The announcement that the US Defense Department’s Office of Strategic Capital is lending $400 million to the Australian scandium miner Sunrise Energy Metals is just one of a series of government investment deals that have caused globalist observers to question the Trump Administration’s commitment to the free market. Yet as history has repeatedly shown, governments have strategic needs, and the globalized free market sometimes fails to support them. Historically, government investment has been quite common even in economies that have spectacularly succeeded. Yet the potential for pouring money down politically attractive ratholes is equally obvious.

The free-market purist theory that government should never invest in the private sector has never been observed 100%. Even the admirably Tory governments of 1803-08 invested in the Portsmouth Block Works, which invented mass production, component standardization techniques and the assembly line to manufacture naval pulley blocks, essential components of the Napoleonic Wars fleet. Later in the century, Benjamin Disraeli nationalized the British telegraph industry in 1868, killing Britain’s potential lead in the electrical sector and leading the Post Office to become responsible for telegraphs, telephones and eventually radio broadcasting. Most Continental European governments nationalized their railways late in the century, because the great Helmuth von Moltke (the elder), with railway as well as military experience, had convinced them (correctly) that railways were an essential instrument of military mobilization.

Finally, in 1913 came the exception that proved the rule: the invention of the Haber-Bosch nitrogen fixing process was an entirely private sector affair undertaken by B.A.S.F.’s (FSX:BAS) Fritz Haber and Carl Bosch, yet it was crucial to Germany’s survival in the war that broke out the following year. Without this invention, when the Allied blockade cut off supplies of Chilean nitrates, Germany would have been unable to fertilize its crops, resulting in mass starvation in 1916-18. Thus, strategic imperatives, of more or less criticality, have very often led governments to make some private sector investments when the necessity arose.

The Chinese rare earths crisis is a classic example of what goes wrong when governments leave matters entirely to a Whiggish free market inflamed by artificially low interest rates. The Mountain Pass rare earth complex in California, containing rare earth minerals sufficient for U.S. needs for decades was closed in 2002 because environmentalist naggers had raised its costs inordinately, making it impossible for it to compete with Chinese producers. Repeated attempts to reopen the mine led to repeated bankruptcies; the fact remains that, without tariffs, environmentalist-free Chinese mines have a structural cost advantage.

This is just one of a huge number of ball and chains that the environmentalist movement has imposed on the U.S. economy in the last 50 years. Environmentalists have made infrastructure impossibly expensive and caused the U.S. to be thoroughly uncompetitive in sector after sector where the Chinese and others have forged ahead without such shackles. Europe is of course even worse in this respect, and Angela Merkel, who forced Germany to build innumerable windmills and shut down its nuclear capacity, thereby destroying its heavy industry, should be cursed before bedtime by every sensible German.

Mountain Pass is currently being operated by MP Materials Corp. (NYSE:MP) and is providing some of the U.S. rare earth requirements, although it would be unable to fulfill all U.S. needs if a complete Chinese cutoff took place. The possibility of a Chinese cutoff was widely reported in 2010 (I wrote on it at that time) but the dozy globalists who then ran the U.S. economy made no attempt to shore up what was clearly a major U.S. strategic weakness. The Trump administration has now invested in MP Materials and a few other rare earth companies, notably USA Rare Earths (NASDAQ:USAR) to provide sources of rare earths within the United States. This makes good sense, within reason; fairly unimportant market costs, especially in a world full of obstructive environmentalists, should not trump highly important strategic considerations.

The Trump administration’s loan to Sunrise Energy Metals is however eccentric. Scandium is NOT a rare earth, contrary to Nic Fildes’ claim in the Financial Times, being element 21 in the Periodic Table, well outside the lanthanide rare earths group (57-71). Scandium has strategic uses in the inevitable data centers, but its entire annual global production is about 60 tons, which appears, unlike with the chemically eccentric lanthanides, to be a tiny fraction of potential global availability. Apparently, Russia has a gigantic stockpile of scandium, which was collected by the Soviet GOSPLAN before 1990 (maybe they didn’t know it was not a rare earth either, which would be sad in a country that gave the world Dmitri Mendeleev). However, it would be sensible for the nominally capitalist Trump administration to avoid repeating too many of GOSPLAN’s errors.

That is the central problem with government investment in companies, whether directly or through a United States Sovereign Wealth Fund (which could only be funded by more borrowing, in the end landing on hard-suffering taxpayers or blowing the deficit out yet further). First, it increases the political direction of investment, almost always sub-optimally. One may be moderately happy at a successful businessman like Trump investing the nation’s wealth but think of the God-awful green boondoggles a Biden Sovereign Wealth Fund would have purchased, all of which would by now be worthless.

Second, government will invest mostly in what is fashionable at any given time. Of course, the stock market does that also, especially when it is bloated, as it is now, but the government will make this problem worse. Of the 30 investments the Trump Administration has made, according to a recent Cato Institute paper, ten have been in semiconductors and nine in quantum computing, surely an over-devotion of resources to sectors at which the stock market and private equity are already throwing money. Third, the government will tend to prop up dinosaurs, to preserve jobs or votes – we see this all the time in European government investments, but even with Trump, the leading semiconductor investment is in Intel (NASDAQ:INTC) surely at this stage the megatherium of the tech sector, to use a quaint Edwardian insult. As Joseph Schumpeter taught us, capitalism’s creative destruction requires some actual destruction, not the infinite preservation of zombie dinosaurs through government investment.

The government has other jobs, such as getting out of the private sector’s way. More value could have been achieved than in the government’s entire 30-company investment portfolio by the EPA getting out of the way of Northern Dynasty Minerals’ (NYSE:NAK) Pebble copper/gold project in Alaska. Pebble is potentially one of the largest and richest deposits of both minerals in the world, solving a major U.S. strategic problem (copper) if it goes ahead without idiotic government harassment and delays, which have already occupied a decade. (No, I don’t have shares in NAK; I have given up in despair!)

One throws one’s hands up! If government makes investments, it will make a frightful hash of them, as well as playing favorites and distorting the market. Conversely, the private sector, especially when a lunatic at the Fed has blown up the money supply and produced a decade of gross speculation, cannot be relied upon to take into account that not all countries are friendly or even rational, so that creating dependence for critical minerals is strategically suicidal. Equally, when looked at closely, the rare earths problem, a genuine strategic vulnerability, was caused not so much by the foolish market, but by the even more foolish government environmental regulators.

So, rather than encouraging government investment, it would appear that the rational observer or investor’s message to government should be that of Ayn Rand’s John Galt: “Get the Hell Out of My Way!”

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)