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Louden Swain: "Can 800 million Chinese be wrong?"
Gene Tanneran: "Frequently."
--Vision Quest

Fall term starts today. In an ongoing quest to improve market awareness, what are the most important lessons that college students can learn to enhance financial literacy?

Seeing both sides of the trade. For every buyer, there is a seller. Regardless of which side you're on, it pays to understand what the other side is thinking. This lesson, of course, broadly applies towards the need for critical thinking by individuals in a liberty-driven society.

Our markets are not free. Throughout their academic careers, most US students are taught that domesitic financial markets function freely with no interference. In reality, nothing could be further from the truth. Bureaucrats intervene in market workings constantly. Case in point: the Federal Reserve. The Fed represents a group of bureaucrats attempting to fix the price of money to the 'correct' value--since freely functioning markets would presumably produce 'incorrect' prices. Central planning at its finest, comrade.

Currency by fiat. Where does our money come from? Simple, bureaucrats create it by fiat. The US Dollar lost its last remaining link to gold in 1971. Currently, no (read: zero) currencies in the world are backed by precious metal. The implication? A worldwide confettifest of purchasing power debasement.

Leverage works both ways. Leverage can be viewed as borrowing to increase potential returns. It can also be viewed as borrowing to increase potential losses. People tend to see the former but ignore the latter--until actual losses are realized. Current financial market turmoil can largely be viewed as consequences flowing from excessive leverage.

Moral hazard. Currently, the government is in the process of bailing out homeowners that are upside down on their mortgages and lenders that extended mortgage credit. As such, excessive risk taking is not being penalized. Instead, those who were prudent and didn't take excessive risk foot the bill for the imprudent behavior of others. It's easy to see what these bailouts invite in the future, isn't it? Less prudent behavior and more risk taking, since decision-makers figure the government will come to their aid if things don't work out. This thought process reflects what is known as 'moral hazard.'

Economic/political sphere overlap. Those who think that markets and government are not related are mistaken. One of the more instructive things market participants can do is to study the history of past civilizations for the regularly occuring patterns of bureaucratic and economic behavior. Applying those historical patterns to our current situation can be revealing.

From where I sit, the most important financial market lessons are 'structural' in nature. These macro forces exert very large influence on market behavior. Those who are aware of these influences will make more informed financial market decisions.

position in gold