. And David, I have known you for 28 years, I know your family. I know the moral and ethical standards that you uphold, absolutely airtight in the law – that’s the mentality. In fact, you feel like that is your responsibility to operate within the law.
David: And that is as a family. As an individual, I am a rule-follower by order of birth. I am the first-born male, which typically likes a well-ordered universe. What if the well-ordered universe subjects me to harm? Do I go along with it? And that is really the question of having your resources corralled toward a certain end, and determining an outcome, top-down. Listen, my conclusion is that there is no amount of statism which reduces essential freedom.
Kevin: You are talking about, at this point, fundamental freedom.
David: Freedom is something that exists. Freedom is a state of mind. We exercise freedom regardless of circumstance, and we are free. We are not granted freedom. Does that make sense?
Kevin: Oh, absolutely.
David: Of course, the individual can face higher and higher costs in the pursuit or exercise of freedom, or if we want to return to this idea of allocating capital, you can be threatened or punished by noncompliance. If you go back to World War I and World War II, it wasn’t a legal consequence, but it was social ostracism. You were the pariah, you were nonloyal, you were unpatriotic, if you were not involved in that year’s war bond offering. And that is the way it was cast. If you want to be the good guy, you are going to throw your lot in with Uncle Sam, and if you don’t throw your lot in with Uncle Sam, we know who you have thrown your lot in with.
What is funny is, it was just within a few years of this sort of social coercion, and social punishment by ostracism, that those same government bonds were called certificates of confiscation because of the heavy capital losses taken by Joe and Suzy lunchbox who decided as investors they had to do their bit. And again, there are different ways of punishing or corralling. That would be, again, a social means, not a direct legal means.
Kevin: I think it is important to go back and repeat again that you said freedom is a state of mind. I think of Patrick Henry when he stood up and said, “Give me liberty, or give me death.” What he was actually stating was that you will not take my freedom, because you have no right to take my freedom. It is my own.
David: Yes. If you take an extreme example where freedoms are clearly limited, you will still find an expression of the free market continues to exist. If you look at the trade in cigarettes and contraband inside a maximum security prison, you know what you have? You have price discovery, you have value exchange, and it occurs regardless of controls. In a sense, you have the formal articulation of capitalism.
Kevin: One of the great exercises of understanding freedom and trade actually comes from some of the worst circumstances when things were almost impossible. I think of the time of the German hyper-inflation and how pianos were being exchanged for other things. We have a gentleman who works for the company who is married to a German woman whose grandparents were paid completely for a mortgage that they had loaned out with a chicken because of the hyper-inflation. Now, that is still a market that is expressing itself in value trade – not currency trade, not necessarily government-controlled trade. But people still have to eat.
David: We have talked about capitalism, we have talked about the shift in what capitalism has become. At its roots we understand that it is just basically the allocation of savings toward ends that we deem appropriate for our family, or beneficial to us individually. And in a sense, the formal articulation of capitalism is a little bit like religion in its structured and codified form. You have the structure, you have the form. These are outgrowths from something that pre-existed. And of course, you have control, dominance, authority, guidance – however you want to put it, whatever you want to call it, these are expression of a will to power, of a determination by individuals, to direct certain outcomes.
Kevin: Let me jump in there, because it is individuals directing certain outcomes, but one of the things that we have seen is that capitalism has taken on a different identity and most people, especially young people, if you talk to the guys who are in college right now, think of capitalism as corporatism, almost as fascism, where you have monopoly, and corporations that are being granted favors by the government, calling themselves the capitalist system.
David: Again, this goes back to that issue of, as long as individuals are directing an outcome for themselves, that is what would be a free and fair market. But where you have individuals, in a coercive fashion, corralling or directing outcomes for other individuals, that is something that is, again, some sort of a bastardized version of what we would know as capital allocation, or the original version of capitalism. Yes, capitalism has become co-opted by people who care nothing for the free market functions. No, they don’t truly care about price discovery and free exchange. But do recall that this has occurred before, and it has been remedied, and it will occur again, and it will be remedied, because the free market exists regardless of what you call it, and how it is co-opted.
Kevin: So, what is capital, itself? That is the beginning of the word. We know that “ism” is when you apply ideology to it.
