Dollar Falls Sharply as Gold Approaches It’s All Time High… Again

Vampire: the Eternal Struggle
As my personal friends know, I’m a gamer geek. My collectible card game (CCG) of choice is Vampire: the Eternal Struggle (VTES). It’s Richard Garfield’s (the designer of Magic: the Gathering) second CCG and he designed it for multiple players. It’s a game I enjoy playing competitively.

Every year, White Wolf (the company that publishes VTES has a North American Championship. In order to play in this tournament, you first have to do well in a qualifier tournament which every region has. This weekend, Los Angeles had its qualifier tournament and I enjoyed playing in it (I didn’t qualify). Since VTES has a small but loyal player base compared to other CCGs, you get to know everyone pretty well who competes on a national level. We’ve become a pretty close knit group despite the fact that we all live in different regions; our willingness to travel and our love of the game brings us together.

Well known members of this tight-knit circle include Ben Peal, and a married couple, Robin and David Tatu. They have all purchased my book and found it a good read. Both of the Tatu’s were at the tournament this weekend, and I commented to them that my investments were up some 50% over the last six months. They recommended that I sell my gold investments before they crashed. Now, I found it a bit peculiar that two people who told me that they learned a great deal about how the economy works from the book that I wrote would then tell me to sell gold.

It does make sense in a human nature kind of way. The knee jerk response I’ve gotten when I tell people how much money I’ve made off of my gold investments is “Sell!” It’s a bit of conventional wisdom that has its roots in reality. After all, trees don’t grow to the sky and what goes up must come down. If something’s up 50%, then it must be time to sell it.

Well, yes and no. Continue reading Dollar Falls Sharply as Gold Approaches It’s All Time High… Again

Is Obama Misplaying His Hand?

Kevin, good friend and loyal blog reader, recently posed me this question:

I was reading the May 6th issue of _Cardplayer_ magazine today, and Roy Cooke’s column, which always sports excellent advice, had this quote about Limit Hold-Em:

“The larger the pot and the greater the risk you are taking, the less you should try to obtain extra bets and the more you should focus on playing your hand in a manner to win the pot with as little risk taken as possible.”

I thought that was superb advice, since taking any large hit to your stack is actually meaningful, whereas you can afford to take several small hits and continue on your way.

Then, I suddenly got chills up my spine, and thought, what if Obama’s overplaying his hand? I know the economy *seems* like a No-Limit game when the government (especially the Feds) has your money, but it’s really closer to Limit poker than it is to NL [As an example of a No-Limit Hold-Em government game, think cold-war military spending in the ’80s, and S.D.I. as the all-in move. Thank G-d Russia folded.]

“The larger the pot and the greater the risk” — sounds like a bajillion-dollar already-failing business bailout, doesn’t it? “The less you should try to obtain extra bets” — such as Nationalized Health Care — “and the more you should focus on playing your hand in a manner to win the pot” — a healthy United States economy — “with as little risk taken as possible” — such as giving a bajillion dollars to prop-up already-failing businesses instead of giving every taxpaying adult in this country a $17,000 tax rebate? Imagine all the cars that we’d be buying from those now-failing Detroit businesses if we all had $17,000 in our pockets! Imagine all the companies now in financial distress that Bank of America wouldn’t be allowed to buy! And the $17,000 play would definitely minimize O’s risk, since it would correct the economy (at least for now), guarantee his party’s dominance in the elections a year-and-a-half from now, and almost certainly set him up for the final table (his second term as President). That’d be playing your hand, O. My advice: Don’t give up your day job.

–kevin

Just so people understand the poker principle at work, the idea is that sometimes you should play your hand differently than math would dictate to add deception as to what you have. However, as the size of the pot grows, deception loses its value in comparison to playing a strong hand in a straight forward way in order to win the pot since the value of a large pot begins to outweigh the value of additional money won through deception.

The analogy is a bit stretched here, because we’re not talking about Obama being deceptive per se. Rather Kevin is saying that saving the American economy is of tremendous importance and Obama should not waste precious time and effort trying to get pet projects approved. This is true. However, it also highlights an classic area where our elected officials have a significantly different interest than the citizenry. For citizens, political crises are caused by disruption and are to be avoided if possible. For politicians, political crises are their opportunity to pass far reaching laws that expand the scope of their purview. “Never waste a crisis,” as the saying goes. In this regard, Obama is acting like you’d expect a Socialist politician to act; he’s using the crisis to pass his agenda.

