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"...If we allow governments
to control finance, we give them extraordinary power over which projects are
allowed and which are deemed inappropriate..."
The BRITISH PRIME MINISTER, Gordon Brown, says
the current mess in world finance and credit is the fault of
"irresponsible" bankers.
Well, he would say that,
wouldn't he?
Let's not forget that Mr.Brown
claimed the credit for 10 years of unbroken growth here in Britain.
For those 10 years he copied Alan Greenspan – the ex-US Fed chairman
– by holding interest rates unusually low, aiming to encourage
investment and demand, which is a near-sighted economist's way of avoiding
mild recessions.
But this low-interest rate
medicine stimulates both the supply and the demand for those products which
Mr.Brown now blames bankers for promoting. It leads directly to a world of
crazy finance, because low rates punish caution.
In a time of state-sponsored
easy credit all projects get financed by incautious banks with cheap,
centrally supplied money. There is no market for cautiously lent money,
priced correctly for the risk involved. Why would anyone pay more for funds
from a cautious bank when cheaper funds are available from easier sources?
This is why the profits of
incautious banks grew, and why their stock prices multiplied. Meanwhile
careful bankers sunk. As Brown (and Greenspan) injected ever more money into
the economy the cautious banks began to lose their customers, their managers,
their share values, and their independence. This Darwinian extinction of
caution is the direct result of a monetary environment which was hostile to
cautious bankers, one which favored those banks with an appetite for cheap
money.
So be in no doubt about the
cause of the credit crunch. It was too much cut-price credit, and the blame
for the supply of it rests squarely on the likes of Gordon Brown and Alan
Greenspan.
So much for the blame. What now?
It seems almost everyone –
from both the right and the left of the political spectrum – agrees
that the world needs more government intervention in the form of bail-outs
and increasing regulation. We're getting it, too.
Yet once we have grasped that
the underlying cause of this disaster was credit creation by government
itself, we should perhaps be a bit wary of putting governments ever more in
charge.
Governments operate a cheap
credit policy in order to defer pain, stay popular, and get re-elected. The
US, British, Australian, Russian and now pan-European bank rescues are
intended to create and promote a higher volume of cheaper and easier credit
than the market really wants. They aim to supply yet more of the wretched
stuff which got us here in the first place.
Is that really so wise?
If we allow governments to
control finance through regulation, we give them extraordinary power over the
direction of the economy. Because they can (and will) deny finance to some
projects and grant it to other, more politically appropriate ones. Such
government control has repeatedly shown itself to be much worse than our
imperfect marketplace at handling the power of economic direction –
both in this case, where their efforts at economic stimulation are the root
cause of the fiasco, as well as in recent history, particularly with
communism.
The new rush of bail-outs, and
their associated tighter regulation, pushes us further towards the socialized
"command" we thought the world had abandoned in 1989. That is bad
– and there is a better way to rapidly re-configure our economies in
the right way:
More than ever we need to trust
the market. Let interest rates rise (without government interference) and
allow the market to kill off those institutions whose functioning depends on
limitless supplies of cheap credit.
Yes, there would be pain, but it
would right a long list of wrongs. It would make houses affordable for
younger working people. It would make saving worthwhile again. It would make
borrowing less attractive. It would increase the use of equity in the
financing of enterprises, and significantly decrease their use of debt,
making all of them much safer in future downturns.
Each of these moves in the right
direction are, sadly, the moves which yet another dose of rescue money will
now suppress. This won't be understood by our politicians, however, so we
will get yet more patched-up bail-outs – and lots more regulation
besides.
Did you notice? While the United States, Britain,
the Netherlands and Australia
were banning short selling on their local stock markets, the Chinese were
relaxing restrictions on it. This is enormously telling. Asians –
suppressed by the command economy for decades – aspire to a world of
free enterprise. Unlike us they are now prepared to accept the costly
consequences of those repeated errors which the free enterprise system allows
people to make.
When we finally wake up under
the yoke of our new, improved and over-sized government regulators, we will
have lost the privilege of benefiting from free and highly profitable
financial centers. It's the turn of Hong Kong, Mumbai, Shanghai,
and Singapore.
Oh well – it was nice
while it lasted. And from an avowedly selfish point of view, I think it is
almost certain that these tax-funded bail-outs will be good for me
personally, because they will be good news for BullionVault.
I believe we will now avoid the
pain of a sharp correction. Instead we will get many years of miserable underperformance
in shares, bonds and deposits – the classic backdrop to a strong bull
market in Gold.
With no bailout, gold would
probably rocket even faster than it has this week, and within a few months it
would have fully appreciated. That would be time to exit gold and start
buying bombed-out productive assets instead.
The speed of such an ascent in
Gold Prices would be highly profitable for gold owners (including me), but it
would probably prevent BullionVault from aggregating more than a few thousand
new customers in total. My personal ambitions for the business would never be
met.
Instead, as all this bail-out
money seeps in, I anticipate some temporary relief for the stock market,
followed by a long, slow, miserable slide in mainstream investment
performance, accompanied by a steady rise in the value of Gold Bullion.
Every month, this on-going shift
from paper to gold...from debt to hard assets...will cause a few thousand
more people to join BullionVault, buying and selling
solid gold bullion – safe and secure in their choice of Zurich, London
or New York – at ever-higher live market prices.
So – entirely
hypocritically – I believe one outcome is required, yet hope for
another! Knowing governments won't allow the incautious banks to fail, I can
only look forward to helping more investors each day move a portion of their
wealth into gold.
Paul Sustain
Director
and Founder
Bullionvault.com
Paul Tustain is director and
founder of BullionVault - the world's
fastest-growing gold ownership service, where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.
Please Note: This article is to
inform your thinking, not lead it. Only you can decide the best place for
your money, and any decision you make will put your money at risk.
Information or data included here may have already been overtaken by events
– and must be verified elsewhere – should you choose to act on it.
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