Watch this 3 1/2 minute video, and you'll understand the process of creating laws better than President Trump seemed to when installed as president... unfortunately. Schoolhouse Rock rocked.
When you buy a stock, a house, a business, or any investment, technically you're becoming a party to a contract of some sort. In the old days, people would read the whole contract, and both (or all) parties involved would sign it, and say they agree to the terms. Things happen faster in the internet age, but when you buy a stock online, or make any other investment, you are entering into a legal contract.
What does that mean? It means you give someone money, or something of value, and they provide you with something of value, or a service, in return. You click and buy 10 shares of Amazon stock online, and you now own a tiny part of the Amazon company, legally. If you buy a house, same thing, you pay some money, agree to terms, and you own that house once everything is signed. Then it's your house, because of that contract. Every investment involves some kind of legal contract.
So what makes a legal contract valid? What makes it valid is the functioning rule of law in the country (city, state, etc.) where the contract is signed. You agree to live up to your end of the bargain. The other party agrees to live up to their end of the bargain. If one side doesn't do that, then there's some form of recourse. Generally, you can sue the other party, and take them to court. In court a judge or jury hears both sides of the story, and makes a FAIR, LEGAL, decision. If the system is corrupted by a judge taking bribes, for example, then people soon learn that contracts there don't mean much. That erodes the TRUST in the rule of law there, and it devalues investments, or makes them pointless altogether. Why would you spend money to buy a building for your business, if a crooked judge can nullify the contract, and say his friend or brother-in-law now owns the building, and you have no recourse.
So to have a functional economic system, you need people buying and selling things, engaging in contracts with each sale, but you also need a system of laws, and a belief by people, that the legal system is actually fair. If most people know the system is corrupt, that there is no functioning rule of law, then no smart person would want to invest there. Do you know anyone lining up to invest in small countries in Africa? No? Why not? It's the internet age, you can send money nearly everywhere. The reason is because the belief is that most of those countries are quite corrupt, and you'll probably lose your money because some person favored in the country can take advantage of you. So investments become largely worthless, when there is no functioning rule of law. That's one big reason why the rule of law in a country is so important, from an investment perspective.
Yesterday, Friday, July 10th, 2020, President Trump commuted the prison sentence for his old friend Roger Stone. He didn't give Stone a full pardon, but in effect said, "Hey, we're bro's, you don't have to go to prison, because I say so." Stone was convicted on 7 felony counts, including lying to Congress and lying to the FBI, to protect President Trump. The president has the power to pardon people, but not in a situation that benefits him personally, or to engage in corruption.
Stone was given due process of law, and convicted, unanimously, on 7 felony counts. Last night the president took a sledge hammer to the United States rule of law, by undoing the sentence of Roger Stone, and doing it in a case that benefited himself, Donald Trump, personally. You can't get much more corrupt than that. In effect, he said, "My friends, like Roger Stone, are above the law, because I say so." President Trump also deprived Congress and the FBI of their 5th amendment rights to due process under the law. If Roger Stone, or any friend of Trump's, can lie to the FBI and to Congress, the rule of law slips away. More important for everyday people and investors, BELIEF in the Rule of Law, in the United States, also slips away.
If you enter in a contract in the U.S., can you still depend on the rule of law here in the U.S., if someone doesn't hold up their end of the contract? Probably... for now. UNLESS that person is Donald Trump or Roger Stone. They are now above the law. The sham impeachment by Mitch McConnell earlier this year declared President Trump was above the rule of law, and would not be held accountable for his illegal actions. You can add Attorney General Bill Barr to the list of people who are above the law, RIGHT NOW, in the U.S., as well. Barr has replaced the federal prosecutors in the three main U.S. prosecutors offices that can (and have been) investigating President Trump. Those are the prosecutors offices in D.C., the southern district of New York, and the eastern district of New York. So the U.S. officials tasked with investigating alleged corruption by the president (this one, or any other one), now have hand picked followers of Bill Barr installed.
So right now, the President of the States, and the Attorney General (top law enforcement person under the president), have both taken actions, which declare the rule of law no longer applies in the United States, if they don't want it to. But they want you and me to believe that every other law (and contract) is still valid. Unless it involves them, or Roger Stone.
So... is your contract that says you own your house still valid? Are your stocks you own still valid contracts? Are government bonds and T-bills still valid contracts? Maybe. Probably. For now... Unless they involve Donald Trump, Bill Barr, Roger Stone, or anyone else with close personal ties to the president.
My point here is rule of law is based in TRUST in a system.
Yes, there is some corruption almost anywhere. But most people still believe in the system of American rule of law. That's one thing that has set our country, and our economy, apart from the rest of the world for about 244 years. President Trump's and Barr's actions yesterday threatened not only the literal rule of law, but the belief of people around the world, in the rule of law in the U.S.. And that threatens every single contract, and every single investment. in the United States. When the trust in rule of law breaks down, so does the entire economic system, and everything based upon it.
Have a nice weekend...
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