EDELWEI SSJ OURNAL

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rcqucnt obscrvation o thc wild movcmcnts in
priccs would lcad onc to think that this is causcd
by nothing morc sophisticatcd than thc rolling o
dicc at somc casino tablc. Tcrc is much truth in such
obscrvation. Howcvcr, or thosc o us sccking to own
what is substantivc rathcr than to rcnt whatcvcr hap
pcns to bc going up in pricc, thcrc is littlc to car. \c
would do wcll to rcmcmbcr that thc uctuation in
thc pricc o an assct docs not in any way add to or
subtract rom thc valuc wc assign to such assct or its
purposc in owncrship. I you arc doubtul, considcr
thc ollowing.
In thc small Frcnch town o Crassc, scvcral gcncra
tions o thc Maubcrt amily havc built an outstanding
company that makcs avors and ragranccs. Robcrtct,
S.A. Tc amilys r stakc along with that o thrcc
othcr rcal owncrs amounts to , o thc outstanding
sharcs o thc company. And so, cvcn as thc sharcs
arc listcd on thc Paris Furoncxt cxchangc, littlc and
inrcqucnt trading takcs placc. Onc day a cw wccks
ago, somconc sold r sharcs, thc only tradc o thc
day, on thc bid, and thc pricc o thc stock closcd down
rom thc prcvious day. It occurcd to mc that thc
Maubcrt amily had suddcnly bccn rcndcrcd poorcr
by ncarly s millionjust on account o this s.cc
tradc. Or had thcy` Lid thcy ccl any poorcr` Lid
thcir rcal asscts changc` Lid thcy discuss this darncd
volatility at thc dinncr tablc`
I bct not. To thc Maubcrts and by cxtcnsion to
us, such uctuation (volatility, thcy alscly labcl it)
has nothing whatsocvcr to do with thc valuc o thcir
stakc or thcir purposc in owncrship. Tcy do not con
sidcr a dcclinc in stock priccs to bc a thrcat to thcir
wcalth. Tcy arc not waiting or thc pricc to go up so
that thcy can scll and gct rich quick. Tcir ocus, and
ours too, is on thc substancc that thcy own. Tus it
ollows that such uctuations (or volatility) do not
mcan much to us.
Frankly, volatility is an cmotional mattcr that
mostly conccrns thosc who dont quitc know what
thcy arc doing but arc still hoping that somchow thcy
havc gucsscd corrcctly. Pcoplc wclcomc a rc movc
up but drcad a rc movc down. In thcir minds, thc
ormcr is normal whilc thc lattcr is volatility, which
thcy havc bccn told is risk. Tat idca has bccn discrcd
itcd long ago, but pcoplc just lovc to hang on to it as
i it wcrc holy writ. Volatility is only a good mcasurc
o risk, somconc said, i you ccl that bcing rich and
thcn bcing poor is thc samc as bcing poor and thcn
rich. But old habits dic hard. Atcr dccadcs o moncy
dclusions, wc otcn talk thc talk o bcing owncrs or
invcstors but wc kccp a wishul cyc on thc wrong
things. \c rcgrct not anticipating a hugc prot in
thc Caracas stock markct and wc ccl that wc misscd
out by not anticipating what wc would havc madc by
ollowing along with thosc who ound sacty in thc
owncrship o US govcrnmcnt bonds. By sccking prot
in tcrms o priccs, wc bccomc atrophic in rccognizing
what is rcal and what is not.
I modcrnity is charactcrizcd by a loss o thc scnsc
o thc rcal, writcs Paul Cantor, this act is conncctcd
to what has happcncd to moncy in thc twcnticth ccn
tury. Fvcrything thrcatcns to bccomc unrcal oncc
moncy ccascs to bc rcal.
A lot o pcoplc might suggcst wc own a big chunk
o govcrnmcnt papcr or inationadjustcd bonds in
licu o so much gold. Tcsc arc prcciscly thc kinds o
instrumcnts thcy now nd attractivc, cithcr as a rc
ugc or as a way to minimizc thc drcadcd volatility. Tc
third and morc subtlc rcason is that customcrs ccl
morc comortablc owning a big chunk o govcrnmcnt
dcbt than a big chunk o gold. But in rcality, thcrc is
kccctions on doing tbc rigbt tbing
I
1 Refections on doing the right thing
6 We read
Issue 4Edelweiss Journal
no comparison bctwccn thc two. Tc rst is a piccc
o papcr or, indccd, not cvcn thata mcrc clcctronic
cntry. It is subjcct to conditions, rulcs and thc whim
o thc statcit is hardly an assct and mcrcly an illu
sion. Tc sccond is rcal.
For such rcason alonc, purposcul owncrship is
nancially and cmotionally incompatiblc with stock
cxchangcs and nancial markcts in gcncral. It is also
irrcconcilablc with sccking to plcasc thc pathctic igno
rancc o cluclcss invcstors. Tc ycar just cndcd was a
nc rcmindcr o this important nuancc.