David: It is the word we substitute for savings, and it pre-existed the “ism.” Capitalism – you had people who worked and people who saved, and people who did something with their savings, and that is the nature of capitalism – having the freedom to determine what you want to do with the result of working the field, working the factory, working the office, whatever it may be, what dignifies and says, “I earned my way.” That, I think, is what I am getting at. Religion, too, is man’s attempt – and again, I am making a distinction here between the formalized and the informal – religion is the formalized attempt to direct behavior and control a mass of people. Yes, those people may share common beliefs, but there is this critical distinction between the precedent beliefs, and what you might describe as crowd capture, which occurs when people position themselves in authority to harness the energy of others toward a certain end. And I don’t want this to be misconstrued as sort of anarchistic or anti-ecclesial.
Kevin: No, but what you are saying is that free trade, just like religion, pre-exists the idealistic structure that sometimes is applied to it later.
David: Right. Free markets exist whether the institution of capitalism does or not. Institutions come and go. Eternal verities do not. The heart of man in pursuit of God hardly needs to be co-opted and controlled, and yet it is. And there is room for critique of both religion and capitalism, particularly the forms they take today. But – and this is, I think, very critical – the critiques fall flat once you strip the formalized and formulaic expressions and go back to the basics. So, the challenge of our day is to distinguish the fake contemporary versions of crony or corporate capitalism from the real.
Capitalism is in the crosshairs because the genuine article is misunderstood. Freedom expressed in the allocation of savings by an individual in pursuit of their greatest good is the heart of capitalism. I contend that the free markets never die, even if the cost of operating in them goes up. You will find that Greenspan expressed it most clearly in his 1966 speech, Gold and Economic Freedom. Do you remember that speech?
Kevin: I do, and that is so ironic, because if you look at the Greenspan of the 1960s, this was a free market maniac – great friends with Ayn Rand, and wrote extensively about gold and freedom. He actually mistrusted the Federal Reserve at the time. But we saw in the 1970s he became a member of the Treasury, and then we saw in the 1980s and 1990s, and into the 2000s, that he became a Federal Reserve Chairman, and unfortunately, Dave, he had to give up those ideals, until recently, and he seems to have come back to them.
David: What I think you see in Greenspan is something of a life sketch in social change, where we did start with a pretty pure version of capitalism. It is what he believed in. It is what he articulated. And then as things changed, he embraced a system of debtism, and ultimately, to the point where things had to be controlled and determined from the top down. So, he does from capitalism to debtism to statism. Alan Greenspan is a life sketch of the change we described. And it is not as if you just end there and that is the final end of the story.
Kevin: That is really interesting, I had never really thought about that, but his life incorporates the transition that we have moved from. We have moved from a gold standard economy, to a debt economy, to a statist economy. Now, you are talking about how the free market exists and always returns – what Greenspan said in October, when you were there in New Orleans with him…
David: And I quote from that speech. “An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense, perhaps more clearly and subtly than many consistent defenders of laissez-faire, that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire, and that each implies and requires the other.”
Kevin: Hardly sounds like Greenspan, does it?
David: “In order to understand the source of their antagonism,” he goes on to say, “it is necessary first to understand the specific role of gold in a free society. Money is the common denominator of all economic transactions. It is that commodity which serves as a medium of exchange, is universally acceptable to all participants in an exchange economy as payment for their goods or services, and can therefore be used as a standard of market value and as a store of value, as a means of saving. The existence of such a commodity is a precondition for a division of labor economy.”
Kevin: And let me remind the listener once again, they are hearing the words of Alan Greenspan. This was 1966 – hard to believe.
David: He concludes this brief presentation saying, “In the absence of the gold standard, there is no way to protect savings from confiscation through inflation.” (We already knew that.) “There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank savings to silver, or copper, or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power, and the government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. This is the shabby secret of the welfare statist’s tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statist’s antagonism toward the gold standard.”
I am including an attachment of Ken Rogoff’s argument for and against physical paper money, as well, and a move toward electronic settlement of all transactions. I trust that you can connect the dots. It is strange bedfellows when you consider fiat paper money and gold being likened as barbaric relics.
