Pre-empting strong states

June 28th, 2009

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On our previous article, one of our readers David, commented that

The situation you describe is just the kind of thing that makes me wonder what will happen when the squeeze occurs. I wonder if all of a sudden the government will come in and change the rules of the game to hide this or prevent it from happening. All of a sudden the rules might just change and FRNs might be substituted for physical Silver in contracts that require physical Silver delivery, just for the sake of the system, and like preferred debt holders at GM silver ?holders? will not get there silver and not have their day in court either.

I can?t remember the source of this quote but it goes something like this:?its not necessarily good to be right when you are betting against the government.? This goes again to the deterioration of the rule of law in the USA and the capital flight this will cause. Will laughing really be the right course of action when Silver defaults happen and the price starts to rise?

This situation mentioned by David is the major Black Swan concerns that bullion investors have. As we mentioned in the reply,

Yes, that quote comes from Marc Faber.

Government intervention to change the rules in the middle of the game is the fundamental uncertainty of silver play (in fact, it is a play on all precious metals/commodities/real assets investing). It is a Black Swan (rule changing) on a Black Swan (silver defaults).

A question we have to ask ourselves is whether we think the future is one of the strong state or a weak state (see Gold and the strong state). A strong state is one in which it has the coercive power to change the rules and enforce obedience to the rules on pain of death. The weak state is one in which the free market forces overrule the powers of the coercive state. There are good arguments for either case.

In either case, we have to be vigilant and take pre-emptive steps in the event that we see the rise of the strong state.

This reply prompted another of our readers, pb, to ask,

I was wondering if you could elaborate on the ?pre-emptive? steps you mention above?

Also would you consider Australia to already be a strong state?

Today’s article will answer this question. For this, we will assume that you’ve already read Gold and the strong state. Otherwise, this article will not make sense.

First, we will address the question of the strong state. Our idea of the strong/weak states comes from this book from the Strategic Studies Institute of the United States Army War College- From the New Middle Ages to a New Dark Age: The Decline of the State and U.S. Strategy. The author believes that the world trending towards the New Dark Age whereby…

Underlying the change from traditional geopolitics to security as a governance issue is the long-term decline of the state. Despite state resilience, this trend could prove unstoppable. If so, it will be essential to replace dominant state-centric perceptions and assessments (what the author terms ?stateocentrism?) with alternative judgements acknowledging the reduced role and diminished effectiveness of states. This alternative assessment has been articulated most effectively in the notion of the New Middle Ages in which the state is only one of many actors, and the forces of disorder loom large.

We remain agnostic on the author’s view. Will the state reign supreme? Or will, as the author believes, the “state is only one of many actors, and the forces of disorder loom large?”

To set you thinking, let us pose you a couple of scenarios:

  1. Let’s imagine you had bullion in Stalin’s Soviet Union in the 1930s, and let’s imagine that Stalin issued a decree that all bullion owners must turn in all the physical gold in their possessions. Otherwise, the consequences will be torture and death in the gulags. Would you comply?
  2. Let’s say you have bullion in Afghanistan today. Hamid Karzai’s weak central government issued a decree that all bullion must in the possession of the state. Would you comply?

These two scenarios are at polar opposites. The question of whether Australia is a strong state or not is rather subjective (and besides, geo-politics/law is not our cup of tea). Arguably, Australia is a stronger state than China. That’s because assertion of central authority is constantly an issue in China’s long history. Today, we still read of stories of the Chinese central governments’ decrees getting watered down as they passed through the provincial governments to the local officials, down to the grass root level. In another sense, China is a stronger state than Australia because there are more democratic checks and balances that limit the power of any entity in Australia. As to whether Australia is a strong state or not, we urge our readers to take a look at Section 42 of the Banking Act here.

In essence, if we see (1) the trend towards stronger government power, more government interventions, greater concentration of power, rise of Big Brother and (2) government debasement of fiat money, then bullion investors should better watch out and take pre-emptive actions. What do we mean by pre-emptive actions? This is a rather left-field question, involving all your wit to remain a step ahead. Here we offer you some ideas (note: we do not necessarily endorse all these ideas):

  1. In 1933, when the US government nationalise gold and silver, 77% of citizens retained them, illegally.
  2. The government will nationalise bullion if the free market are using them as money. If the free market are using them as money, it means hyperinflation would have occurred. If hyperinflation have already occurred, it would already mean that wealth have already been transferred to the bullion holders. If wealth have already been transferred, then there’s no point in holding bullion. By the time this occurs, sell your gold to the government and immediately use the proceeds to buying something else tangible (e.g. real estates, farm land, office blocks, bribes to skip the country on a boat, etc).
  3. There’s always the black market, which is essentially the free market going underground to assert itself against the government’s unsound interventions.
  4. Buy and store your bullion overseas (this may mean you have to make an overseas trip to do that).

It should be clear by now, investing in physical gold (and silver) is not just a mere financial decision. It is also making a political statement that you care for liberty and freedom. It is also a vote against the financial oligarchs, who derives its power from the fiat monetary system (see The Quiet Coup by Simon Johnson, former chief economist of the IMF).

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