On doing the right thing
Intcllcctually, .crr was also unusual in that thc
invcstmcnt sctting was dominatcd by two distinct,
and quitc oppositc, calls to action. Our lct car was
inundatcd by a dclugc o signs pointing to an impcnd
ing doom, thc cndlcss and cacophonous dcbatcs on
ination vcrsus dcation, and thc dcstructivc con
scqucnccs that arc likcly to bc visitcd on anything
nancial. To hcar many o my ricnds talk, onc would
scll all his matcrial posscssions, quit his job, and hcad
or thc hills with a cw bars o gold, a gun and somc
dricd ood. Somc want to cscapc by buying a arm in
Tuscany or Uruguay to grow chickcns and vcgctablcs.
Othcrs rationalizc that thcy should just load up on
rcycar US govcrnmcnt bonds sincc this sccms to bc
thc last placc o rcugc. And somc, thc morc aggrcs
sivc typcs, sccm happy to bc short this and long that
in thc cxpcctation that thc unolding crisis will makc
thcm rich i thcy just makc thc right movcs. Our lct
car was quitc busy, as you can imaginc.
Tc right car hcard an dicrcnt tunc altogcthcr,
but thc voiccs wcrc as loud and cqually pcrsuasivc.
Fquitics arc chcap, thcy told us. Crcat companics
arc undcrvalucd. Invcstmcnt valuc is just oozing
likc Cruycrc chccsc out o a rcshlymadc vcal cordon
blcu. Tats whcrc thc ocus should bc. Comc what
may, wc should ollow Buctt. Buy valuc stocks and
just orgct about it.
Tcrc wcrc cvcn morc calls to action bcyond thcsc
two promincnt oncs. As ccrtain asscts soarcd in pricc
whilc othcrs plungcd (to bc ollowcd by thc rcvcrsc
only a cw days latcr), wc hcard cmincnt calls or
buying commoditics, gold, silvcr, rcal cstatc, swaps,
bonds, cmcrging markcts, mortgagc loans and othcr
things pcoplc pcddlc rom timc to timc. Tcy wcrc all
ollowcd invariably by calls to scll commoditics, gold,
silvcr, rcal cstatc, swaps, bonds, cmcrging markcts,
mortgagc loans and so orth, by pcoplc who scll things
atcr thcy soar whcn othcr things plungc, and so on.
Tanks to thc wondcrul and lowcost world o thc
intcrnct, thc numbcr o adviscrs and opinion pcddlcrs
has boomcd in rcccnt ycars. Tcir unsolicitcd and rcc
opinions comc with supporting charts and graphs
sccking to provc thc mcrit o thcir pitch. Tc scarch
or what is to go up in pricc or what othcrs think will
go up in pricc has bccomc a circus o rantic gibbcrish
and cvcrish pcddling.
Amidst such ruckus, only thc thc rst two calls to
action dcmandcd our attcntion. To thc voiccs in thc
lct car, I rcspond. no, I dont bclicvc that thc world
is coming to an cnd. In act, i it wcrc, all thc gold
in thc world couldnt possibly hclp us. \c own gold
only as a tool and not as a mcans to wcalth. Having
to choosc bctwccn what gocs or moncy, whcthcr
in cash or in thc pcrccivcd sacty o a govcrnmcnt
obligation with a ncgativc rcal yicld, and gold, wc
havc choscn thc lattcr. \c havc madc thc casc clcar
many timcs in past writings and it so happcns that thc
unolding cvcnts havc justicd our old dccisions. Tc
largcst and most visiblc componcnt o our portolio
is composcd o thc only kind o moncy that comcs
without promiscs. Somc think wc havc bccn lucky
ovcr thc ycars. Tcy think o priccs, whilc wc think
o indcpcndcncc, scarcity and substancc. And that is
prcciscly thc distinction at which wc aim, sincc wc arc
unintcrcstcd in imprcssing anyonc by anticipating
which priccs will soar and which will plungc and whcn.
As to thc idca o having a arm in Uruguay, I scnsc
that it is born out o a dcsirc to nd cconomic indc
pcndcncc and substancc rathcr than as a mcans o
physical cscapc. Tc idcas o cconomic indcpcndcncc
and substancc (any cntrcprcncur will rcadily admit)
makc or a wondcrul motivation. But again, I doubt
that thc world will comc to an cnd sincc it has sur
vivcd ar grcatcr and unspcakablc calamitics. Yct, it is
no consolation that what may indccd bc coming to an
cnd is thc way o living and thinking to which wc havc
bccomc accustomcd. In othcr words, thc nancial
and cconomic world as wc havc cxpcricnccd it in thc
last hundrcd ycars or so, will not last much longcr.
From thc right car, thc idca o invcsting in cqui
tics on account o apparcnt valuc alonc is cqually
as distastcul to mc. In thc ycars to comc, as thc
Te search for what is to go up in
price or what others think will go up
in price has become a circus of frantic
gibberish and feverish peddling.
Edelweiss JournalIssue 4
nancialization o our world crumblcs, it will bccomc
apparcnt that valuc sccn rom thc pcrspcctivc o past
rcsults is mislcading. For a hint, witncss thc lcgcnd
ary Fastman Kodak, a rcycar old company which
ovcr thc ycars wcnt rom bcing Ccorgc Fastmans
cntrcprcncurial cruciblc to a growth stock to a bluc
chip to a valuc stock, but now tcctcrs on unavoid
ablc bankruptcy. It is a sad story o valuc dcstruction,
mismanagcmcnt and institutional stupidity rcplctc
with lcssons that gcncrally rcmain unlcarnt. Valuc as
sccn through thc prism o past carningsthc naturc
o which may havc bccn inucnccd by crcdit crcation
and thus illusory dcmand or alsc pricc inputsis
not only inadcquatc but also dcccptivc.
