Someone once told me about their parents’ experience in the Vietnamese revolution. The government seized their land and froze their bank accounts, but they had gold jewellery, so they bought a ticket out of the country and escaped the carnage.
I’ve previously stated that governments could create stable, prospering economies with a land-backed currency, but can private individuals prepare their asset portfolios against good governments going bad?
The Value Of Most Assets Depends on The Government
When you think about it, almost ALL assets – with very few exceptions – depend on the good will of governments. The value of all financial assets like stocks, bonds, copyright, patents, indeed licenses of all kind, depend on government-enforced obligations. CEOs only pay profits to shareholders because of the law. If a government told CEOs, “Don’t worry about those shareholders, keep all corporate profits for yourself!” do you think you’d still get dividends? The value of bonds arises from the legal obligation of debtors. If the government told debtors “Forget about those bondholders, you don’t have to pay them anymore!” then bonds would become worthless. Licenses, patents, copyright, etc. all depends on the government allowing the owners to produce an artwork, an invention, or perform an industrial process while preventing those without the license, patent or copyright from doing the same. Without enforcement, IP is worth zero.
Landownership also depends on government. Land owners differ from trespassers by being able to get police to evict trespassers. Yet if, after a revolution, police refused to evict trespassers from your land, your land holdings wouldn’t be worth the paper your title deed was printed on. Small cottage businesses without much fixed capital have some resistance to governments, but any business with large plants and machinery is a sitting duck during a revolt.
The key point is the government is the most powerful force within a nation’s territory. If a territory contained a more powerful force than the government it would, by definition, become the new de facto government. Short of revolution, disorganized private individuals cannot resist a government with force. Without protection from a major political movement, or foreign country, government officials, backed by the police and the army, can take any valuable assets you can’t hide.
What about hiding paper cash under your bed? Can cash be protected from government seizure? No. Like other financial assets, cash depends on legal fiat and is made of cheap materials whose value depends on laws against forgery. Governments can print all the cash they want and, through hyperinflation, can steal the cash from under your bed without touching the physical notes.
Government-Resistant Assets
The following are a list of government-resistant assets:
- Skills/education
- Black market business capital (valuable connections)
- Compact Antiques, jewellery and other precious objects (Vintage wine? Rare stamps?)
- Cryptocurrencies
- Precious Metals
What’s in your brain, cannot be seized. However, education takes time as well as money. So if trouble is just a few months away, you cannot rapidly exchange vulnerable assets for skills. Valuable skills must be developed years, decades, in advance. Yet skills are one of the few government resistant assets that yield an income during tough times.
Even the most oppressive regimes have trouble seizing people’s underground business networks, connections, and reputation. Black market business capital is either intangible or compact; governments can always take the big stuff. Like skills, black market business capital is a government-resistant income-yielding asset. Like skills it is illiquid and cannot be purchased rapidly, but must slowly build up. Unlike skills, it is difficult remove from the country. Furthermore, while black market business capital is government resistant, it is not immune, and governments can break up operations and imprison participants. Even worse, participating in the black market when justice prevails can get you imprisoned or involved in gang warfare. I’ve referred to the costs of running a business outside the law here. When governance is good, business should be kept above board. Nevertheless, honest businessmen in politically unstable regions can explore strategies to go underground during political strife.
Finally, some compact valuables can be hidden and don’t depend on government enforced obligations. Precious metals and other compact precious items, such as antiques and cryptocurrencies, fall into this category. These assets don’t yield an income, but they can be rapidly purchased and readily moved.
Production Risk, Breakage Risk, Network Risk and Preference Volatility Risk
This first risk to any valuable asset is production risk, the risk that some new process will produce the asset in large quantities and devalue it. Unlike cash, governments can’t print diamonds. Nevertheless, diamonds are just a rare form of carbon. Industrial diamonds are routinely made. Though not yet identical to natural diamonds, that could change any time. Pearls are also vulnerable to production risk. Antiques, by definition, are no longer produced and thus invulnerable to production risk. Any one cryptocurrency can be made immune to production risk. For example, only a finite number of bitcoins can ever be made. However, an arbitrarily large number of cryptocurrencies with identical qualities to bitcoin can be produced. New mining techniques can extract precious metals from lower grade ores, but these increase the cost and energy of extraction and only a finite amount of precious metals can be extracted at a given grade of purity. So, while precious metals have an associated production risk, it is comparatively low and step changes in technology are unlikely to suddenly flood the precious metal market.
The second risk is breakage risk. Precious metals, valuables, such as diamonds or pearls, and cryptocurrencies are hard to break, but antiques are highly vulnerable. If an antique (such as a vintage bottle of wine) breaks while being transported, or a priceless stamp collection gets wet, its value is instantly destroyed.
Then there is network risk. Most compact items of value do not depend on networks, but cryptocurrencies do. Internet access mostly comes from large infrastructure such as mobile phone masts or optical fibres. Satellites might allow foreign governments to provide internet access against the will of a relatively poor country, yet many governments can successfully shutdown the internet and no internet: no cryptocurrency access. Despite Bill Clinton’s statement in 2000 that censoring the internet was like “trying to nail jello to the wall” the Chinese government has had increasing success in determining what can and can’t be transmitted and, if they wanted to, they could block crypto-payments.
Finally, there’s preference volatility risk. In principle, no asset is immune from preference volatility risk as an asset’s value is only what people are willing to pay for it. If everyone suddenly decides they don’t want something, it’s value will be zero – there’s no way around that. And yet, antiques and crypto-currencies are particularly vulnerable to preference volatility risk, due to the vast, practically limitless, array of different antique and cryptocurrency classes. Precious elemental metals and generic valuables (like diamonds), while undoubtedly volatile, are less volatile than antiques or cryptocurrencies due to the comparatively limited number of categories they can exist as.
