The actions of institutions and individuals employed for your benefit will harm you if it is in their best interests to injure and deceive; only a pervasive lack of trust in these institutions and individuals will prevent the harm.
In accordance with the Law of Perverse Incentives this essay is written based on the presumption that people in power will try anything they think they can get away with.
Most people resist the blandishments of the used car salesman because his motivation to deceive is obvious. But how many have stopped to think about the situation in the medical profession? The physician's financial well being is best served by the prescription of drugs to alleviate symptoms without curing the underlying illness. Of course, repeat customers are great in any business. Even conscientious doctors will do this because of the strictures placed on them by the American Medical Association, the medical journals, the drug companies, and the FDA. The AMA and the medical journals work for the benefit of the doctors and the drug companies, not the patients in their care. What do you suppose reaction of doctors and drug companies would be to recommendations from the AMA or the journals that doctors change what they have been doing because it does not work? Consider the situation of the maverick doctor who discovers a cure that works 1000% better than the competition for a commonly fatal illness. If a very few of his patients succumb to the illness he becomes subject to malpractice suits because he did not conform to standard practice.
Of course, the FDA is motivated by politics, money, and the presence of power seekers, who try to maintain and grow the influence of the organization. A more or less standard career path in the FDA is for the individual to spend a few years in the agency and then go to work for big bucks at a drug company. How much motivation do you expect for stopping an undesirable drug that is not an immediate and total disaster? Of course, letting a few bad ones through will bring calls for strengthening the FDA; more Chiefs; more Indians. I feel that a person should go to doctors for relief of acute symptoms and injuries, but cures and health care are do-it-yourself projects; this has worked for me.
My wife lost 85% of her stomach to ulcer surgery in the middle 1980's. I found later that a new approach to ulcer treatment had been discovered several years earlier by an Australian doctor. The treatment had about a 90% success rate and was completely non-invasive. Even if a doctor didn't believe the result presented by the discoverer, it should have been tried and widely tested. It would have spread quickly. Since then I have learned of many other widely practiced procedures that mainly benefit the drug companies and the finances of the medical profession. Yet, I believe this is an institutionalized phenomenon rather than being done deliberately by individual physicians.
Like Topsy, systems of perverse incentives are "jest growed" because they benefit the individuals and institutions that grow with them. There does not need to be any deliberate conspiracy to make them develop. Nor does anyone need to wonder at government focusing on taking firearms away from citizens rather than on the SSRI class of drugs that have been prescribed and taken by most of the perpetrators of the horrendous massacres that have occurred in recent years. Do not expect government to place blame on itself or fail to take advantage of tragedy in order increase its own power over our lives.
The above examples involve the effects of perverse incentives on individuals and communities. Because of the universal relationship of the LPI to the human condition it is inevitable that it will make itself felt by whole cultures and societies. The boom and bust cycle and the seemingly endless growth of government involvement in the lives of ordinary citizens are examples of this. There seems to be great inclination to follow the charismatic leader or father figure rather than develop the faculty for personal responsibility and the use of reason to decide important issues on the basis of logic and historical precedent. Pervasive mass media just enlarges the herd of baboons following the leader.
The checks and balances and the freedoms outlined by the US Constitution are the result of the writers being fully aware of the untrustworthiness of government and the men attracted to positions of power. This contrasts sharply with the complacency of the current population that has been stoned and numbed by media propagandists. The current population couldn't care less about whether government practices follow constitutional guidelines.
Lies, weasel words, and the use of raw power are the stock in trade of the politician and the financial industry. These are the kind of people that will put their arm around you while they urinate down your pant leg. Even the most honest politician in the world will resort to the use of tactics that divert attention from peoples' real interests, otherwise he could not be elected. We should never listen to protestations of innocence on the part of these people if we perceive that they benefited from the situation and that they may have felt that they could escape from blame. Bad news is confirmed when it is officially denied.
Many politicians have become the tools of the self interest of the save-the-environment industry. As always happens, what began as service for the benefit of everyone has turned into a big-salary industry for the benefit of the activists. Thus, we have people trying to combat global warming by cutting carbon dioxide emissions even though there has never been any proof that this is a real problem or that any general change has resulted from the use of fossil fuels. A two degree rise in ocean temperature will bring about a 10% increase in atmospheric moisture and cloud cover which in turn will reflect more of the suns rays and give rise to about 10% more rainfall which will tend cool the continental land masses. It has been proved that more carbon dioxide will make plant growth more bountiful and drought resistant. Perhaps mankind's destiny on earth is to turn barren steppes into lush forests and croplands by carbon dioxide emissions. Of course, we have a big herd of baboons scared into following the political baboons.
