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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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