Dec

13

An awful lot of investing is simply gambling. A lot of people love to gamble, and investing is the one form of gambling that is legal in all 50 states. When people buy the stock of a company because they know it is going to go up, they may know nothing at all about the company; or they may know nearly everything. Either way, they are betting on a future number; and to call it investing becomes at most a half-truth. Almost all the time, The company itself gets none of the money being spent in the Wall Street casino by the gamblers/investors.

This is where the problem of money and credit comes in. In financial markets, sooner or later, the investors/gamblers can find themselves in danger of default because they do not have the cash on hand to meet their promises to pay. For whatever reason, they face a mismatch between their financial assets and liabilities. Most of the time, they can simply take the loss or get the extra credit they need; but sometimes there are so many people caught short at the same time that new credit can be hard to come by. Even the people in the credit business find themselves wanting to lend less, not more; and those who are willing to lend want what is so impossibly high a price that being saved seems almost as bad as enduring default. for lending it. When this happens, a lot of investors/gamblers, especially if they went to good schools and studied economics, expect the government "to step in". What that means is that they want the U.S. Treasury and the Federal Reserve to give them credit on easy terms. Almost always, the government has obliged.

The irony is that when the government does not step in, when it tells the gamblers/investors to work it out among themselves, the seemingly impossible situation gets resolved. It did in 1873 and again in 1920. It is only When the government does "step in", that the cost becomes considerably greater. Either The country either borrows an enormous amount of money which it never pays off except by borrowing new money or the people see their own savings destroyed through bank failures, outright confiscation or suppression of interest rates. When the government hands out the free money to the investors/gamblers, the Panic turns into a Great Depression/Recession which leads, in turn, to another foreign war.

These dismal facts of history do not answer a serious question: what would happen if the government gave the credit to people and left the investors/gamblers to themselves? Why not give people more money whenever they need it? Ever since the country began as a collection of Dutch, Spanish and British colonies on the western coast of the North Atlantic ocean, "ordinary" (sic) people have been asking what really is a sensible question. If, in 2009, Warren Buffett and the other richest men in the country can get free money "to save the financial system", why can't the rest of us get some?

The rich, who are always the largest part of the government and often all of it (they certainly were in 2009), have a simple answer: the rest of us won't ever pay back the free money. They are right, of course; we need the money to spend it now, not to invest it to earn more money in the future. What the rich don't admit is that they don't pay it back either. Since the U.S. Government first claimed the right to own the country's men of military age (it's called the draft) in 1942, it has never once paid off any of the money it has printed "to save the financial system" and/or "have another foreign war".

Occasionally, the American government ends up in the hands of someone who actually thinks the people need sound money more than the rich do. When that happens, he (and in the future, she) does something truly bizarre. He/she insists that the U.S. government do what the Constitution says and use only Coin for its money. George Washington did it; Andrew Jackson did it; so did Ulysses Grant. They even manage to have the government pay off its debts. Since money is not "free" under such a system, They cannot directly give people more money. What they do instead is create a world where the money people have and can earn goes farther and farther. The wonderfully odd thing about following the Constitution, about allowing only Coin to be money, is that prices fall even faster than wages; every-anyone who earns and saves money finds themselves getting richer and richer without investing/gambling at all.

No wonder so many "educated" people hate the Constitutional money standard; it works far better for "ordinary" people than it does for them. The poor can, with work and thrift, stop being poor; they can do what generations of Americans' ancestors did. But, for the Progressives and the rich owners of the government, a Constitutional money standard takes away their ability to make certain that the government will spend and borrow money for their benefit. Even worse, the CMS takes away the promise that the rich and their friends will always be the winners of the free money lottery. As we all should have learned from the last financial panic, the really successful investors/gamblers are the ones who can have even their losing bets covered by the government's free money.

Money - currencies - are what each country or group of countries uses as its financial unit of account. In the U.S. the unit of account is the dollar. Almost everything borrowed, bought, lent or sold in the U.S. is priced in dollars, including the investing/gambling in the financial markets. Almost all the trading involves promises to pay money. Some of the promises are clear; with bonds you, the investor, get a specified interest rate and your money back on a certain date. Some of the promises are only implied; with stocks you own a piece of a corporation and are entitled to whatever the Board of Directors decides to do for the shareholders.

What is interesting about financial markets is that, as the total amount of financial stuff get larger and larger, the promises to pay actual money come close to disappearing. In really sophisticated investment markets - the ones where some of the gamblers don't even understand their own bets, the trades are swaps where financial stuff is traded directly for other financial stuff. With currency swaps between central banks - the largest trades of all - payment is not even considered. When the U.S. Federal Reserve and the Bank of England agree to swap dollars for pounds, neither of them is going to actually use the money to buy something.

None of this is "bad" except in the sense that gambling itself is "bad". And, if you really think gambling is "bad", then you don't want anyone to take the risk of spending their money on starting a new business or developing a better, faster, cheaper way to do things. The problem is not in people using credit and taking risks with it; it is in having the rest of us bail them out when they fail.

The argument made against having only Coin as money is that it will bring the country to a halt. If people can demand that their Federal ReserveNotes be exchanged for gold coin, the argument goes, then there will be no more credit. People won't be able to buy Starbucks lattes with their phones. Why not? Carrying phones and credit and debit cards will still be much more convenient than carrying money. Using paper money will still be easier than carrying a sack of coins. All that will change is the ability of the rich and the educated to have their government spend money they have printed for themselves for free. They will still be able to borrow money; they will just have to do what "ordinary" people have always done - figure out how they will earn enough to pay it back.


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1 Comment so far

  1. astro the dog on December 14, 2016 1:34 pm

    investing is simply gambling:

    Speculation accepts risk.

    Gambling creates risk.

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