Stock markets that surge wildly, led by a gap between the S&P 500 futures contract and the S&P 500 index, whenever King Billy makes a speech or is called to task for the many scandals surrounding him are the most conclusive proof of market rigging imaginable for the rational person. What better way for a politician to maintain support? Similarly, what better way to hide inflation and raise cash for buying S&P futures than to sell calls on US gold reserves, allowing hedgers to protect themselves in taking short positions that drive down the price of gold.
The much hyped US balanced budget of the current ruling regime can best be appreciated as a glorious prank played by the financial-political-media cabal on the gullible US investing public. The cabal got the suckers to put the wasteful government spending that represents the budget deficit on their charge cards. Think about it. The US economy actually grows at about a 2% rate when corrected for excessive contributions attributed to computer technology, so a valid increase in value for the US stock markets would be about $100 billion per year starting from a $5 trillion base. Instead, the market capitalization has been growing about $1.5 trillion per year. The capital gains tax on this for a year of trading in mutual funds would be $200 to $300 billion per year. The increase in charge card debt and home mortgage debt through consolidation loans has been more than this. Because the suckers were feeling so rich they charged living expenses and taxes to their charge cards. In reality, the market didn't increase in value much, but the dollar lost about 20% per year as measured against the real value that is represented by corporate stock. The suckers have been paying more in capital gains tax than the actual increase in value of the stock.
This is the sort of thing that would make the old masters of the Soviet Union proud of a protege who is not in a position to cause the death of millions by starvation like the old masters did in the Ukraine. Or maybe it's like a weasel sneaking into a hen house and drinking the blood of three or four of the birds and then killing about 50 chickens for the sheer fun of it.
The illegal possession of FBI files and the subsequent failure of Republicans to pursue the matter is conclusive proof of the fact that the Republicans are being blackmailed and that a substantial number of Republicans are crooks. Anyone who focuses attention on administrative wrong doing is immediately targeted by media hacks. The failure of the media to pursue these matters is evidence that they are unreliable and crooked as well; they would have been perfectly happy doing their job in Nazi Germany.
The average investor feels rich as a consequence of the bubble stock market. He is actually a frog in a pan of water with a fire under it; he won't jump out because he thinks he is getting a nice warm bath. When the market goes down, as it must, prices will rise as a consequence of the return of all the paper with dollar signs that has been exported by the US during the many years of massive trade deficits. The inflation chickens will come home to roost in the trees over our heads. The investors will be bankrupted by excessive credit card and other debt, higher interest rates, higher cost of living, and collapsed asset values. Good bye Wall Street; hello poorhouse.
The Republicans and the media will not expose the danger for fear of being blamed for the collapse. The administration will not expose the danger because it wants to hold on to power. All these groups are supposed to protect the country and abide by the United States Constitution. There can be no greater or more deadly example of the Law of Perverse Incentives in action than that of politicians and financial nabobs who perpetuate a bubble market that has to lead to financial catastrophe.
I have read F. A. Hayek's Road to Serfdom. I am absolutely horrified by the similarities between the USA today and Germany before the rise of the Nazi Party. We have the same arrogance about a way of life, the same acceptance of government interference on every level of our lives, dependence on government for our well being, and readiness to blame others for our problems. The list goes on and on. In the event of economic catastrophe we will be extremely lucky if we get leadership in the form of a ruthless but patriotic General Pinochet rather than a charismatic and murderous psychopath like Adolf Hitler.
We have taken advantage of other nations of the world by sending shiploads of paper with dollar signs on it in exchange for quality merchandise. This paper has been used as backing for local currencies, giving rise to inflation and malinvestment in every corner of the world. The world is getting wise to the danger of a reserve currency that has no assets backing it that the issuing government can give in fair exchange. At the same time, the rest of the world is fearful of engaging in overtly hostile economic acts such as trading in all the hundreds of billions of dollars worth of government bonds they own. The blatant manipulation of the gold market by US financial nabobs gave them the opening to act. Because of the US tendency to downgrade the importance of gold and precious metals as financial assets the effect will not necessarily be immediate but it will occur. The US political-financial system will be hanged by its own rope.
