36 South: "Let's Legalize Cocaine"

From Jerry Haworth of 36 South Capital

Let’s Legalise Cocaine

Think about it – a substance which makes one feel good, promotes a feeling of well-being and confidence…..what is the problem with that?

The problem, as I explained to all my teenagers, is not that drugs are inherently bad per se, it is the medium to long term consequences of drug use that inevitably leave one worse off and forces one to make decisions one would not normally make e.g. selling your mother’s wedding ring for drug money.

Like the good pseudo-parents they are, the governments have (probably correctly) stepped in and outlawed drugs and their use. But there are other substances which also make one feel good, promote a feeling of well-being and confidence but is just as dangerous. With this substance the government does NOT limit use but promotes it! It is in fact the grower and distributor!

What is this stuff? Hint …. Comes in two flavours: money (present money) and credit (future money).

Our pseudo parents, the governments, are money pushers and we are the junkies. They have encouraged their “children” to take up the habit. Thus, we have all become addicts, the world is one big “needle park” and we are so habituated that any call to limit its creation is met with derision. The fiscal cliff, which should be renamed ‘last stop before insanity,’ was merely an attempt by the “Salvation Army” to limit our addiction, to put a boundary on how much longer we can go on without consequence.

The governments have driven interest rates to near zero as well. What does this mean? Interest rates are like an automatic ship stabiliser. If the economy tilts too much towards credit, interest rates go up, telling the economy that there is too much credit in the system and vice versa. If the economy tilts too much towards present money, interest rates fall basically indicating there can be more credit money in the system. When governments subvert this indicator by effectively switching it off by artificially driving rates to near zero, there is no way to tell the correct mix of credit and money in the system. This suits the government, they know they have too much credit in the system (especially their own bonds) and they know that there is so much other credit in the system that any Volker-like move to raise rates to correct the imbalance would send the economy into another Great Depression. Thus they distort the present money/ future money balance to suit their and our short term avoidance of pain all at the expense of the medium and long term. Lyrics from Hotel California spring to mind, “you can check out any time you like but you can never leave”.

At time of writing I don’t know how the debt ceiling will turn out but I am eerily calm about it, the government, the ”pusher” of money, is not going to stop “pushing”. And the medium to long term consequences of this money and credit creation to solve a previous “money and credit creation” problem will be disastrous for so many. Why? It will result in high inflation and probably more likely the serious strain, stagflation. Imagine 20% unemployment, 20 % inflation and 1% interest rates. How would you protect wealth and savings?

The upshot of this scenario would be even more severe wealth inequality as a lucky few closest to the government spigots would benefit “oligarch style”. Hardest hit will be the middle class, the working mule of society, as inflation or stagflation tightens its stranglehold. The ultimate sadness will be taken to its logical conclusion; we will have a great depression anyway, in million dollar units instead of 10 dollar units.

So if our money junkie pseudo-parents, the government, have no regard for our medium to long term well-being, why stop at money?  Legalise drugs! Don’t pretend to have our interests at heart in one important area of our lives, our health and not in the other important area of our lives, our wealth.

For the record the above is nothing more than a metaphor, I don’t really condone the use of drugs and don’t want them legalised.

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