Do you recognise this symbol?
If you know your history, you certainly will.
If not, you may still recognise it if you watched the surprisingly good TV drama Taboo in 2017, starring Tom Hardy.
The symbol is, or rather was, the company logo of the East India Company.
The East India Company became such a force that it in its day (1600-1874) it was simply known as “The Company”.
Just how much of a force? Well…
The company ended up seizing control over large parts of the Indian subcontinent, colonised parts of Southeast Asia, and colonised Hong Kong after a war with Qing China.
Originally chartered as the “Governor and Company of Merchants of London trading into the East Indies”, the company rose to account for half of the world’s trade, particularly in basic commodities including cotton, silk, indigo dye, salt, spices, saltpetre, tea, and opium. The company also ruled the beginnings of the British Empire in India.
That’s right, it controlled half of the world’s trade, and even had its own – formidable – army, which it used to wage and win wars (emphasis mine):
In its first century and half, the EIC used a few hundred soldiers as guards. The great expansion came after 1750, when it had 3,000 regular troops. By 1763, it had 26,000; by 1778, it had 67,000. It recruited largely Indian troops and trained them along European lines. The military arm of the East India Company quickly developed into a private corporate armed force used as an instrument of geo-political power and expansion instead of its original purpose as a guard force. Because of this, the EIC became the most powerful military force in the Indian subcontinent. As it increased in size, the army was divided into the Presidency Armies of Bengal, Madras and Bombay, each of which recruited its own infantry, cavalry, and artillery units. The navy also grew significantly, vastly expanding its fleet. Although heavily armed merchant vessels, called East Indiamen, composed most of the fleet, it also included warships.
A force of 67,000 troops, and even… its own currency:
An East India Company coin, struck in 1835
What does all this remind you of?
That’s right, Facebook and its plan to launch a cryptocurrency called Libra (aside from the 67,000 troops).
Could Facebook really become the new East India Company?
The thought that Facebook could become as powerful as a nation state sounds kind of ridiculous, until you look into the history of the East India Company.
And when you really start thinking about it, it makes even more sense. And if its Libra cryptocurrency gets off the ground, it could be very bad news for the US government.
Here’s why (summed up beautifully by a redditor john_carver_202):
We are at the first point in history in which a private multinational company’s power is actually rivalling (at least influentially and somewhat economically) that of nation-states.
Think about this… Facebook has a userbase equivalent to the population of China x2 (~2.3 Billion!) Billions of people across the globe log in to it every day or at least every week or month (or one of their other products– Instagram, WhatsApp, et cetera).
That is a lot of power.
And if they were able to get that user base of roughly 2 billion people to start using Libra for transactions, that poses a significant threat to one of the arms of US hegemony — the dollar as the global currency. If FB is able to get its entire user base using Libra, it immediately becomes one of the world’s top currencies.
That’s a big deal. A REALLY big deal.
Now, a lot of people on here [the ethtrader subreddit] hate Facebook and also hate the US (or at the very least, its dollar hegemony). If you’re in this camp, you’re probably conflicted. But beyond your personal feelings, the battle that is about to ensue over Libra is going to be a historical one. Because if FB is able to pull off Libra (legally speaking), the economic reality of nation-states being the dominant power-players in market creation and regulation is turned on its head– and there is good and bad in that.
But short-term, the day that US dollar hegemony collapses, is the day that the US National Debt becomes a very real issue. And if you’re an American, this could create a very real systemic economic issue. So, I would probably refrain from cheering the destruction of US dollar hegemony too quickly.
Either way, you are living through a pivotal period of human history — one in which the power-structure and societal organization is fundamentally changing.
That post by john_carver_202 was in response to the news of the US government officially ordering a moratorium on Libra, as stated in this release:
In that release, the US government literally says (emphasis mine):
We write to request that Facebook and its partners immediately agree to a moratorium on any movement forward with Libra – its proposed cryptocurrency and Calibra – its proposed digital wallet. It appears that these produces may lend themselves to an entirely new global financial system that is based out of Switzerland and intended to rival the US monetary policy and the dollar.
So what john_carver_202 proposed isn’t really that farfetched at all. It certainly has the US government concerned.
What would happen to the value of stockmarket and the purchasing power of government-issued currencies if this all played out?
I wrote about this idea in a different way yesterday: Petrodollar warfare in the age of cryptocurrency.
I wrote about what could happen when China competes its own national cryptocurrency and how the rest of the world would react.
But the crux of what might happen came from the idea of petrodollar warfare.
Again, I’ll quote the Wikipedia entry on that here (emphasis mine):
The United States dollar remains de facto world currency. Accordingly, almost all oil sales throughout the world are denominated in United States dollars (USD). Because most countries rely on oil imports, they are forced to maintain large stockpiles of dollars in order to continue imports. This creates a consistent demand for USDs and ostensibly supports the USD’s value, regardless of economic conditions in the United States.
According to proponents of the petrodollar warfare hypothesis, this in turn allegedly allows the US government to gain revenues through seignorage and by issuing bonds at lower interest rates than supposedly they otherwise would be able to. As a result, the U.S. government, according to this theory, can run higher budget deficits at a more sustainable level than most other countries can. The theory points out that a stronger USD also means that goods imported into the United States are relatively cheap (although the country’s exports become relatively more expensive for the rest of the world).
So it’s fair to say that if Facebook’s Libra really did take off, it would be bad for the value of the US dollar, the US economy, and likely the British pound and UK stockmarket, too.
One thing it wouldn’t be bad for is gold.
Here’s one asset that could soar in this scenario (and it’s not bitcoin, or any other crypto)
If the US dollar really does start to be unestablished by the Facebook cabal or China’s national cryptocurrency, there is one asset/investment/currency that would be sure to increase in value. That asset is gold.
Gold is the original “safe haven” asset. And it tends to do very well in times like these, of economic and political uncertainty.
I wrote about why that is back in June:
This week the gold price surged, and gold’s top exchange-traded fund (ETF) recorded its biggest gain in almost three years.
Why? Well, to answer that question, we can cast our minds back to 2016, when Goldman Sachs’ head of commodities, Jeff Currie, appeared on CNBC’s “power lunch”.
“I always like to say gold is a great hedge against politicians, and we have a lot of political risk in the market right now. So gold has a strategic purpose,” he said.
“Why, what’s the tie between gold and politicians?” Brian Sullivan of CNBC asked.
“Well, if you think about the correlation between rates and you think about when you debase a currency or weak dollar, what people gravitate to are hard assets and gold is the epitome of the hard asset,” said Currie.
Basically, when economic or political uncertainty increases, so does the gold price. And given what we have right now, with the US-China trade war and our own Brexit chaos, gold is back in the limelight.
In fact, on Monday, gold once again regained its crown as the king of precious metals, bumping palladium – which is 30 times as rare as gold – off the top spot.
And given that “politicians” don’t look to be calming down anytime soon, it’s fair to say the future is looking bright for gold investors.
Given all this, right now could be an opportune time to take a look into investing in gold.
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Until next time,
Editor, Exponential Investor