I’m always surprised by the reactions of Libertarians to market shifts. After Europe’s Brexit vote, the markets went down. My reaction: “awesome! I can buy some shares of an S&P index at a price that was not available to me last week.” The reaction of Libertarians is to point at the anomaly and say, “I told you so. You should have been in gold.”



While most people will tell you that the goal of investing is to increase your holdings, there is an inability for many to disentangle understandings of the unit of account your investment is listed in (probably $USD) and the definition of a medium of exchange. Sure, the United States dollar inflates at 2-4% every year. Sure, that means that your spending power parity is always dropping compared to the real value of your investment holdings. But for most of us, that really shouldn’t matter.

Consider that the entire reason Libertarians like gold is because they say that it is real money. It won’t lose it’s value. I have heard them say that in 1920, a troy ounce of gold could buy you a decent suit. In 1950, while the suit was much more expensive, you could still purchase it with a troy ounce of gold. And now, in 2016, the same quality suit can be purchased for the same troy ounce of gold. Apart from the fact that suit manufacturing has probably seen some advancements in the last 100 years that have driven down cost of production and driven up quality, the fact isn’t entirely untrue. Sure, in 1920, you could have bought a high quality suit with an ounce of gold, and now, you can still buy a pretty damn nice suit with an ounce of gold. Likewise, if you had held onto the dollars in 1920 and done nothing with them, you could probably sell those same dollars for a numismatic premium. But they would, almost certainly, have lost spending power. So the question we must explore is the following: who in their right fucking mind would hold cash for 100 years? And before you scoff at the absurdity of the question, consider that this is the thought experiment that has validated goldbugs for the last 50 or so years.

The opportunity cost of not purchasing gold, it would seem, is the lost opportunity to have at the end of things the same amount you began with. And if this were how I pitched you gold, you would very likely spit in my face. “What you mean to tell me is that you think I should hold gold instead of cash because in 50 years, when I pull my gold out, I will be able to buy the same number of tomatoes with the same amount of gold?” Who the hell wants that?

The Libertarians answer this by casting aspersions at the Federal Reserve. Inflation, they will tell you, is a conspiracy. These banksters, as Max Keiser likes to call them, are out to steal your money by inflating it away. Where you think you have 100 tomatoes worth of money in your bank account, they will soon make that money worth 50 tomatoes, and before long, 25 and 12 and 6 and 3 and eventually no tomatoes. And that certainly is true. That is the overall effect of inflation. But how can it be a conspiracy if the federal reserve tells you that that is what they are going to do? Why not simply plan for it?

For those that are interested in gaining no spending power when they invest, the Federal Government has bestowed upon our brow some interesting products. Most of them rely on a solvent government. But I’ll make that bet. End of the world reboot scenarios where I come back richer are uninteresting to me because while I would like for a reboot to happen and make me wealthy beyond my wildest imagination, the truth is, I’m a weak-bladdered, piss-in-my-pants when scared kind of person and wouldn’t do very well in any apocalyptic scenario. Eschaton aside, if you want an investment that will gain you no spending power, TIPS are pretty darn cool instruments. They promise to increase in value per the CPI. They are going to be less liquid than cash, but I promise you they are more liquid than gold and the slippage is going to be far less. For those that want to be exposed to the risk of theft, however, the Treasury has made sucker-coins for Libertarians. Legally defined as numismatic legal tender, a person can dump their hard earned money into $50 coins made of pure gold or silver. The American Eagle is one such coin. In some countries like Canada, you can purchase legally spendable Star Trek or Superman coins as well. While you probably can’t put these coins in vending machines, they will allow you to fulfill all your Liberty-lubbing dreams. Buy a $50 gold coin for $1200. The government will be happy to sell those to you. They will accept cold hard cash in exchange.

In a world of Brexits, maybe that is the way to go. Make sure you can buy the same number of tomatoes tomorrow that you can buy today. Maybe those are the actions of a good, responsible father. Or maybe it’s time to consider the opportunity cost of searching for the perfect, stable unit of account. There are a number of projects out there that strive to provide units of account that inflate at as close to 0% as possible. And while these projects are perfectly interesting, it’s time to acknowledge that they are, for the most part, money laundering tools. And sure, I object to the notion that money laundering is some kind of objective word where, like the Supreme Court’s porn standard, “you know it when you see it.” In reality, it’s far more complicated than that, and whether someone is guilty of money laundering is never something that we can say for sure (at least not in the United States) until a Jury of one’s peers hears all the facts of the case, goes into a backroom, punches one another in the face out of the public view, and decides whether they believe the actions of the defense constitute this somewhat mythical crime. What’s more, there are plenty of circumstances, I am willing to bet, where a jury of one’s peers would come down on both ends in similar cases. But I’m not here to discuss my understanding of legal theory, considering I know so little about it other than that it is inscrutably nuanced. But that is what stable units of account are for - which is why the criminal’s choice of exchange medium is the US dollar. It is predictable, value-dense, and easy to move from place to place. Moreover, it is fungible and globally accepted.