Onc o thc unassailablc conscqucnccs o thc scrics
o criscs through which wc navigatc is thc ccrtain but
pcrmancnt changc in thc structurc o production
rom a statc rcliant upon continuous crcdit crcation
to onc which dcmands cconomic viability on its own.
And whilc it is human and scnsiblc to scc valuc as
wc havc bccn uscd to mcasuring it in ycars past, its
nancial antcccdcnts orcc us to rccxaminc it, not
only in pricc but also in tcrms o dcsirability.
Both o thcsc distinct but opposing voiccs to which
I alludcd ocr many uscul and practical applications,
but only to thc cxtcnt that wc can comc to our own
conclusions about what is valuablc and what is mcrcly
chcap by thc standard o othcrs.
How do wc know what is thc right thing to do`
Indccd, how do wc know that wc know` How do wc
know that what wc know is not just an illusion` Tc
problcm o moncy suocatcs us.
In a tclcphonc convcrsation, writcs Paul Cantor,
onc docs not scc thc pcrson onc is talking to, but
has thc illusion o bcing in his prcscncc. Similarly,
in a papcr moncy cconomy, onc docs not scc gold
anymorc, but thc currcncy givcs thc illusion o thc
prcscncc o wcalth. Hc also rcminds us that as Miscs
has shown, thc wholc o inationary policy dcpcnds
on thc conusion in any systcm o indircct cxchangc
bctwccn moncy and capitalthc illusion that picccs
o papcr arc somchow wcalth. I so, sccking to nd
valuc whilc dcning it by using thc vcry illusory
papcr in which it is cxprcsscd, is shccr nonscnsc.
Tis is not to say that I am against thc idca o invcst
ing in thc sccuritics o cxccptional companics. On
thc contrary, I havc grcatcr trust in thc ability and
charactcr o somc cntrcprcncurs than in thc promiscs
o thc statc and its bankcrs. My point is that wc must
dcnc what is cxccptional without rclying solcly on
thc cxisting yardsticks o valuc sincc thcy arc gcncr
ally bascd on moncy pricc inputs that arc plain alsc.
Invcsting in thc sccuritics o companics dcmands
a complctc rcthinking o what is valucto us. In
timc, ovcr thc ycars to comc, many morc pcoplc will
rcthink this issuc, particularly atcr thcir customcrs
moncy is gonc. And i, as I alludcd carlicr, thc nancial
and cconomic world as wc havc cxpcricnccd it in thc
past is to cnd (and it will), it ollows that thc idca o
what is valuc in an cconomic world o zcroCLP and
zcrocrcdit growth will bc undoubtcdly rcvisitcd. But
as it happcns in thc long history o man, rcal cconomic
cnlightcnmcnt must bc prcccdcd by thc pain o thc
cconomic and intcllcctual bankruptcy o thc old cra.
Falsehood
It comcs as no surprisc to anyonc that thc sctting
in which wc cmploy our capital is uttcrly corrupt. Tc
hopcs and drcams o a ncw cra havc bccn dcstroycd.
Tcrc is no astcr CLP growth, no tcchnology mira
clcs, no pcacc dividcnd and no grcatcr productivity.
Tc ocial statistics arc all phony. All wc havc is cvcr
incrcasing intcrvcntion and manipulation by ccntral
planncrs around thc world. Tis is a daily obscrva
tion and a rcqucnt topic o convcrsation among
collcagucs. I dishoncst moncy bcgcts dishoncst
accounting, it also bcgcts dishoncsty and corrup
tion in cvcry aspcct o licrom thc boardrooms o
thc big bankcrs down to thc lowcst cconomic agcnt.
Fvcn mainstrcam authors arc bcginning to scc
thc statc as thc author o all this malaisc. Tc .cr.
Indcx o Fconomic Frccdom publishcd by thc Hcrit
agc Foundation and thc Wall Street Journal castigatcs
govcrnmcnt but docs not scc thc corrupt naturc o
our cconomic systcm. It says. Rapid cxpansion o
govcrnmcnt, morc than any markct actor, appcars
to bc rcsponsiblc or agging cconomic dynamism.
Covcrnmcnt spcnding has not only ailcd to arrcst thc
cconomic crisis, but alsoin many countricssccms
to bc prolonging it. Tc biggovcrnmcnt approach
has lcd to bloatcd public dcbt, turning an cconomic
slowdown into a scal crisis with cconomic stagna
tion ucling longtcrm uncmploymcnt. Accuratc but
inadcquatc. It docs not addrcss thc lawlcssncss that
dcncs our modcrn world, and thus ails to notc that
Some think we have been lucky over
the years. Tey think of prices, while
we think of independence, scarcity
and substance.
Issue 4Edelweiss Journal
our systcm o inationary nancc has brought about
incrcascd lcvcls o dcccption, raud and unrcality.
In his rcccnt book Extreme Money, Satyajit Las
cxplains, moncy changcd rom a mcchanism o
cxchangc into somcthing important in its own right.
