Yesterday, we closed up the house and began our trip back to the US.
This morning we are in Paris. But the City of Lights is as empty and lifeless as Senate hearing. It is a holiday in France: the day of the Assumption of the Blessed Virgin Mary… on which the mother of Jesus was “assumed” into the company of angels, archangels, saints, seraphim, cherubim and whatever one finds in heaven.
It that weren’t enough, it is the 42nd anniversary of the day on which our money system became faith-based too. We’ll come back to that in a moment.
Yesterday, Wall Street stirred. The Dow fell 113 points. Gold rose $12 an ounce.
We believe these are portents of coming trends. The bond market has topped out. The stock market has topped out. Gold has bottomed. Stay tuned for confirmation… or further guesswork.
Back to the Feast of the Assumption… and other things…
Full Frontal Lobotomy
Did Mary really ascend to heaven on this day? Was she really a virgin? Did she really give birth to the son of God? You need faith to believe such things.
Likewise, you need faith to believe that a piece of green paper is “money.”
You are also supposed to believe its managers will make sure this “money” holds its buying power… even as they do their damnedest to undermine it. But to believe that you need more than faith. You need a full frontal lobotomy.
Ultimately, all money systems are based on faith, but some require more faith than others.
Even a barter system requires barterers to have some level of trust in each other. But contrary to popular belief, barter was never a basis for trade for settled groups of people. Instead, early forms of “money” were webs of credit, says anthropologist David Graeber in his book Debt: The First 5,000 Years.
This credit-based system worked well enough, as long as the community was small. You could remember who owed what to whom. And you knew, too, whether you could trust your counterparties to make good. Faith was reality-based.
Today’s money system – put into place by Richard Milhous Nixon on 15 August 1971 – is essentially a modern form of a credit-based system. It is based on faith in the government and its functionaries. And in the economics profession. And in the financial industry. And in the dollar.
We have been following a conversation between colleagues Justice Litle and Rob Marstrand, two smart analysts who work for our new publishing business, Bonner & Partners. (Justice edits a new investment advisory that focuses on profiting from big macro trends called Strategic Wealth Report. Rob is the chief investment strategist for our family wealth advisory, Bonner & Partners Family Office.)
On the surface, the subject of the conversation is how the European Union can get itself out of its economic slump. As you can see, Europe is looking better, but not exactly rosy. Britain’s The Telegraph is on the story:
The immediate threat of banking and fiscal meltdown in the southern periphery has receded, and after one of the longest recessions on record – six successive quarters of economic contraction – there are even tentative signs of recovery.
[But] unemployment, already at intolerable levels in some euro-zone countries, is still rising and money growth remains exceptionally depressed.
Nor is there any end in sight to credit destruction, with deeply negative implications for SMEs and future jobs creation. According to a new report by Royal Bank of Scotland, Europe’s banks need to shed a further €3.2 trillion of assets (roughly equal to annual German GDP) to comply with new international capital standards.
IMF research cited last week by the European Central Bank puts the euro zone’s “structural unemployment” rate – that is the unemployment that won’t go away even after the economy returns to normal – at a staggering 10.1%, up from 7.4% before the crisis. If correct, it means that any European recovery will be a largely jobless one.
What to do? What to expect?
As Justice points out, it’s a real brain bender. Neither austerity nor stimulus work as advertised. Each comes with problems attached. And in modern democracies – not to mention a collection of 27 sovereign nations with 24 different official languages – the authorities’ hands are tied. They are limited by what the public will accept. The public needs to have faith too. Otherwise, it won’t go along.
To paraphrase the positions: “The problem is debt; adding more debt does not help,” says Rob.
“Yes, but when you try to reduce debt by cutting government spending, the economy shrinks, deficits rise… and you get more debt relative to GDP, which is ultimately what matters,” answers Justice.
Justice goes on to point out that in the 1930s austerity budgets led to social chaos, which opened the door to Adolf Hitler in Germany and the militarists in Japan.
Who’s right? Who’s wrong?
Well, there’s the deeper problem. Who can know what policy will lead to what outcome? No one! There are too many questions. Economies and markets are complex dynamic systems that often obscure cause and effect. We tend to think in post-Enlightenment rational terms… and step-by-step logic. But in systems such as cultures, economies and markets, this kind of logic flounders.
In a primitive, tribal society you can have a fair idea of what’s what. You can operate a credit-based system because it’s fairly easy to know who’s a good credit risk and who isn’t. But when you are operating in a complex, modern economy you don’t know much of anything. All you have are questions.
But your questions will be answered. A credit-based monetary system will continue to add credit until faith gives way… and the whole system blows up.
Then the asset everyone will want most is the asset about which you don’t need to ask questions: gold.
Gold owes nothing to nobody. Gold is the money that requires the least faith.