Gold: The Most Government-Proof Asset
While precious metals are vulnerable to production risk and preference volatility risk, their intrinsic vulnerability to risk is lower than other assets. Gold has a particular low vulnerability to preference volatility risk. Some say gold has little underlying use value, but this is not true. Gold is a highly useful medium for storing and exchanging value as it is intrinsically:
- Portable
- Durable
- Homogenous
- Divisible
- Rare
- Non-toxic
- Cognizable
- Comparatively Stable Value
The fact that gold’s main use is to exchange and store value is a strength rather than a weakness and serves to stabilize its value. More common materials, in high demand from industry, only have value while demand remains high and, since technology and industrial processes constantly change, industrial demand, and their corresponding price, could drop precipitously.
But so long as we need for money, materials ideally suited to function as money will have value. Lower industrial demand stabilizes value.
The biggest challenge to storing value is preference volatility risk. Many media can potentially store value, yet, when society switches its preference from one medium to another, those who stored their value in the first medium will lose it. To narrow down the vast array of options, let’s return to basics. The universe consists of elemental atoms; other value arises from their arrangement. The different ways to arrange elements into things of value is limitless so, to narrow down money candidates, we should only consider elemental substances.
Elemental substances are also divisible. Divisible things can be bartered for items over a wide value range. You can exchange a little gold for a ham sandwich, or a lot of gold for a car. On the other hand, while you might exchange an antique tribal mask for a car you want, if all you have is one antique tribal mask and all you want is a ham sandwich, you have a problem…
Rarer money candidates generally have more value per unit mass (neglecting industrial demand and irrational preferences). Rarer elements make value easier to move, all else being equal. When the universe began, only hydrogen, helium, lithium and beryllium were formed. Nuclear fusion in large stars formed elements up to iron. But it takes a neutron star collision to make gold, so it would be an understatement to say gold is difficult to manufacture. Elements higher up the periodic table are generally rarer than those lower down and so are more favourable as value stores. But we don’t want radioactive money! The highest stable element is lead. Only Mercury, Thallium and Lead have more protons than gold. Mercury exists in an elemental form, but it’s liquid; it’s also highly toxic. Both Thallium and Lead are also toxic and so unsuitable to be passed from hand to hand. Platinum is inert and non-toxic, but it’s melting point is 1,768 degrees compared to the 1,064 of gold making it less divisible; it’s also heavily used by industry, which could be a source of demand volatility. The inert nature of gold’s elemental state also makes it cognizable, and for money to be money, it must be possible to distinguish what is money from what isn’t. Different compounds of elements have different macroscopic properties, so only elements that remain in a single, chemically recognizable form are suitable money candidates. The pure elemental form of gold has recognisable qualities like density and resistivity that distinguishes it from other yellow shiny things.
Finally, gold’s traditional use as a medium of exchange and store of value makes it the most government-proof asset around.
Rhodium: An Alternative to Gold?
One other candidate may be a more suitable value store than gold: Rhodium. Rhodium was only discovered in 1804, and its toxicity is still unknown. But it has one significant advantage over gold: despite being the same price, annual rhodium production is 100 times lower, so if Rhodium became a generally accepted store of value, since it’s 100 times rarer, you could potential stuff 100 times more value in your pocket by stuffing it with Rhodium rather than gold. Doing so may or may not have negative health consequences, but if future studies show that Rhodium is non-toxic it might be a better government-resistant asset than gold.
It’s important to remember that any government resistant asset must be safe to handle, carry and hide. When times are good, its more sensible to securely store precious metals in institutions like Gold Money. But when politics starts deteriorating, it is essential to withdraw that value and hold it directly in your hand.
This is why toxicity is important.
Gold/Rhodium Powder Wallets?
Technological trends towards smaller, more accurate measuring instruments will affect suitable money candidates. In the future, precious metal powder wallets will be docked together and instructed to transfer a precise, arbitrarily small quantity of metal powder from one wallet to another. Instrumentation in the recipient wallet will rapidly check the weight and purity of the transferred powder within a fraction of a second and trigger an alarm if the powder was sub-standard or if the donor and recipient wallets disagreed on the transferred amount. In such a situation, you could just as easily buy a ham sandwich or a packet of crisps with physical gold or rhodium as a car, a house, or a cruise ship.
Such payment methods could ensure no element was be too rare to serve as money.
Self-Provision: The Best Hedge Against Total Collapse
Precious metals are convenient for exchanging value, but the greatest actual value is access to food, clean-water and shelter. If civilization collapses, it will be critical to secure access to necessities – and defend them from aggressors. The problem is you need land to grow food and quite a large space to store, say, a 10 year food supply. States can seize large things, like houses and land, so the best strategy against totalitarianism is to store gold, while the best strategy against anarchy is to buy land – along with food and guns. Either way food cultivation, shelter maintenance and self-defence skills will be of high value. Since an acre of farmland, which can support one person, is only £10,000 and food is relatively cheap to procure, it makes sense, for those with financial resources, to buy a plot of land, large enough to survive on, (for fresh food) and a 5 year reserve of dried food (in case of failed harvests) as a hedge against anarchy while storing any surplus asset value as gold to hedge against the seizure of your land and food. Heavy-duty weapons are illegal in many countries, so it makes sense to store wealth as gold and only buy serious weapons at the start of collapse and lawlessness.
In either case, while it makes sense to secure sufficient resources to satiate your most basic requirements in a remote region, relatively safe from invasion (perhaps a small island), it is best to store excess asset value as gold.
John
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