Convincing social-democrats and neoconservatives that the free market economy is the only humane and rational way to organize society is a tall task, since mainstream “thinkers” hold so many untrue assumptions about the fundamental nature of human beings.
To really know anything about investing and the economy, one must start at the radical foundation that led to the insights of Austrian economics: Humans beings are rational individuals.
From there, it’s easy to build the argument not only for the free-market economy, but also for gold and silver, which are not only attractive long-term investments, but ultimately the key to human progress.
1. Human beings are rational: Human beings are endowed with reason. This allows us determine what we need and want to survive and flourish.
2. Human beings are individuals: We each determine our own needs and wants by a process that takes place inside our heads. No one else can know the content of our minds, which is what motivates our actions.
3. Human beings require material sustenance to survive: We need food, clothing, and shelter, all of which are made from a combination of natural resources and human action. This action is the product of thought, which is unique to each individual.
4. Natural resources are mutually exclusive: We can’t survive without natural resources, and the consumption of a resource by one makes its consumption by another impossible.
5. Resource exclusivity sets the stage for conflict: Humans in the hunter-gatherer stage of development consume resources rather than produce them, and this creates a world of finite resources necessary for survival. Humans living under these conditions thus view each other as competitive threats.
6. Private property is ethical: But private property, the idea that natural resources belong to the individuals who transform them into useful goods, is a system that works to resolve those conflicts.
7. Human beings are differently abled: Each individual human being develops different talents and skills, and/or is predisposed to different types of labor. In collectivist, hunter-gathering society, these abilities are unable to be developed, since all humans have to spend their time acquiring food.
8. Division of labor promotes higher living standards: When humans moved from hunter-gatherer bands to agriculture, it allowed more people to specialize in what they did best. This allowed greater overall levels of production, since people who specialize in a given task can produce more than people who do a variety of tasks.
9. Human beings have different preferences: Preferences are the product of the mind, and since each individual human mind is different, it’s not surprising we have different wants.
10. Voluntary exchanges benefit all parties involved: Mutually agreed upon exchanges of private property between two or more individuals necessarily results in the betterment of all parties involved, since no one would engage in a voluntary transaction that they didn’t think made them better off. Value is subjective; the result of preferences which are the product of individual minds.
11. Free trade extends the division of labor: One man producing everything he consumes can produce and consume far less than the man who specializes in producing one thing and trades his surpluses with other specialists in his village. By this same token, trading with people throughout the country is better than trading within the state; and trading throughout the world is better than limiting trade to one country. Just as men shouldn’t produce everything they need to consume, neither should a city, state, or nation.
12. Third-party interference leads to suboptimal outcomes: Since no third party can know the contents of another person’s mind, uninvited third-party interference (government intervention) of voluntary exchange can only result in at least one party receiving a worse deal than he or she otherwise would have, whereas voluntary exchanges only take place when all parties are satisfied.
13. Money is natural: Money naturally evolves in the free market as certain goods are valued for their ability to be exchanged later. Money ultimately comes into being as “the most commonly accepted medium of exchange.”
14. Money promotes the social good: Money makes exchange more possible, since primitive barter requires a “mutual coincidence of wants.” Since voluntary exchanges necessarily benefit those involved, money promotes the social good.
15. The profit/loss system promotes the social good: Profits result from efficiently utilizing scarce resources for the satisfaction of human needs and wants; losses result from inefficiently utilizing those resources. In a profit/loss system, those who efficiently economize accumulate more resources, which can further be deployed to satisfy human wants; while those who inefficiently economize go out of business, preventing them from further squandering scarce resources. It works!
16. Wealth accumulation promotes the social good: The nonviolent pursuit of wealth through the profit motive has led to higher standards of living, including medical technologies that have saved countless lives. Many of us have loved ones who’ve been saved by 20th century (or 21st century) medical technology. Any efforts to prohibit or demonize nonviolent wealth accumulation work to undermine the long-term trend towards longer living standards with higher quality of life.
17. Everyone is an investor: Every human being consciously or subconsciously weighs the cost and potential benefit of every action they take or consider taking, and will only act if they feel the potential reward and likeliness of achieving it outweighs the risks. In this way, all human action is profit-seeking, since “profits” shouldn’t be viewed in a purely financial context.
18. There are many ways to invest: People can invest in their education, in home improvements, in building better relationships with their loved ones, etc. Starting a business is a form of investment.
19. Liquid assets are easily bought and sold: While “illiquid” investments like small businesses have the advantage of increased investor control, liquid assets such as stocks, bonds, currencies, commodities, and tradable “infrastructure” investments can be easily bought and sold, giving investors much more flexibility.
