A friend recently sent me a picture of a 1957 $1 silver certificate he found in his change while buying a cup of coffee. He’d been a coin collector as a kid and learned that his father carried nearly the same note in his wallet.
When I brought up Gresham’s law and the recent news that U.S. public and private debt had just breached the $18 trillion mark, it made very little impression, other than a brief pause in thought, though barely recognition.
Gresham’s law is still in effect, but as some sort of novelty.
Can you imagine taking risk that makes no rational sense, even after observing and repeatedly confirming that your bank (or your country’s financial system) has run amuck?
Say you’ve accumulated some of those notes. Can you imagine redeeming them for silver or gold?
Of course you can. Most of you reading this are actually doing that, quietly and unofficially.
But for brief moments of pure control, clipping, or price manipulation, the precious metals have nearly always been a key signaling mechanism — acting as the most efficient economic and financial communicator.
Gold and silver have always been money, only they have not served as legal tender currency.
The masters of finance will always seek to silence the canary; especially in an age where currency is unredeemable promise where expansion occurs by decree.
Smother it in a politico-financial policy-induced mountain of babble as the ultimate anchor on credit expansion. It is much harder to hide or lock away than electronic representations that stand in for money today.
The final clearance mechanism. The end of the line when expansion goes too far. When the risk is palpable and unbearable.
Equity margin debt is at record highs and irrationalizes exuberance for hollow technology companies which dominate the investment imagination.
The U.S. oil complex seems ripe for bubble bursting as supply and financial liquidity dry up. Real estate prices relative to rent have stretched out to beyond pre-subprime crisis.
Currently, the U.S. median income is $28K. The median home price is $300,000. But the danger is in the participation. Work participation and debt participation are at polar opposites.
This puts us on the razor’s edge of collapse, where a flood of defaults will need to be cleared as more and more fall out of the system. Most people in the wealthiest nation on earth do not have enough resources to sustain them after 1 or 2 missed paychecks.
And people realize this on a certain level - maybe not always on the surface. But it is reflected in their decisions and what they choose to learn about the consequences.
As a result, every aspect of life is at risk of terminal exploitation - from healthcare to agriculture. It creates an epidemic blindness in which even the most sophisticated and wealthy are not immune. Few see any risk beyond the next paycheck or quarterly earnings report.
It may be difficult to verify the origin, but the myth that a Roman engineer was recently forced to sleep under a bridge evolved for good reason. It doesn’t mean that it will fail later — so all risk is not removed.
As time goes on, the engineer may lapse on maintenance or fail to communicate new developments regarding the structure of the bridge. The engineer could be lying. Unfortunate and unforeseen outcomes may occur, regardless of intent, even regarding the dividend producing, rational, meaningful financial fund with honest directors who are tethered to performance and are legally liable.
They are still cogs in the wheel of a system that has long gone off the rails. We used to hear a lot about “moral hazard”. The euphemism seems to have faded along with most investors’ memory of just 5 or 6 years ago.
But risk is rewarded, and lavished upon in the climax of too big to fail. There will always be cycles in finance - occurring alongside culture and society. History repeats, rhymes.
We are here again.
It all boils down to counter-party risk. When the counterparty cannot demonstrate that they can be trusted…we have problem.
A prudent actuarial look at the entire world would force the insurance premiums to skyrocket. Just as the skies open and the system collapses.
In the end: Yes. There will be investment returns realized. The cycle will continue.
Yet at the end the road, when the storm is over, the insurance policy written in physical precious metals will be left standing.
The metal itself intact for another 7000 years. The metal you control and no one else.
The policy written in silver.