“The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or evade truth, not to reveal it.” John Kenneth Galbraith.
Our financial system is hugely complex; it is interesting to note that economics as a subject is often referred to as “the dismal science” because of the lack of proven theory to practical application and resulting inability to generate meaningful economic forecasting.
The question asked by Her Majesty The Queen to the Bank of England officials in the presence of Governor Mervyn King following the Banking Crisis of 2008.
The fact is that few people understand the nature of money itself, how it is created and what it represents, let alone the complicated idea of freely ‘floating’ currencies issued as debt and backed by nothing more than a ‘promise to pay’ from the issuing Government.
Our monetary system today bears no resemblance to the system we had at the beginning of the Twentieth Century when the World’s leading economies operated on a fixed exchange system based upon the weight and fineness of gold. Currencies, or paper money, were then redeemable in gold coin upon demand at the Bank. Consequently, the control of the supply of gold and therefore money, was determined by real economic demand. The price of money, through the interest rate, was set by the market.
Today, Central Banks determine the price and the quantity of money through their ‘Open Market Operations’ and whilst they are notionally ‘independent,’ their policies are heavily influenced by Politics, Ideology and Vested Interests.
As many of our clients will know, we take a keen interest in economic and monetary history and how our Monetary System works today. If we consider that we are now ten years on from the Financial Crises of 2008, yet interest rates remain close to historic lows and Central Banks continue to pump new money into the system to ‘support’ the economy, then it is clear that asset values and the ‘price’ of money are no longer set by the market and it therefore follows that current Modern Portfolio Theory which continues to form the basis of accepted investment practise, must be questionable.
We think it is important, as advisers on money and investing, to understand how we reached this current financial situation, and, as Governments and Central Banks throughout the World continue to encourage the huge growth in credit and debt, how this will play out over the forthcoming years. The bottom line is what the impact will be on your wealth.
Our approach to investment is to pursue a ‘Sound Money’ proposition.
Professor of History Jennifer Cunningham.