It ccascd to bc a claim on rcal things, bccoming instcad
a way o to crcatc wcalth, incrcasc cconomic activity,
and promotc growth. About thc valuc o moncy hc
writcs that modcrn moncy is inhcrcntly worthlcss
but cvcryonc acccpts it as rcal, and that papcr moncy
is an abstraction or, as most o it docs not cvcn cxist
physically, thc abstraction o an abstraction. You
now undcrstand why I am convinccd that priccs arc
just mcaninglcss and traditional valucsccking utilc.
It is in thc authoritics bcst intcrcst to maintain thc
systcm o inationary nancc cvcn as it is cxploding
out o control. As a rcsult, in addition to thc distor
tions brought about by thc crcdit dclugc, govcrn
mcnts arc cncroaching into morc and morc arcas o
thc world cconomy. Tis is not just through political
arcc (witncss thc Furo arca mclodrama), nor cvcn
through thc convcntional mcchanisms o intcrvcn
tion in orcign cxchangc. \hat wc scc arc dircct and
indircct intcrvcntions and manipulations in thc
moncy markcts, bond markcts, stock markcts, prc
cious mctals, oil and so orth. Furthcrmorc, cxtrcmc
lcvcragc, highrcqucncy trading, rampant insidcr
trading, cxpcrt nctworks, thc Pcrmancnt Opcn Mar
kct Opcrations (aka POMOs) and so orth, all mag
niy thc intcnscly political problcm. Tc combincd
ccct rcsults in cxtraordinary movcmcnts in priccs
that scrvc no purposc othcr than to conccal rcality,
prolong thc incvitablc clcaring and continuc to givc
alsc signals to all participants. Pumping thc Low
oncs Avcragc so as to crcatc thc imprcssion that
thc cconomy is alivc and wcll is just plain irrational
and stupid. Tc brutal disciplinc that is imposcd by
thc markct has mcrit and is indccd a ncccssary ingrc
dicnt in thc unctioning o a rcc markct, in that it
cnsurcs both thc right to succccd and thc right to ail.
Altcrnativcly, pricc discovcry in a systcm whcrc priccs
arc manipulatcd is not pricc discovcry at all. It is a
condition that sows discord, distrust and thc sccds o
anothcr cyclc that cnds badly. Tc mischicvous cnd o
manipulation is to cncouragc spcculation which ulti
matcly disintcgratcs thc rcal cconomy cvcn urthcr.
Te shape of things to come
Tc most critical rcsult o inationism is not nan
cial at its root. Cantor cxplains it as ollows. ination
is that momcnt whcn as a rcsult o govcrnmcnt action
thc distinction bctwccn rcal moncy and akc moncy
bcgins to dissolvc. ... Moncy is onc o thc primary
mcasurcs o valuc in any socicty, pcrhaps thc pri
mary onc, thc principal rcpository o valuc. As such,
moncy is a ccntral sourcc o stability, continuity, and
cohcrcncc in any community. Hcncc to tampcr with
thc basic moncy supply is to tampcr with a commu
nitys scnsc o valuc. Tis is prcciscly thc rcason or
thc undcrlying moral crisis o our timcs. Tc wcight
o history bcars witncss to this statcmcnt and it is
a ar grcatcr conccrn than thc drcadcd volatility wc
sccm to car.
It is no wondcr that scnsiblc and lcarncd orccastcrs
paint a vcry dismal picturc o our world to comc. I am
hardly cvcr imprcsscd with talk o doom and gloom
as I am with thc promiscs o govcrnmcnt cmployccs
that things will gct bcttcr. Yct, onc cannot cscapc thc
conscqucnccs o so much misbchavior nor dismiss
thc incscapablc impact. From country to country and
rcgion to rcgion, in small or largc mcasurc, and sooncr
or latcr, wc considcr thc cvcntual conscqucnccs. Tc
list is daunting. political instability, stagnation, rcbcl
lion, social unrcst, hungcr, protcctionism, nation
alism, morc intcrvcntion, rcgulation, conscatory
taxcs, opprcssion, joblcssncss, insccurity, class war
arc, limits to compctition, grcatcr govcrnmcnt con
trol in morc aspccts o daily lic, thc bankruptcy o
pcnsions and thc impovcrishmcnt o billions. Pcrhaps
cvcn rcvolution and war. On a rcccnt trip to Crcccc
to scc things or myscl, I witncsscd a microcosm o
an imploding world.
It is quitc natural that most pcoplc nd it dicult
to cvcn imaginc, i not acccpt, thc miscrablc con
scqucnccs o olly. It is pcrhaps that or so long, wc
havc bccn orccd to livc or thc momcnt, invcst or
thc momcnt, plan or thc momcnt and mcasurc or
thc momcnt. Noncthclcss, virtually cvcryonc agrccs
that somcthing is tcrribly wrong, that thc systcm
is out o control, that thc politicians, bankcrs and
invcstmcnt procssionals arc conuscd and that all thc
old assumptions and promiscs havc ailcd. Tings arc
not working as thcy should. For thc momcnt, much
Value as seen through the prism of
past earningsthe nature of which
may have been inuenced by credit
creation and thus illusory demand
or false price inputsis not only
inadequate but also deceptive.
