Working Capital

"Capitalism" is another of those words, like "liberal," whose meanings have been twisted by time, use and particularly by government influence, to mean something quite different from, and sometimes opposite to, their original intent. When we see Occupy Wall Street protesters waving banners calling for its downfall, they are referring to what they think is capitalism (to the extent that they think; several of them don't) and not to real capitalism at all. I am an anarcho-capitalist, and both parts of that label have been twisted in such a way, so I have to explain the term. I don't mind that much; it is an opportunity to convey priceless ideas unknown to most listeners.

What so enrages OWS folk is actually State Capitalism, in which large enterprises operate under the guidance of and for the benefit of the State, which returns the favor by enacting laws to give each an effective monopoly. A better term for that is "Fascism," with every economic activity within the State and controlled by the State but not actually owned by the State; while it's an ancient idea--18th Century Mercantilism was one form of it--it formed a more successful alternative to Communism in the 20th Century and seems to have been worked out first by Mussolini, who began adult life as a Communist and attracted the notice of Lenin as such, but who later recognized that it's much smarter to direct the cow and milk her, than to own her outright. What we see all around us, and what our OWS friends are protesting, is a well-developed version of such fascism.
What "Capitalism" properly means is something far different, and it is that anyone who works hard and earns more than he needs for immediate use, can with advantage put a little aside for future uses, of which one is investment. If he runs his own business that's sometimes called "plowing back profits" to improve its operation, increase its market share, cut its operating costs by mechanization, etc. Or if he doesn't own a business, his savings can be invested, for example through the stock market, in other companies which in his sovereign judgment as owner of the funds, seem best poised to prosper with them.
All businesses improve and grow, to the benefit of all (suppliers, customers, employees, shareholders) only by the injection of such saved capital. This was the great engine of the Industrial Revolution, and not just the flood of ingenious inventions themselves. And capital must derive from that process, of saving some of what is earned and putting it to work. The government alternative of stealing or printing it and investing where bureaucrats think best, destroyed the USSR and is well set to destroy the USA--because those putting it to work don't own the bogus capital, and nobody can ever invest money more wisely than its true owner.  Yes, of course owners of capital will make mistakes; but only owners of ca-pital are positioned to learn from them.
The foregoing is basic to free-market economics, and is shared by all economists who know which way is up, and by Conservatives as well as Libertarians and Anarchists, even when the former have some weird ideas about justice and America's place in the world that can not be reconciled with a well-rounded commitment to liberty, and while only the latter have worked out the implications consistently. At this point, however, we must notice an anomaly: gold has been providing a much better return on capital invested than have companies traded in the stock market; so much so as powerfully to incent an ever larger fraction of every investor's portfolio to consist of  precious metals, so depriving sometimes well managed true wealth-generating firms of working capital. And that's a tragedy, for gold cannot generate any wealth. If the trend continues, the last 350 years of unprecedented prosperity are certain to end.
It wasn't always so; in the 1985-2000 period, for instance, the gold-dollar exchange rate was rather steady--evidently because there were so many promising investment opportunities that attracted capital elsewhere. Then the dot-com bubble burst and gold resumed its upward march. The 10-year chart here shows an increase in its dollar price of five times, equivalent to an annual return of 17.2%.  Very hard for the Dow to beat.
Here's the nub: gold is only money. Honest money, true money, but only money; unproductive cash. If investors are (very wisely) shifting to gold, that means they prefer cash to companies. Reverse that: they trust companies less than they trust (real) cash! The process of putting capital to work is drying up, or perhaps has dried up already. Because accounts are denominated in false money (government paper) it looks as if investors are buying shares at a decent clip and keeping prices up, as if all is normal; but it's not true. To the extent that they prefer gold, they have given up on putting capital to work.  This is why commerce (denominated in real money) is stagnant or regressing, and why living standards have stalled. Check also the Dow itself; ten years ago it was 10,200 and today about 12,500--a rise of 22.5%, in dollar terms. Now divide that 1.225x multiplier by 5, the corresponding growth in the dollar price of gold, as above; the result is 0.245, meaning stocks are now perceived as being worth only 24.5% of their value of one decade ago, when the denominator is real money, gold. By that measure, they lost over 75% of their value.
Why do investors prefer gold to stocks? Several reasons. Let's pick a few. (1) First and foremost, that 75% loss makes it a no-brainer. Just to preserve what one has, one must buy gold. (2)  Every other way to place paper money involves sharing that information with the FedGov, and therefore paying taxes on any nominal gain (which is likely, as above, in any case to be an actual loss). Coins and bars, well hidden, are the only simple, private way to store value. (3) Governments of all "developed" countries have had such an orgy of overspending over so long a period that they owe massive sums of their fiat currencies which cannot, realistically, ever be paid back; therefore they will inflate, having no other option. Therefore, the decline in purchasing power of those currencies will continue. Therefore, the appeal of gold will intensify, for the foreseeable future. And (4) the complex web  of regulation which has been woven around commercial firms of any size so restricts their freedom of action that their value as investments would be open to serious question even if none of the foregoing were true.
Putting capital to work is perfectly simple. When government has vanished--but not sooner--it will be simple in practice. Meanwhile, the system government has created is incurably constipated; as investor Harry Browne so succinctly put it, "Government Doesn't Work."

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