The Market, Gold, and other Myths

A talk given at the Committee for Monetary Research and Education, posted by Jesse on 22 October, caught my attention due to the high praise Jesse heaped on its author, Ben Davies. Ben Davies is an investment manager who claims to be having a hard time in the markets, which are not operating as they should. He begins by referencing Rumsfeld (Donald), Heisenberg, Popper and Soros, an illustrious group variously famous for their work on uncertainty, with Davies’ point being that The Market is about as uncertain a playground as you can get. His belief is that they whir quite closely around dynamic equilibrium unless interfered with. Sadly governments do interfere, then markets suffer, then we all do. It’s that simple, despite the uncertainty and complexity. One thing is crystal clear; The Market, in Davies’ world, is the god of truth and blind wisdom, and must not be tampered with, ever. It is beautiful in its awe inspiring complexity, merciless, all-knowing, rewarding and punishing participants with unerring accuracy.

We mortals, on the other hand, are cripples of imperfect knowledge, Davies laments. No matter how smart a particular Master of the Universe might be, “No one person can likely understand everything.” This is an honest admission, since perfect knowledge is one of the prerequisites for perfect competition, without which markets cannot work as Davies eulogizes. Nevertheless, he leaps deftly from all this uncertainty and imperfect knowledge straight onto the broad shoulders of Rational Economic Man, who sadly is not always allowed to be rational:

Rational behavior becomes irrational in the thickening of the maddening crowd until the crash wakes us from the insanity.

There is rational behaviour as a rule and things are generally fine, then folk get crazy and bubbles form. Accursed bubbles, blemishes on the beautiful face of The Market. How dare they!

How indeed. Davies blames government:

Intervention in or manipulation of markets by the state is such a distortion. Its acts postpone the day of reckoning for years or even decades. It creates false sense of equilibrium that ultimately gives way to disequilibrium and heightened instability. We have not experienced free markets -- that is, the invisible hand -- for decades.

Only The State can do this of course, no other person or entity. It wouldn’t be in a businessman's or corporation's interest I suppose, it wouldn’t be rational of them, because they understand full well that The Invisible Hand takes care of everyone, a beneficent Big Daddy quietly doing good by coordinating our rational, self-interested pursuit of ever more money far better than anything else possibly could. This is why there is never any fraud or other crime, or market manipulation from business, unless The State comes along and pokes its nose where it's not needed. Things were so good in the past, when Hand, The Invisible was free to work his magic.

But governments are peopled by the economically ignorant, and can’t keep their busy-body fingers to themselves. Nowadays, “financial markets are the mirror of state intervention, revealing our every hour of labor confiscated, our lack of personal ownership for our decisions, and the resources the state absolves us of.” If only government could be rational, like Economic Man, we wouldn’t be in this fix. Perhaps we should privatize it. Or establish laws making market intervention illegal. Maybe that would be a rational solution. Without government in the way, there’d be no crime, because The Market would be free at last!

Ah, Rational Economic Man, how I hate him. How I want to punch him in the mouth, knee him in the gonads, then, as he doubles over to vomit out his rationally consumed breakfast, stab a ball point pen into his neck. Is this rational of me, this venomous rage? Am I being infantile? Probably, but I don't care. I don’t even know what rationality is.
 
My wife met a piano tuner earlier this week, who told her the following tale. A musician friend of his could no longer play, and was forced to sell her grand piano. Its value was €15000, known to her at the time. She sold it for €4000. Obviously no one was prepared to pay €15000, right? Wrong. She had offers of €15000 from various parties, but sold it to the buyer who she believed loved her piano. This buyer could only afford to pay €4000. Rational, or irrational?

If we were indeed as rational as economics theory needs us to be, fashion would not be fickle yet pervasive, advertising would be a waste of money, we wouldn’t flock to watch sentimental, or horrific movies in our millions, and a million other ‘anomalies’ we indulge in daily. The world would be a very different place. We irrational, untrained ones know this, but worshipers of Market Almighty and orthodox economists alike won’t. On purpose. They belligerently refuse to allow a rich and complex human beast full play in their theories. They can’t. It would be too difficult. And economics would have to change from the bottom to the top.

Another element of Davies’ speech which irritated was about money.

Twenty years ago, according to the Forbes Rich List, there were 140 billionaires. Three years ago there were almost 500. This year there are close to 800, each with an average net worth of $3.3 billion. Why the surge? The "invisible hand"? No. Animal spirits? I doubt it. Did the world just get eight times more get-up-and-go? Hardly. So what then?

Money -- that's what.

Not money per se, Davies lambasts fiat debt-money (rightly, though fails to mention money is created by private banks), but reckons gold to be the ultimate money, and that what we are witnessing in gold’s price rise is the inexorable return to gold as money because, well, paper’s just paper, right? Anyone can print some of that shit off the press with some fancy markings on it, whereas gold has history, longevity, stays shiny, has heft, charisma, and can’t be created out of thin air. And that forever. Even the direction of the Earth's spin is uncertain for Davies; “Remember: Just because the sun rises in the east and sets in the west doesn't mean it always will. That, I know, is unknown.” But gold is eternal.

The fact that gold can be manipulated via clipping and other scams; can support debt-created money via ever thinner fractional reserves; is finite in amount on the planet (at least until technology can create it) whereas man’s economic imagination is infinite; that is has been the cause of deflations in the past, as well as inflations, Davies does not mention. No, everybody just knows gold is the real deal. All you have to do is look at it, so pretty and shiny. And though he does not mention store of value, his gold-love is dripping with that notion. For Davies, money is wealth, or should be. I’m sure he would agree with the following:

In most of the world's advanced economies, the local currency can be counted on as a store of value in all but the worst case scenarios. However, currency can sometimes come under attack as a store of value (such as in hyperinflation). In those instances, other stores of value have proved their consistency over time, such as gold, silver, real estate and art. The price of gold, in particular, will often skyrocket during times of national peril or when a financial shock hits the broad markets, as demand grows for other widely recognized stores of value. [Source]

I shouldn’t be disappointed, but I am. Have these people not read the story of King Midas? Have they not considered that a world suddenly robbed of all its gold would present humanity with a minor problem, but stripped of its soil humanity wouldn’t last another year? Similarly, if all notes and coins disappeared, along with all digital records of all money everywhere, we could recreate money and go through a system reset, or (small chance) try out a resource-based economy. Money does not make the world go around. Money is a medium of exchange, not a commodity. I’m repeating myself, I know, but this needs to be said again and again, because the wrong idea of money is out there still, and deeply so.

Money’s value and stability cannot possibly be intrinsic, in gold or art or anything. If they were intrinsic, inflation and deflation would be impossible. Money gets its value relative to goods and services available for sale. It is a legal invention, a fiat whether paper, gold or cow—there can be no market without some sort of state apparatus, however simple, laying down the laws of its operating, and no money without consensus—and represents value and performs stably only for as long as social, economic and environmental conditions allow it, not from inside itself.

Davies’ analysis of money is woefully ignorant, and that Jesse touts him as eloquent and knowledgeable surprised me; I had held Jesse in high regard. There is a growing nostalgia out there at the moment for 'the real deal,' whether this be gold, or genuine capitalism, or rational behaviour, or the Invisible Hand unmolested and free. Perhaps those who love these notions can sense their end is near, and turn to such melancholy musings as Davies'. Whatever the reason for their increased appearance, the sentiments are as wrong now as they always were. I can only hope we are able to wise up to it this time around.