Edelweiss JournalIssue 4
o thc morass is ocuscd on Furopc but thc situation
in Amcrica is, at its root, ar worsc. I havc a ccling
that whcn thc car ovcr sovcrcign dcbt movcs across
thc Atlantic (as it will), all hcll will brcak loosc. But
that may takc timc.
On a rcccnt trip to Lublin, as I was cxiting thc air
port I saw this sign in Caclic. Cosc Ar Fhillcadh.
It simply mcans No Rcturn, but it imprcsscd mc
or bcing analogous to our timcs. mystic, incomprc
hcnsiblc and lcaving no room or doubt about thc
possibility o going back. I would likc to think that
atcr thc smokc clcars, thc world o tomorrow (pcr
haps cvcn in my own lictimc) will bc a bcttcr onc.
I can imaginc a massivc shit o pcrccptions toward
thrit and honcst work, toward a culturc o postponc
mcnt o consumption in avor o production, onc o
sclrcliancc and contracting political powcr, and a
ncw rcnaissancc in thc productivc cconomy as against
thc nancial onc. Bctwccn now and thcn, whcthcr
in politics, cconomics or in thc invcstmcnt proccss,
this drcadcd volatility will rcmain a rcmindcr as to
what is rcal and what is an illusion.
Capital preservation
For thosc o us who arc intcnt on protccting our
capital, this is not thc timc to bc cithcr doubtul or
irrcsolutc as to thc right thing to do. Furthcrmorc, it
makcs no scnsc to rcly on nancial asscts, markcts,
conscnsus opinion, thc promiscs o wcllmcaning
olks or thc wishul cxpcctations o thc many. On
thc contrary, this is a timc or conviction and bold
ncss. Our ovcrriding aim, as I havc dcscribcd carlicr,
is to ocus cxclusivcly and crccly on indcpcndcncc,
scarcity and substancc. To do so, wc nccd to makc a
wholcsalc changc in how wc think about cvcrything.
Tc crisis cvcryonc is talking aboutycs, thc onc
that is about to unscttlc thc world wc havc known
or so longis onc that starts and cnds with lcvcr
agc, unsustainablc dcbts, insolvcnt govcrnmcnts
and insolvcnt banks. It is a crisis o moncy, moncy
substitutcs and moncyrclatcd activity and asscts.
Conscqucntly, thc dcstruction o crcdit, thc dclcvcr
aging cvcryonc talks about, and thc cnsuing impov
crishmcnt in tcrms o moncy, nccd not in any way
dcstroy thc physical capital cmploycd. Somc o this
capital is uscul and sustaining, in othcr words, it has
cconomic valuc.
Most nancial and invcstmcnt procssionals ail
to makc thc crucial distinction bctwccn what is cco
nomic and what is purcly nancial. In act, cvcry
thing is mcasurcd by thc samc rulcr and counts as
i it wcrc thc samc. \c havc bccomc accustomcd to
sccing highcr assct priccs, morc moncy and grcatcr
nancial activity and counting it all it as dcsirablc
growth. As a conscqucncc, wc havc long bccn uscd
to vicwing our invcstmcnts as a mcans o making
moncy rathcr than with thc cycs o owncrs intcnt on
accumulating capital and productivc asscts.
For thc sakc o conviction and boldncss, I scc our
invcstmcnt practicc orward having just two simplc
and distinct pillars. rst, amplc liquidity, and sccond,
a collcction o pcrmancnt and productivc asscts to
which wc can add opportunistically.
Te wonderful world of cash...
I wc arc going to havc cash or liquid asscts or thc
purposc o waiting out thc unccrtainty or as a mcans
o acquiring morc productivc asscts, wc cannot aord
to havc thc kind o cash that is mcrcly thc promisc o
an insolvcnt govcrnmcntthus lacking valuc o its
ownno mattcr how popular it may bc and no mattcr
thc rclativc trust pcoplc assign to it rom timc to timc.
I dont know anyonc who anticipatcd thc popularity
o thc Ncw Cuinca Kinas or anyonc who can corrcctly
gucss what any onc moncy will do as against anothcr.
Bcsidcs, this is not thc kind o activity suitcd to thc
accumulation o capital. Owning an abstraction o
an abstraction and calling it cash is a tcrribly dumb
idca no mattcr how acccptablc othcrs nd it. As it is,
ncarly all our liquidity is in prccious mctals, but it is
not a mattcr o pricc against anothcr kind o moncy
and it is not or thc purposc o making moncy.
Vicwcd as cash, prccious mctals providc us rccdom
rom thc immoral banking systcm that cnvclops us.
Most pcoplc havc cash in somc varicty o papcr. Tats
nc, but in rcality, thcy dont quitc havc it. Tcy think
it is in thc bank bccausc it says so in thcir monthly
statcmcnt, but thc bank docsnt rcally havc it cithcr.
I dont scc thc mcrit in having moncy that rcquircs
mc to trust somconc. Othcrs kccp thcir liquidity in
govcrnmcnt bondsbut cxactly what is a govcrn
mcnt bond` Icts not go thcrc. Succ to notc that it is
not moncy cithcr, dcspitc thc act that onc can otcn
makc moncy by owning thcm. Our own liquidity is
not subjcct to crcdit risk, liquidity risk, countcrparty
Owning an abstraction of an
abstraction and calling it cash is a
terribly dumb idea no matter how
acceptable others nd it.