Insofar as the world is concerned, it is desirable that severe dislocations in the US economy begin to occur before January first. This is because it is always desirable that guilty parties receive blame for their acts. But in an economic sense this is less important to other nations than receiving real assets that can back up their currency and see them through hard times that will result from the decline of their own bloated stock markets. They must put an end to the US export of an unending stream of worthless paper money. If they crash US stock market suddenly or cause the sudden devaluation of the US dollar they will salvage less than if they allow the dollar and the US stock market to die slow painful death.
Expect to see repeated declines, followed by repeated rallies, generally with progressively lower lows and lower highs. If things start to get out of hand, expect sudden rallies to avoid panic. The insiders, foreign and domestic, will be buying precious metals and stocks that have declined to the point where they represent real bargains. Market rigging will occur at every turn. Expect to see rotation between groups of stock as the gullible US investors keep looking for a way to avoid losses. The insiders will take advantage of every possible trick to despoil the less sophisticated investors and those inclined to buy and hold. Warnings about the dangers of the US stock market have been made by well respected people with German bank experience. All they will need to do is repatriate US government paper in a careful and controlled manner so as to avoid panic. In a threatening world they may also purchase military hardware with US dollars. Of course, any dollar repatriation will be inflationary in the USA. They will do this until they value of the dollar has been lowered to the point where there is no net export of dollars. The recent increases in long bond rates indicate that this is already occurring. Because of the monstrous accumulated trade deficit and the lack of US savings, foreign banks and investors are in control.
On the other hand, you can expect the US government, especially the bureaucracy and the administration, to continue the market rigging with the cooperation of foreign interests. The administration will do everything possible to avoid blame, including setting up a deliberate Y2K crisis if panic is seen as inevitable. Alternatives include precipitation of a crisis leading to martial law and the use of propaganda to delay crisis until other political parties can be blamed. A lot depends on the extent of Republican involvement in the cabal.
Every attempt will be made to pump up overvalued stocks to unprecedented highs to draw in the gullible American stock buying public. At the same time, extra paper dollars will be printed by the Fed to keep interest rates down. Money going to insiders and foreign money interests in exchange for US bonds and notes will be going for US stocks that have taken substantial price declines. These dollars will also go for precious metals and other real durable assets. The illusion of a healthy economy will be maintained if at all possible through high stock prices in spite of steadily increasing prices for gold and foreign made goods. It would take about four years of 20% inflation to accommodate the monetization of all the government paper that has been shipped overseas in the absence of a panic. With panic, we could have a replay of South American style hyperinflation in excess of 100% per year. Of course, this game which has been going on for some time now, has entered a new phase since the price of gold and other precious metals has slipped out of control. I doubt that the insiders will be able to avoid severe market drops, but they will try.
It really is the eleventh hour for those who would protect themselves from economic disaster by investment in precious metals and mining stocks that are not excessively hedged by sale of calls and unprotected forward sales. Put purchases and call purchases in combination with forward sales do not jeopardize the company. A call that has been purchased can be used to close a forward sale position. Dayton and Bema are companies with relatively safe hedging. On the other hand, Eldorado did not respond to my email requesting info on their rather extensive hedging position. I sold it.
The Canadian exploration stocks that I follow often have discovered assets in the ground that become valuable with a gold price around $400/ounce. I will list some of them here along with website urls. I recommend a subscription to Canada Stockwatch. http://canada-stockwatch.com/ BFM.V about 700,000 ounces of discovered gold, good exploration potential, startup problems in initial mining operations. http://www.battlefield.ca
CMG.V gold in the ground at $0.70/ounce based on market cap, 15+millions of ounces total. Initial PGE exploration operations have started. http://www.conquistador.net
NSU.T about 3,000,000 ounces in pre-production stage. http://www.nevsun.com
AMC.V about 700,000 ounces gold equivalent in polymetallic deposit, good exploration potential. http://www.abacusminerals.com
SUR.A on basis of drill hole positions and grade at Mina Rica I judge that they have discovered about 200,000 ounces of shallow mineable gold, good exploration potential. http://intergate.bc.ca/business/sur/
GEN.T about 1,000,000 ounces just waiting for financing, producible under $200/ounce, $3,000,000 market cap. http://www.kasnergroupco.com
Do your own Due Diligence. I can not guarantee results with any stock.
Do not be overly concerned with the rise and fall of gold and mining stock prices in terms of dollars. The gold and companies with real uninflated asset values are the real money. An ounce of gold is real; it defines itself; it always has the value of an ounce of gold. The dollars are just illusions printed on paper!
Truly, we live in interesting times!
Gabriel Sunset
25 November 1999
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