Why the Gold Price is the Only True Form of Political Accountability Left – Fat Tail Daily

An old co-conspirator of mine just told me something I shall never forget: ‘Those in power are not price sensitive.’ I believe this simple statement explains a great deal of what’s been going on in the halls of power lately. It also reveals why the gold price, of all things, will be the final reckoning for those who think they can defy economic realty.

But let’s start at the beginning. What did my Irish friend in Texas mean when he said, ‘Those in power are not price sensitive?’

Well, if you or I make a poor choice in our lives, we feel the impact. It costs us money, or perhaps time. But what happens when we make a poor choice for someone else?

The feedback loop and the accountability just isn’t there anymore, is it? If the decision maker doesn’t feel the price, why make good decisions?

The real trouble is, how do you even know if a choice is good or bad without those feedback loops and accountability mechanisms?

And what if the person making the decisions has very different beliefs and values about what is a good and a bad outcome from any given choice to begin with?

Different people have very different priorities and problems in their lives.

These sorts of questions highlight how political systems can go astray if politicians don’t feel the impact of their policies.

Do you think Al Gore cares if his climate change policies result in the end of commercial aviation? Or do you think he believes he can continue to jet around the world on his private flights regardless of what Net Zero means for the rest of us?

Do you think Angela Merkel cares what her energy bill is each month? Or do you think she hasn’t got a clue how much it costs her to control her climate at home?

Do you think central bankers feel the pinch of inflation at the grocery store? Or do they earn so much and own so many assets that it doesn’t make a difference?

Do you think President Biden is aware of shrinkflation, as he claims in a new video? I rather doubt he has been grocery shopping in quite some time…

Do you think our Prime Minister cares about the plight of renters, or sees the impossibly low vacancy rate as a rather good sign for the value of his properties?

Do you think local politicians will be fined for leaving their designated 15-minute cities in their government vehicles? Or will that only apply to those who don’t need to cross lines for the good of humanity?

Do you think Bill Gates anticipates replacing meat with insects at his table, or will that be something which merely applies to the rest of us who can’t afford meat at Net Zero prices?

My point is that the everyday accountability mechanisms of bad government policy don’t seem to apply to those in government. And this is an economist’s definition of how we get bad governments.

If politicians faced the consequences of their actions…well, I doubt we’d suffer them in the first place.

If politicians had to start the businesses they run into the ground with regulation…

If civil servants had to comply with the health and safety guidelines they write for the rest of us…

If lobbyists had to make an honest living on the free market instead of competing for government handouts of other people’s money…

If lawyers had to pay their own legal fees in order to understand the legislation and common law coming out of Parliament and court…

Instead, these groups seem to be exempt or distant from all of the negative consequences they impose on the rest of us each day. They can afford them, or even benefit from them.

Now look, this isn’t anything new or groundbreaking. When JFK was about to announce the embargo of Cuba, he first sent his trusty aide to go and buy up the local supply his favourite Cuban cigars…

But what has me worried is that the extent of government intervention in our lives is reaching extremes, while the accountability mechanisms and feedback loops are growing ever weaker. Canberra feels busier than ever, but ever further away.

We listen to climate change campaigners that spew out incomparably more CO₂ than any of us.

Policy decisions for Western Sydney get made in places like Davos.

Our politicians don’t come from competing on the free market. They come from protected sectors that are heavily regulated like law, medicine, unions and the civil service, where the customer is always wrong and consumer sovereignty is something to be avoided, not obeyed.

Hypocrisy doesn’t cover it. It’s a perverse incentive to impose a harder life on us while evading the consequences. They don’t care about the price we pay, because they don’t have to pay it.

And what are you going to do about it? Vote for the other party? What will they actually do differently when they come back from COP28?

The good news is that there remain some forms of accountability for those in power. Well, measures that reveal how badly they are failing, and threaten to thereby humiliate them. And I believe the gold price is the ultimate one. But first, I better reveal why we seem to have lost gold’s side-kick, the bond vigilante.

As Margaret Thatcher once explained, ‘The problem with socialism is that you eventually run out of other people’s money’. In the past, this manifested itself in a very specific way: bond yields rose.