Issue 4Edelweiss Journal
wr rrtb
risk, rating risk, intcrcst ratc risk or duration risk.
Furthcrmorc, it is not subjcct to political risk. Ycs, wc
pay somcthing to storc it in a sccurc placc, and ycs, (as
also is with papcr moncy) it docs not carn anything.
\ondcrul. Tats thc wholc point about cash. Iastly,
with gold, thcrc is no possibility or bctrayal.
... and that of Rudolf Pazeller
Tc rcst o our asscts arc stakcs in thc owncrship o
a cw corporations. Tcir sharcs may tradc on a stock
cxchangc, but liquidity is not a actor in our owncr
ship. Fach o our holdings, whcthcr wc valuc it on
account o scarcity in rcsourccs or bccausc it carrics
physical or opcrational substancc, contributcs to our
aim o indcpcndcncc rom our nancializcd world.
Tc bulk o this lcttcr was writtcn during a bric
Christmas holiday in a small villagc in thc moun
tains o thc lowcr Fngadin vallcy in cast Switzcrland.
I staycd at thc r/room but uttcrly splcndid Schlos
shotcl Chastc, and was scrvcd by thc owncr, Rudol
Pazcllcr and his amily. I was astoundcd to lcarn
that thc busincss had bccn in thc samc amily or ..
gcncrations. Tcy wcrc incrcdibly proud and quitc
cxccptional as hosts. Had it bccn possiblc, I would
havc bought sharcs in this busincss right on thc spot
without cvcn as much as looking at thcir nancial
statcmcnts. But it also occurrcd to mc that dcspitc
thc hard work involvcd and thc occasional dcsirc this
amily must havc surcly had ovcr thc ccnturics to scll
and divcrsiy thcir asscts into somc nicc govcrnmcnt
bonds, thcy valucd thc simplicity, gcnuincncss and
honcsty o indcpcndcncc, scarcity and substancc.
Tcrc arc many Rudol Pazcllcrs and Philippc Mau
bcrts lct in our world. I rcjoicc whcn I nd thcm and
gricvc whcn thcy scll out. But on thc othcr hand, I
am otcn amazcd to scc thc transormation o so
many intclligcnt mcn who atcr ycars o building a
succcssul busincss (rcad. hard work, illiquidity, lack
o knowing what it is worth at any onc timc, and
lack o any divcrsication), scll it or a pilc o moncy
(thcir lic savings, rcally) and thcn, suddcnly, bccomc
valucd highnctworth clicnts to cluclcss bankcrs,
und managcrs and othcr advicc pcddlcrs, nonc o
whom has thc slightcst inkling o how to crcatc such
capital in thc rst placc. It is astonishing to scc thc
changc that takcs placc in pcoplc oncc thcir capital
is nancializcd. It nccd not bc so.
Rcal cconomic activity, thc kind in which wc own
participations, is not suitcd to thc mcntality o invcst
ing or thc momcnt or mcasuring or thc momcnt.
Tis is not to say thcrc arc no busincss risks. Tis is
prcciscly why thc human actor is o principal impor
tancc. By placing a portion o our capital in a busincss
that is involvcd in gcnuinc cconomic activitywhich
wc can undcrstand, which posscsscs cithcr physi
cal, tcchnical or intcllcctual substancc, and whosc
owncrship and managcmcnt is compriscd o pcr
sons o charactcr having prioritics and motivation
similar to ourswc can bc quitc condcnt that thc
idca o capital prcscrvation is not mcrcly an cmpty
promisc.

(TL)
References
Cantor, Paul A. Hypcrination and Hypcrrcality.
Tomas Mann in Iight o Austrian Fconomics. Te Review
of Austrian Economics Vol. /, No. r (r,,). .,
Las, Satyajit. Extreme Money: Masters of the Universe and
the Cult of Risk. Iondon. FT Prcss, .crr.
Real economic activity... is
not suited to the mentality of
investing for the moment or
measuring for the moment.
I
n a capitalist cconomy, thc wcalth o thc rich is in
thc orm o capital, i.c., wcalth cmploycd in thc
production o goods and scrviccs or salc. So starts
an opcn lcttcr by Procssor Rcisman to somc idiot
who suggcstcd that thc rich do not crcatc jobs.
Tis wcalth, hc continucs, is thc oundation both
o thc supply o products that pcoplc buy and o thc
dcmand or thc labor that pcoplc scll. Two short
scntcnccs prcgnant with thc csscncc o thc marvcl
that is capitalism. Should thcsc words sound strangc
in our modcrn nancial world, it is only bccausc wc
havc all bccomc nancializcd and bambozzlcd with
crcdit, moncy and inating assct priccs as thc sourcc
o wcalth and prospcrity. Furthcrmorc, or thosc who
insist that consumption is thc path to cconomic pros
pcrity (a rccurring nonscnsc that is now takcn as holy
Edelweiss JournalIssue 4
writ), Rcisman intimatcs thc oppositc. Consumcrs
arc not rcsponsiblc or thc industrial dcvclopmcnt
o any country. Consumcrs havc myriad nccds and
dcsircs, which go unmct cxccpt to thc cxtcnt that
busincssmcn and capitalists nd ways o supplying
thcm through thc dcvclopmcnt o ncw and improvcd
products and morc ccicnt, lowcrcost mcthods o
production.
