Power in the “wrong” hands is still the world’s greatest threat

The concluding paragraphs of the book “Free to Choose” written by Milton and Anna Friedman in 1980 end with the following comment:

“The two ideas of human freedom and economic freedom working together came to their greatest fruition in the United States… they are part of the very fabric of our being, but we have been moving away from them.”

As part of the population of the free world, it is this writer’s view that we have been forgetting the basic truth that the greatest threat to human freedom is the concentration of power, whether in the wrong hands of government or anyone else. We have, unfortunately, been previously persuaded that it is safe to grant power, provided it is for good purpose. Ayn Rand in her global classic,

Atlas Shrugged, has shown to us a great disagreement as well as why we should reject that persuasive feeling that we get from the socialist intelligentsia.

Watching the recent US election campaign is making it clearer that perhaps we who live with freedom should be waking up and beginning to recognize the dangers of being over-governed with rules of overregulation by government that can be perverted by bad means. The relevance on the freedom of people to control their own lives in accordance with their own values is the surest way to achieve the full potential of a great society. The current revival of Ayn Rand’s classic book,

Atlas Shrugged, is part of the demand for the resurrection and the partnership of human and economic freedom. Unfortunately, the outcome of this potential for our society is about the most bullish feeling that I can take away as I, as an investment counsel, observes and studies the global economic and financial scene that we live in the midst of currently.

But to continue with Milton and Anna, “Inflation is a disease, a dangerous and sometimes fatal disease, a disease if not checked in time can destroy a society”. Many examples abound.

No government should be willing to accept responsibility for producing inflation. Nonetheless, when inflation occurs those elected or even non-elected governments always have someone to blame:

• Greedy businessmen

• The rich

• Tradewinds

• Spendthrift consumers

• Bad weather

• Arab sheiks

Nevertheless, none of those have the printing press (the magic pen), that central bankers have exclusive use of when they merely “authorize a bookkeeper to make ledger entries that create those pieces of paper that we call money.”

The 1980 book written by Milton and Anna and which achieved their Nobel Prize in economics convinced me and a host of many others, that inflation is not a capitalist phenomenon. There are many socialist and communist economies that have experienced some of the most rapid rates of inflation. In our modern world, according to the Friedmans, “inflation is a printing press phenomenon, and today there are appointed central bankers who have been given the ultimate authority over government printing presses for paper money.” The Friedmans, in their book, ask the question, “Why do modern governments increase the quantity of money too rapidly? Why do they produce inflation when they do understand its potential for harm?” I add to this the question of why do governments work hard to deny their creation of inflation and then try to conceal their own responsibility for inflation? Simplistically, the answer is that the more normal environment for the achievement of stable prices is actually a deflationary event, and governments do not get elected when they produce deflationary economies, period. The voters and the public are happier with inflation than deflation.

The necessity of a democratically elected government and their politicians to finance their spending by continually increasing the quantity of money is actually often considered to be getting something for nothing, which, like all such things from never-never land must be provided by a “magic pen”. Today, many of our politicians of the free world and elsewhere are using that “magic pen” with a vengeance.

The end result of higher government spending, the full employment policy and the US Federal Reserve’s obsession with interest rates has been a roller coaster ride along a rising path. A rising path of inflation which – from time to time – is brought under check. But each time it rises again and after a check, we get higher inflation. Of course, with that “magic money” created by the Fed, government spending has been rising as a fraction of income received along with government tax receipts which have also been rising, but not quite as fast as the spending. As a result, US deficits have been rising. This type of action is not unique to the United States, or only to recent history. Since time immemorial sovereigns – kings, emperors or elected parliamentarians of any sort – have used “magic money” to acquire things, to wage wars, build monuments, fly around in expensive airplanes, live high or any other act or thing that the “magic money” allows them to succumb to their temptation. Whoever in power, and whenever in time, we must note that printing of “magic money” has always been closely followed in time by an inflationary event. For most of the history of the United States as well as a good part of the rest of the world, slow but continuous inflation has always been accepted as natural because both wages and costs were increasing at the approximate same rate.

Today, history shows that since 1912 the US dollar has lost more than 95% of its value. What cost a nickel in 1912, costs a dollar today. What cost $50 in 1912, cost $1000 today. It was in 1913 that the US Federal Reserve was created and it was in 1971 when President Nixon abolished the gold standard. It took 58 years after the Federal Reserve creation for the dollar to lose 75% of its value. But it only took 26 years after Nixon ending of the gold standard, for the US dollar to lose another 75 per cent. The scary part is that the next 75% decline appears today to be in the process of being established, and as investors, it is appropriate and necessary to be prepared. It is a fact that money does not lose value naturally it does not degrade itself; its degradation requires manipulation by central bankers.

The Economic Nobel Prize winning Friedmans have convincingly proven and have had their proof accepted by a host of competent economists. The printing of money is always an inflationary phenomenon. The ownership of hard assets such as real estate, farm land, gold, silver, energy and many other commodities, either directly or as a derivative, such as those entities that produce or create them, surfaces as an absolute necessity for investors at large.

The McKinsey Global Institute recently prepared a 210-page study entitled “Resource Revolution; meeting the World’s Energy, Materials, Food and Water Needs”. The major conclusion of their 210 pages of study was that – 3 billion more people of middle class are expected to become consumers in the global economy over the next 15 to 20 years and at least $1 trillion (US) and perhaps as much as $3 trillion more investment in the resource system is needed each year over these years in order to meet the future demands of land, food, energy and materials. New sources of supply and extracting them is becoming increasingly challenging and expensive. We are living through a world that is not ready to accept 2 to 3 billion more middle class capitalists.

The McKinsey Report offered insights into how the demand for resources is evolving and how we are going to see it grow over the next 15 to 20 years. The report examines what policy makers and the private sector are requ
ired to do in order to overcome significant resource constraints as we go forward. Part of their conclusion is that “expanding capacity in order to add the necessary supply of materials will likely run into logistical and political difficulties, making the adding of supply even more costly. In short they are saying that demand is soaring at a time when finding new measurable participants in the global economy is in decline.

It is my belief that it is time to fertilize investment portfolios with those companies that produce the “stuff” that those consumers in emerging markets, who are clamouring for the developed world’s “good lifestyle” that is kept on conspicuous display will require. The world’s population, mostly in China and India, is growing by more than 75 million people per year.

To conclude with some investment advice, it is a well-known fact that the world’s Central Bankers are the only ones free to use “insider information” to execute their expected task. We should all be aware that the most prominent purchasers of gold bullion today are the Central Bankers – maybe they know something?

 

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