Legal Cartel Update

I have complained before about the legal cartel’s barriers to practicing law. I did not realize that the cartel extends to financial participation in legal practice:

The ban on law firms accepting nonlawyer investors is nationwide, with the exception of Washington, D.C., under ethics rules established largely by state supreme courts. Violations of the rules can lead to disbarment.

The restriction on investors is decades old and stems from even older strictures against lawyers sharing fees with nonlawyers, for fear that might compromise their professional independence.

The present system of ownership restrictions “perpetuates economic inequity,” Jacoby & Meyers said in Wednesday’s court filings. “The small [legal] practice does not have access to the capital markets that the Wall Street [law] firms have,” it added.

QOTD: The Higher Education Bubble

From an article on Peter Thiel:

“Universities are like the General Motors of the 1970s,” said Mr. Thiel, a graduate of Stanford University and Stanford Law School. “They’re incredibly dominant, incredibly arrogant and impervious to change.”

“I don’t think there’s anything controversial about an education bubble,” he said. “Price is up by a factor of 10; quality hasn’t really changed. There’s something really crazy going on here.”

Benchmarking Gold as an Inflation Hedge

I have long derided “gold bugs” and others who claim precious metals are the best hedge against inflation. Here’s another way to look at it: You can buy dollar inflation protection from the U.S. Treasury in the form of TIPS. By shorting a suitable index of treasury bonds you can virtually strip out the interest-rate exposure of the TIPS, producing an investment with a government-guaranteed real return.

Now ignore all my other arguments against buying precious metals as a hedge against inflation. Even assuming the gold bugs’ best case scenario — that gold retains its real value — you still have to pay storage and transaction fees on the metal, so an investment in gold has at least a slightly negative real rate of return.

Except for the last few months TIPS have sold with positive real rates of return. So any rational gold bug (I know, oxymoron) should prefer the TIPS real-return strategy to investing in precious metals when TIPS offer positive real returns.

Granted, there are two risks associated with using the TIPS real-return strategy:

  1. The inflation measure used to calculate TIPS values might differ significantly from what you value. E.g., TIPS price food, clothing, and shelter, but you want to preserve your ability to buy silver bullets and steam engines.
  2. The U.S. government could actually default on its debt.

I’ve admitted in the past I wouldn’t be surprised to see the Treasury inflate its way out of debt. But in the dire situation that the Treasury actually defaults on its debt I believe you’re mistaken if you think gold bars are going to be any comfort. At that point you’re going to want stockpiles of real real value.