Read more: http://tinyurl.com/ej-reisman. George Reisman is Profes-
sor Emeritus of Economics at Pepperdine University, a Senior Fellow
at the Goldwater Institute, and the author of Capitalism. A Trcatisc
on Fconomics (Ottawa, Illinois: Jameson Books, ).
U
rging citizcns to rcpatriatc moncy thcy havc
stashcd abroad, thc Crcck Financc Ministcr
said, I havc callcd or a patriotic campaign or bank
dcposits to bc rcpatriatcd. Tc Crcck banking systcm
is totally guarantccd undcr thc agrccmcnts wc havc
madc. Surc.
While on the subject, here are some breathtaking photos of the old
place: http://tinyurl.com/ej-greece.
I
n thc coursc o this work, I havc clcarly cxprcsscd
my opinions as to thc nal atal ccct o thc papcr
moncy. thosc opinions arc in dircct opposition to
thosc o thc Ministcrs and thc Parliamcnt. Timc, thc
tricr o all things, must now dccidc bctwccn us, and
i I bc wrong, I havc, at lcast, takcn ccctual mcans
to makc my crror as conspicuous and as notorious as
possiblc, whilc, on thc othcr hand, i I bc right, I havc
laid thc surc oundation o complctc triumph ovcr
my haughty, supcrcilious, unjust and insolcnt ocs.
William Cobbett, Papcr Against Cold, or Tc history and
Mystcry o thc Bank o Fngland, o thc Lcbt, o thc Stocks, o
thc Sinking Fund, and o all thc othcr tricks and contrivanccs,
carricd on by thc mcans o papcr moncy (London: self-published,
) p. .
T
hc MF Clobal scandal (Scc thc nowamous Rcu
tcrs articlc by Christophcr Flias that cxposcd thc
massivc raud o rchypothccation) is but a small
cxamplc o thc grand raud that pcrmcatcs our nan
cial world. Frcd Shcchan writcs that it is a rcvclation
in nancial lcvcragc. Hc draws vc lcssons.
First, i not or thc moncy stolcn rom MF Clobals
customcrs, Rcutcrs probably would not havc sct Flias
on thc trail to rchypothccation. Sccond, it is whcn
good crcdit is rcccding that such scandals comc to
light. (Mado.) I not or thc slidc in Furopcan sov
crcign bond priccs (thc routc by which MF Clobals
CFO lcvcragcd and bct thc solvcncy o his rm), MF
Clobal would not havc disappcarcd. Tird, and vcry
much rclatcd to thc prcvious point, thc worlds good
collatcral shrinks by thc hour. Fourth, thc supposcd
bond guarantccs that authoritics bray about arc a
chimcra. Quoting Flias. Backcd by thc Furopcan
Financial Stability Facility (FFSF), it was a clcvcr bct
(at lcast in thcory) that ccrtain Furozonc bonds would
rcmain dcault rcc whilst yiclds would continuc to
grow. Tc FFSF is backcd by words, not asscts. Tc
morc that govcrnmcnts and intcrnational bodics votc
to back spiraling guarantccs, thc lcss thcir guarantccs
arc worth. Tus. good collatcral as a pcrccntagc o
papcr and papcr promiscs shrinks. Fith, and vcry
much rclatcd to points two through vc, it is only
thc spiraling o nancial lcvcragc that prcvcnts thc
nancial cconomy rom collapsing.
Christopher Elias article can be found at: http://tinyurl.com/ej-elias.
Frederick J. Sheehan is the author of Pandcrcr to Powcr. Tc Untold
Story o How Alan Crccnspan Fnrichcd \all Strcct and Ict a
Icgacy o Rcccssion (McGraw-Hill, ). His website is http://
www.aucontrarian.com.
M
urray Pollitt is a tough guy. An cnginccr by pro
cssion, hcs bcttcr known as thc hcad o thc
cponymous Pollitt 8 Co in Toronto (www.pollitt.com).
A dozcn ycars ago, hc convinccd mc bcyond doubt
about thc brilliant substancc that was (and is) bchind
Impcrial Oil Company and othcr invcstmcnts. But
o all things, hc knows mining. His opinions arc
otcn ar rom conscnsus or thc glossy promiscs o
thc stock mcrchandiscrs on Bay Strcct. In his anu
ary r8 mcmo to customcrs, hc contcnds what many
do not acccptthat is, that thc minc supply o gold
will soon cntcr a longtcrm dcclinc. Hc argucs that
dcspitc highcr priccs, cconomic rcscrvcs arc bcing
dcplctcd. Hc talks about how thc old busincss o pros
pccting has bccn supplantcd by slick promotcrs, and
about thc bull markct in thc politics o rcgulation and
tax. But nally, hc talks about costnot thc kind that
can bc summarizcd in an incomc statcmcnt but thc
ncccssary and rcal onc.