20. Investment liquidity promotes social good: Since the liquidity of an investment makes it more attractive, having the ability to offer liquid investments increases the ability of businesses to raise money to invest in projects. Sufficient liquidity results in the creation of “exchanges” where assets can be traded – such as the stock market, the bond market, etc.
21. Shares of stock represent ownership: Shareholders of a corporation are able to vote on its board of directors, who in turn hire the chief executives. Shareholders are entitled to a share of corporate profits, particularly when issued as dividends.
22. Buying bonds is the same thing as lending money: Bonds represent debt. Companies and governments issue bonds to raise money, with the promise to pay back the loans with interest. Typically, bonds pay fixed semiannual interest payments (called “coupons”) with the face value of the bond due at the end of the bond’s term (i.e., at the end of 30 years for a 30-year bond).
23. Bonds also trade in a secondary market: Once a bond is issued by a company, it can then be bought and sold on bond exchanges. The interest rate (“coupon”) paid by the bond does not change, but the market value of the bond may change – if interest rates in the economy go up, that means new bonds issued at higher interest rates will be more attractive; and previously issued bonds at lower interest rates will be comparatively less attractive. The price of these bonds fall, and as a result, the interest rate they pay as a percentage of their market value goes up, usually to equal the interest rate paid by newly issued bonds.
24. Bond prices are inversely correlated to bond yields: For the reasons explained above.
25. Commodities trade in the futures market: Precious metals, industrial metals, agricultural products, livestock, oil, natural gas, and textiles all trade in the futures market, where traders buy and sell contracts for the future delivery of the particular commodities.
26. Gold and silver also trade in the spot market: Gold and silver also trade for current prices in the spot market. These prices help establish the prices charged by coin dealers.
27. Gold and silver are also available for purchase in ETF form: Exchange-traded funds (ETFs) trade like shares of stock on a stock exchange. “GLD” and “SLV” are the ETF ticker symbols for gold and silver, respectively. Investors can buy shares of these ETFs, which are designed to represent actual gold and silver.
28. Currencies trade in the Forex market: “Forex” means “foreign exchange.” Major currencies such as the euro, the yen, the British pound sterling, the Australian dollar, and the Canadian dollar trade against the U.S. dollar in the global Forex market.
29. Liquid real estate and infrastructure: The fifth and final liquid asset class includes exchange-traded assets backed by real estate and infrastructure. These include Real Estate Investment Trusts (REITs) and oil-and-gas pipeline MLPs (master limited partnerships). ETFs that combine many REITs and MLPs are available under the respective ticker symbols “VNQ” and “AMLP.”
30. Inverse correlation provides diversification benefits: A diversified portfolio of investments includes some investments that go down when others go up. This tendency is measured by “correlation.”
31. The traditional portfolio is 60% stocks, 40% bonds: This allocation was based on the historical pattern that stocks and bonds had low or inverse correlation, so that when stocks went down, bonds went up, and vice-versa.
32. Monetary policy has altered the relationship between stocks and bonds: Last year, bonds were widely expected to fall but didn’t. Stocks and bonds are positively correlated now, since the Federal Reserve inflates the money supply at the slightest hint of a crash in either market.
33. We don’t have a free market: As depicted in this rundown, interventions inevitably lead to suboptimal outcomes. Governments intervene in markets through taxation, regulation, and monetary inflation.
34. Central banks control the money supply: Although the U.S. dollar was backed by gold until 1971, since that time the entire world has been on a fiat-money standard, whereby their currencies are backed by U.S. dollars, and our currency is backed by nothing more than the military might of the U.S. government. This system is unsustainable, and everything that’s unsustainable must end (Stein’s law).
35. New money enters circulation as debt: The Fed creates new money by buying government bonds, which are issued as a result of the government’s expenses exceeding its taxation revenues. This is called “monetizing the debt.” The Fed writes checks which are backed by nothing but the debt it purchases; the government cashes the checks and distributes the new money to government contractors and employees. By the time the money circulates down into the hands of working people, its value has usually been reduced by price inflation. Banks also create new money when they issue loans, which are also debt.
36. The Petro Dollar holds the system together: Oil is still (for now) the global economy’s most vital resource, and through imposition of its military might, the U.S. government prohibits oil transactions from using any currency other than U.S. dollars. If Saudi Arabia sells oil to Iraq, the Iraqis must pay for the oil in U.S. dollars. When countries have tried to circumvent this rule in the past, it has led to the overthrow of their governments by U.S. forces.