This is where the confusion is. Currency holds a weird position wherein it can be used as both a medium of exchange (like a beaver fur), and a unit of account (the unit that things can be listed in for exchange). Consider, if you will the notion of a beaver fur based monetary system. If beaver fur were a good, stable, unit of account, you might log into your Fidelity account and find that your stocks are listed in beaver fur quantities. “I’m so excited,” you might say to yourself, “my account has grown from my original 10 beaver fur investment to 15 beaver furs. Glory be to the LORD Jesus Christ.” And when you retire, Fidelity would go into its beaver fur warehouse, and divest itself of your beaver furs, sending you boxes and boxes and boxes in the mail. I think we can all acknowledge that there are some problems with using Beaver furs as a unit of account. Not only are they probably not stable, there is going to be a problem with their fungibility - some beaver furs will be more desirable than other beaver furs - not to mention a myriad of other problems with using beaver furs as currency. Mediums of exchange, really only work when people can derive utility from accepting them. Generally the sort of person who is going to want a beaver fur is going to find a great amount of utility in the soft fur. Maybe he is a Jewish hat maker, and he needs a steady supply of beaver furs for his operation. But for the most part, most of us do not NEED beaver furs. For most of us, the value of a beaver fur is going to involve a thought experiment asking questions of how neat a beaver fur would be to own, or whether we could get our local grocer to accept them for his tomatoes. The first question might entice each of us to own one beaver fur. But the second question, whose answer is very likely “no,” is going to ensure that most of us do not own more than one beaver fur.

The function of money is largely to allow us to exchange goods and services at a well understood cost. That cost slowly changes over time, such that your parents can tell you stories of buying gum for a nickel, but can’t really tell you stories about how, when, or why they stopped being able to buy gum for a nickel. All they know is that gum costs more now. We can all participate in this exchange because at any given moment, when the exchange is occurring, for all intents and purpose, the medium is worth the same today as it was yesterday. This is why hyper-inflation is so devastating - because this necessary assumption no longer holds. In a hyper-inflation scenario, and we’ll use Phillip Cagan’s definition, is when a medium of exchange is losing value at a rate of about 50% each month. For those who don’t want to do the math, that would mean that if you bought something for $1 on January 1, that same item would cost a little over $300 on December 31. The spending power of your money would be cut in half every 1.44 months. Simply put, the value of the tomatoes can differ day-to-day. And that imposes all sorts of extraordinary costs on everybody.

The inverse of the hyper-inflation example would be one wherein your money is always increasing its spending power. So to disentangle the medium of exchange from the unit of account itself, it seems to me that what you might want is to buy something that is denominated in something stable, like the US dollar (so we can all understand it), but whose value is increasing relative to that inflation measure - meaning simply that in 100 years, holding 1 unit of what you had will buy you many suits rather than 1.

Wouldn’t that be a glorious thing to invest in?

Consider what has improved exponentially over the last 100 years. In the last 100 years, the American economy has gotten better and better, and it has grown in incredible ways. 100 years ago, lightbulbs were new, computers didn’t exist, the internet wasn’t even in the conception of futurists, credit cards were a fictitious figment of Edward Bellamy’s imagination, air conditioning hadn’t revolutionized southern cities, and Norman Borlaug hadn’t reconstituted wheat and saved the world from hunger. Modernity has exploded with medical innovations from dick-hardening viagra to cancer-curing gene therapy. And it should be recognized that through it all, a fairly stable dollar has resided over the economy. And while we can debate whether or not it is good to have decoupled it from gold, or whether the Bretton Wood agreements are a good or bad thing, there is little denying the reality of America’s rise to greatness - and the subsequent rise of the entire world’s economy.

Wouldn’t that be a glorious thing to have invested in 100 years ago?

When I was invited into the Illuminati some years ago, it became apparent to me the benevolent economic experimentation that had been performed. Where Borlaug innovated by developing genetic modifications into wheat that more than doubled their yields, a more and more robust understanding of efficient markets has resulted in the incredible invention of the index fund. As Vanguard’s founder and former CEO John “Jack” Bogle emphasizes in The Little Book of Investing, you can purchase the entire market and participate in that glorious growth. Had you done that 100 years ago, today, you would be on your yacht having enjoyed every inch of America’s growth. So let’s consider what a Libertarian might tell you a suit cost in 1920. The price of gold in 1916 was, on average $18.99. So we’ll use that as our basis. The price today is $1,321.50. Your average Libertarian would say that these two numbers are the same, since gold’s value doesn’t change (a claim that’s stupid, but an assumption under which we’ll operate). What do you think that purchasing a broad based index in 2016 would be worth today had you put $18.99 into it? Well, the market has grown at an average of about 9.9%. Simply, an $18.99 investment 100 years later would be worth $363,414.11. So the Libertarian dream will have cost its most ardent 1916 proponents about $362,092.61 - all in the name of avoiding the Fed’s inflation. While gold bought you a single suit in 1916 and a single suit today, your S&P investment of 1 suit worth of dollars in 1916 would buy you 275 suits today (363,414.11/1,321.50). As such, you can articulate the cost of being a Libertarian in suitertunity cost. The cost of investing in ideology rather than science and math was (274 2016 suits/1 1916 suit).

Better luck next time, amirite? So while the Brexit is raging, and the world economy is on the bring of complete and utter failure, don’t forget that rantings of economic fragility are the mantra of the economic equivalent of the boy who cried wolf. Yes, the economy is always on the brink. And yes, the world will continue to function in spite of it. And yes, that means everything is out of your control. The best you can do is to make a list of everyone that tells you they own physical gold (just in case you need to kill them in an apocalyptic scenario) all the while you can buy the market through broad based indices and take advantage of global advancement of wealth. And in the event of a global financial collapse, at least you’ll be well dressed.