I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them.- Thomas Jefferson.

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Friday, September 10, 2010

Is There Such a Thing as a Free-Market Bull?

By Vedran Vuk

Can you be a free-market supporter without being a bear? After all, government grows endlessly larger and larger. It’s hard to stay optimistic about what appears to be inevitable doom. But there are two ways of looking at the problem. Most are more familiar with the bears who watch for the next downturn and invest heavily in gold. And of course, in our opinion, this is a highly warranted perspective at the moment.

But there is a way to be a free-market bull, even in this grim environment. Instead of focusing on the growing size of government, this perspective focuses on the strength of capitalism. In many ways, capitalism has become stronger and stronger over the last century – especially on an international level. Today’s world trade is historically unmatched as new economies arise from absolute poverty. Market analysts can no longer focus on the U.S. and Europe alone but must pay close attention to Japan and the BRIC countries as well.

According to the free-market bull view, capitalism is similar to an avalanche. Once triggered in motion, little can stop the avalanche. One can throw regulations, social welfare programs, and other interventions into the avalanche’s way, but the snow will simply roll over them all. Even FDR was only able to choke off capitalism momentarily; free enterprise came roaring back after the war. His policies resulted in a Great Depression, but not a “Permanent Depression.” History sides with the bulls.

Capitalism has faced many dangers from Nixon’s abandonment of the gold, to LBJ’s Great Society, to endless spending in every administration. Through all of these events, capitalism somehow fights back, survives, and even prospers. Today’s companies and technologies are simply amazing. Our growth hardly appears stunted in the past few decades. If anything, these policies have slowed us down but haven’t stopped progress.

Does this mean the bears are wrong and bulls correct? Not at all. What really separates the two groups is timing.

The greatest free-market thinkers, such as Ludwig von Mises and Friedrich Hayek were certainly bears. Hayek wrote the Road to Serfdom during WWII because he thought that capitalism was coming to an end. In retrospect, his timing was off. Similarly, Ludwig von Mises wrote about the impossibility of socialist calculation and central planning. He never witnessed the fall of the Soviet Union in his lifetime, but ultimately he was correct. The bull and the bear believe in the same ideas. Only the free-market bull believes that the collapse will come later, while the bear believes it will come today.

Though the bull has been lucky thus far, there are plenty of cautionary tales that should warn him now. Japan’s lost decade is a glaring example. After years of regulation and intervention, something finally snapped. Almost no one saw it coming. It’s risky to be a free-market bull. Sure, the market might survive yet another recession, but it also might not. With the second longest recession continuing, even the bulls must be less confident now.

So what does the common investor take away from this? You could choose to be either a bull or bear. But there are smarter ways. In The Casey Report, we recommend holding one-third gold, one-third cash, and one-third other investments. Whether you’re a bull or a bear, the gold allocation makes sense. The bull looks at it as an insurance policy, and the bear sees a great investment. But regardless of the perspective, it’s worth owning.

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