Ovcr and abovc thc usual complcmcnt o cngi
nccrs, gcologists and survcyors, hc writcs, UC
mincs nccd all sorts o skill scts. raisc mincrs, drit
mincrs, longholc mincrs, shrinkagc mincrs, shat
sinkcrs, vcntilation cxpcrts, mcchanics (a million
dollar jumbo drill has a dicscl cnginc plus mcchanical,
clcctrical, hydraulic and comprcsscd air systcms), rock
mcchanics cxpcrts, blasting cxpcrts..., knowlcdgc o
ccmcnting, pumping, comprcssing and, i a minc is
dccp, a knowlcdgc o scismic activity. Indccd, you
dont nd thcsc olks on \all Strcct or among thc
millions o invcstmcnt adviscrs and bankcrs. Tcrc
may bc a glut o lawycrs, accountants and public scc
tor cmployccs, hc writcs, and thcrc may soon bc a
glut o tradcrs who churn away in a zcro sum gamc
Issue 4Edelweiss Journal
with thcir countcrparts in onc acrc trading rooms,
but thcrc is no glut o thc abovc mining skills. It will
takc many ycars to rcbuild thc UC mining busincss.
And it will bc costly. Anybody who bclicvcs opcrating
costs as cxprcsscd by many mining companics today
prcsumably bclicvcs in thc tooth airy, but uturc
costs will dwar todays.
V
cry rcqucntly in rcccnt timcs, thc qucst or
what is right is thc main subjcct o your cditors
privatc corrcspondcncc. Fortunc has it that hc has
scvcral likcmindcd partncrs in thought. In onc rcccnt
cxchangc with a ricnd, thc mattcr bcing discusscd
was our mutual rccctions on thc uturc o thc nan
cial industry and thc naturc o our rolc as duciarics.
Following arc somc random thoughts that hc sharcd
with mc.
I bclicvc thc savings industry is a undamcntally
noblc cndcavor. Tc protcction o capital and its c
cicnt allocation rcwards todays savcrs and improvcs
thcir matcrial wcllbcing. But sincc tcchnology,
knowlcdgc and knowhow grow cumulativcly, cach
gcncration o scicntists and cntrcprcncurs rcly on
thosc prcccding thcm. Tus, a morc ccicnt alloca
tion o todays savings lays a morc solid and plcntiul
oundation or thc gcncrations o tomorrow.
Howcvcr, I also bclicvc that thc industry has bccn
corruptcd by what I considcr an intcllcctual raud
which has ostcrcd a thirtyycar crcdit ination.
Industry lcadcrs today carn dominancc not by out
smarting thcir compctitors tcchnology, productivity
or dcsign (as in othcr industrics) but by tclling morc
plausiblc lics. Tc assct gathcrcrs promisc unsuspcct
ing savcrs a mathcmatical impossibility. that thcy can
all outpcrorm thc markct. Tc brokcrs lic to thc assct
gathcrcrs. thcy promisc thcy can all hclp.
Our industry has cw satiscd customcrs bccausc
cw in thc industry carc about thc ultimatc cndcus
tomcr (thc savcr) upon whosc wcalth tomorrows
prospcrity dcpcnds.
Brokcrs, banks and assct gathcrcrs arc klcptocracics
not only in unction but in orm. Livision hcads arc
thcrc bccausc thcy arc thc most ruthlcss politickcrs.
Tcy arc thc hungricst or powcr and status. Tcir
only aim is to makc moncy. Fvcry day thcy ask arc wc
making moncy` ... Locs hc makc moncy` Locs shc
makc moncy` Lo thcy makc moncy` ... \ill wc makc
moncy ncxt ycar` ... How can wc makc morc moncy`
Tcrc is nothing wrong with making moncy, o
coursc. But thc way moncy is madc is morc important
to mc than that it happcns to bc madc. Rarcly in my
carccr havc I hcard thc qucstion Arc wc doing thc
right thing by our customcrs` Arc wc providing thcm
with a world class scrvicc` Arc wc improving thcir wcll
bcing` Arc wc dclivcring what wc promiscd`
Tc oundation o any industry is thc systcmatic
cxploitation o its cxpcrtisc. cxpcrtisc in crating
urniturc, cngincs, bridgcs or clothcs. But in thc
savings industry, cxpcrtisc is o a pcrvcrsc kind. It is
thc hcightcncd ability to bamboozlc and udgc with
nonscnsical linguistics \hat makcs a succcssul
invcstmcnt busincss is a grcatcr ability to hidc thc
truth, than to cxposc it.
But I bclicvc savcrs arc bcginning to undcrstand
that thcy arc bcing licd to. Ivc had a cw ricnds ask
mc what thcy should do with thcir moncy. Tcy dont
know much about invcsting but thcy know that lcav
ing moncy in thc bank at ratcs bclow CPI ination
docsnt work, that paying a mutual und to basically
track thc indcx docsnt work, that thc indcx itscl
docsnt work, that tcnycar risk rcc bonds dont
work, that structurcd products dont work, that
hcdgc unds charging two and twcnty dont work,
ctc. Tcy ccl thcy arc bcsct by phonics, liars and con
mcn at cvcry turn, and intuitivcly scnsc that all such
products arc littlc morc than sophisticatcd clandcs
tinc wcalth siphoning vchiclcs, allowing thc advisor
to takc a cut o thcir wcalth. And thcy arc right.
Pcrhaps onc cant quitc apprcciatc thc qucst or
doing what is right until atcr hc has comc to con
cludc, on his own and without doubt, thc naturc o
what is wrong. Morc corrcspondcncc to comc.