In order for governments to finance their mad schemes, like a Net Zero energy grid, they must borrow money. That money must come from somewhere. And the lenders demand to be compensated. They earn interest.

How much interest they charge reflects all sorts of things, including the risk of default or inflation. Thus, if a government is misbehaving in some way, the interest rate on their debt goes up. This obviously costs them even more money. And, eventually, they run out of it.

Historically, it was possible to judge whether a government was pursuing good or bad economic policy by their bond yield. The higher the yield, the higher the risk and therefore the worse the economic mismanagement. Bond vigilantes were in the business of betting that bond yields would go up when governments misbehaved. That’s why governments hated them so. They anticipated how government policies would go wrong. And often forced governments to reverse course.

The trouble is, these days, central bankers are willing to just print up the money which governments might need. After all, a government that goes bust these days doesn’t just blow up rich people’s bond portfolios. Thanks to policies like Superannuation, and broad welfare policies, we’d all be in deep trouble if the government went bust.

Central bankers must therefore prevent this and they see inflation as the lesser evil. Thus, even at the height of the recent inflationary burst in the UK, the Bank of England returned to quantitative easing policies and bought up UK government bonds to try and stabilise the crashing bond market.

Instead of bond vigilantes pulling the rug out of government finances, we now face a different form of accountability: inflation.

And the gold price has an awkward habit of warning about inflation. It soared at the onset of the policy response to the pandemic, for example. And it performed very well in the 70s. In many countries around the world, owning gold was the only way to protect your wealth from complete government mismanagement.

My point is that investors can see the gold price as a sort of barometer of government misbehaviour because it anticipates how much governments will have to lean on central banker money printing. A rising gold price is an indictment of whether governments and central banks are doing the right thing.

Historically speaking, all of this was once self-evident. A poorly run country would eventually run out of gold. The reason why was simple. Its economy stopped being competitive on the global markets due to bad government regulation.

As the trade balance went negative, more money was flowing out than in. But people overseas don’t want your local currency. They want the global currency – gold. And so a trade deficit really meant an outflow of gold from the country.

Eventually, there isn’t enough gold. Before that point, the government would revalue its money to be worth less gold, thereby making its economy more competitive on global markets again. This restored the trade balance and stemmed the outflow of gold.

But notice how a poorly managed economy and a devaluation of the currency against gold were inherently linked. People understood this connection and its embarrassment.

While governments these days are busy devaluing their currencies to remain competitive, they once considered such devaluations to be an embarrassing indictment of their policy failures.

The gold price is the give-away that things haven’t changed. It’s just that the process is hidden behind a floating gold price instead of very public and embarrassing periodic devaluations. But governments’ poor economic policies are still exposed by a rising gold price.

The worst run economies of the past few decades, for example, were the likes of Argentina and Zimbabwe, where gold went ballistic in local currency terms. But gold is at or near record levels in a rather long list of currencies these days, including ours.

Of course, you can turn all this into a defensive measure too. If you believe that governments and central bankers have got everything comfortably under control, and have your best interests at heart, you don’t need to own gold right now. ‘Let them eat cake.’

But if you suspect there’s something dodgy going on in the halls of power because the people in them are insulated from the consequences of their own policies, you need to find a way to own gold and benefit from their mismanagement.

Until next time,

Nick Hubble,
Editor, Strategic Intelligence Australia

Nick Hubble found us at Fat Tail Investment Research in 2010 after a stint inside Wall Street’s most notorious bank, Goldman Sachs, during the 2008 GFC. That’s where he saw the true nature of the investment banking business. Since then, he’s been the editor of the Daily Reckoning Australia and the UK-based Fortune & Freedom and Gold Stock Fortunes.

He’s delighted to work as Investment Director and Editor for Jim Rickards’ Strategic Intelligence Australia. Here he helps turn Jim’s big-picture views into specific actionable advice and ideas for Australian investors.

All advice is general advice and has not taken into account your personal circumstances. Please seek independent financial advice regarding your own situation, or if in doubt about the suitability of an investment.