37. Domestic production of U.S. oil is at all-time highs: Thanks to the shale revolution and breakthroughs in hydraulic fracturing (“fracking”), U.S. oil production has created a global supply glut, pressuring prices down.
38. OPEC is a cartel: The Organization of Petroleum Exporting Countries (OPEC) is a cartel controlling around 40% of the world’s oil production. The members, which include Saudi Arabia, Iran, Venezuela, and Nigeria, among others fix prices by restricting production.
39. OPEC is powerless to stop oil’s slide: Nobody in OPEC is happy about oil’s current price, but the member states are burdened by bloated socialist budgets, and they can’t afford to cut back production (thereby cutting back sales), even in the face of low prices.
40. Low-price oil is leading to low price inflation: Since the government measures “inflation” in terms of the prices of a “basket of goods” in the consumer price index (CPI), and one of those good is oil; price inflation is currently low.
41. The Fed has a 2% inflation target: The Federal Reserve, whose original job was to maintain price stability and full employment, now targets 2% price inflation (i.e., 2% price instability) and 5% unemployment (i.e., 95% employment).
42. The Fed created $1.8 trillion as part of “QE”: As part of its “quantitative easing” bid to “stimulate” the economy, the Federal Reserve created $1.8 trillion in new money between 2008 and 2014, which many people predicted would result in consumer price inflation.
43. The Fed’s money flowed into financial markets instead: While increases in CPI have remained below the Fed’s targets, the stock and bond markets have been bullish, and until recently, so were commodities markets.
44. Oil was in a Fed-created monetary bubble: Oil’s price dropped so precipitously because its boom was the result of speculators using the Fed’s newly created money. When the Fed creates the new money, it stays in the hands of elites, who use it to invest in financial instruments, rather than increasing production.
45. The BOJ and ECB have taken up where the Fed left off: The Bank of Japan (BOJ) announced a roughly $60 billion a month “quantitative easing” the same day the Fed ended its QE. The European Central Bank (ECB) has also announced its own QE.
46. Global QE suppresses “risk-free” rates of return: In the modern world of fiat money in which governments control the monetary printing presses, government bonds are seen as being “risk-free,” since governments can tax their citizens or ultimately print new money if they need to, in order to make the interest payments. Since central banks buy these bonds with newly created money, they artificially suppress the interest rates paid on the bonds. Remember: Bond prices are inversely correlated to bond yields, and since central banks bid up the prices of new bonds, they push down the interest rates they pay.
47. Global QE thus suppressed all rates of return: In considering the “opportunity cost” of an investment, investors must compare its risk/reward probabilities to the risk/reward of the “risk-free” rate of return provided by government bonds. If “risk-free” rates are suppressed, then investors are motivated to take on more risk to achieve their desired level of returns. This is what has pushed the Fed’s new money into riskier areas of the market, such as emerging-market stocks.
48. Central banks need inflation: Central banks work on behalf of national governments, all of which are deeply indebted. Since inflation reduces the purchasing power of money, it makes debt less onerous to pay. Governments therefore are unquestionably proponents of inflation, which is nothing less than the theft of consumers’ purchasing power.
49. Gold and silver are inflation hedges: Gold and silver have been used as money since before the dawn of recorded history. Their usage evolved from free and voluntary exchange. Demand for gold and silver is much more stable than the purchasing power of fiat money, which is constantly eroding.
50. The dollar will likely get stronger in 2015: Since the BOJ and ECB are rapidly inflation their money supplies, pushing down interest rates in those countries; foreign investors are flocking to the U.S., where returns are high (albeit still extremely low) and expected to get higher when the Fed begins raising interest rates later this year. Thus, despite the Fed’s massive monetary inflation, consumer prices are likely to remain low in the U.S., and this will likely result in flat, modest, or negative returns for precious metals in 2015.
Conclusion
The strong dollar cannot persist indefinitely, and ultimately, all fiat moneys of the world are doomed. That said, 2015 presents a good opportunity for gold and silver investors to use the strength of the greenback to gain more precious-metals exposure, whether through physical assets, mining stocks, or ETFs. Physical gold and silver, in particular, protect against uncertainty and should be in every investor’s portfolio.
While the dollar looks to be strong in 2015, the Soviet Union fell without warning, and the same thing could happen to the global fiat-money system any day, even if the chances of collapse remain very remote for any particular day. Anything that’s unsustainable must come to an end, and the fiat-money system is a teetering house of cards, unlikely to fall in 2015, but guaranteed to fall in time.