In terms of ending this recession, Obama’s actions are doomed to fail. Kevin is correct in pointing out that the bailout bill of $17,000 per adult would be far better spent as a tax rebate then as a bailout given in the form of a loan or an equity share in auto companies. Of course, it would be better still if the government did the opposite of Keynes’s advice and began to cut spending altogether rather than expand it, but austerity has fallen out of fashion in government circles. Cutting back on spending was a tried and true method for restarting a stalled economy from time immemorial, and a method that has an unparalleled level of success.

Spending our way out of a deficit, unfortunately, has very little to show for itself in terms of ending recessions. It didn’t end America’s Great Depression of the 1930s, nor did it end Japan’s ongoing depression. It really has very little in terms of economic history to suggest that it will work at all. To return to the poker analogy, this seems like the kind of self-destructive behavior you see losing players engage in all the time: they make plays they shouldn’t make, but feel they’re a good player despite never having seriously studied the game and being a consistent loser at it. Sadly, we the taxpayers have decided to stake this losing player with as much money as he needs. No one would be foolish enough to do this in the poker world, but that’s why government is such a wonderful invention- it allows us to collectively act far dumber than any one individual ever would.

Investment Ideas from Prison

I have a friend of mine doing hard time in the California State Prison system. Drugs and armed robbery were his crimes, but the real roots lay in his childhood. I told him as much, and urged him to take a look at his childhood upbringing in the hopes that he might exorcise some of his demons. Towards that end, I sent him the book One of a Kind: The Rise and Fall of Stuey ‘,The Kid’, Ungar, The World’s Greatest Poker Player.

I’m sure most of my readers will have no idea who Stu Ungar is, but, as the title of the book says, he was the greatest poker player the world has ever seen. He is estimated to have made over $30 million dollars over the course of his poker career, but he’d continually throw the money away on drugs or other gambling addictions. He went from broke to millionaire and back to broke four separate times over the course of his life. He died so penniless that this friends had to take a collection for his funeral.

I send my friend this story because I wanted him to understand that talent and ability are no replacement for a good understanding of yourself. That’s a lesson I hope he’ll come to learn before he gets out.

He wrote me this letter and I wanted to share it with my readers: Continue reading Investment Ideas from Prison

Investing, According to The Bible

I gave a talk at Bethel Temple in Longview, Texas today. It was a largely black, Protestant church; as you can imagine, there was a lot of very vocal Jesus-praising going on. Maybe it was my years of parochial school, but I feel worship services should be more reserved. Of course, I’ve also had a crisis of faith since then, so I’m sure all religious services make me slightly uncomfortable. Still, I believe that the message I have for them — that an economic crisis is unfolding and these people need to make themselves ready — is one that transcends religion. At no time do I hold, or have I ever, held myself out to anyone as an authority on spiritual matters. I’m here to talk about the economy, and I’ve found that Christian audiences are very receptive.

A touchstone I return to is one borrowed from Bill Bonner: capitalism, at its core, rewards virtue and that to prosper in a such a system, we need to be industrious and thrifty. I then point to fact that we, as a nation, have been gluttonous and foolish in terms of how we’ve conducted ourselves, and the economic crisis we’re facing is merely a consequence of that conduct. When speaking to a Christian audience, I term it as we’ve violated Biblical principles, since the following can be found in the Bible:

  • Proverbs 23:21: “for drunkards and gluttons become poor, and drowsiness clothes then in rags.”
  • Proverbs 22:7: “the rich rule over the poor and the borrower is servant to the lender.”

So, just going off of these verses from the book of Proverbs, the Bible seems to pretty clearly state that being thrifty and industrious will lead to prosperity, whereas the reverse will lead to ruin. Add to that the parable of the talents from the book of Matthew, the Bible is telling us that, were we to want to acquire wealth, we need to work hard, save money, and invest it well.

It’s hard to find verses in the Bible that relate to investing much at all, because a lot of the Bible — the New Testament in particular — are about giving up worldly goods and embracing eternal life. Still, Bible verses make the rest of the message more receptive.

Coincidentally, in doing Internet searches for silver, I found Jason Hommel’s website. He has a section dedicated to “Biblical Capitalism” because “it’s what Jesus would do.” In reading the website, he seems to firmly have this conviction with the appropriate uses of “The Lord Jesus Christ” in his speech. In comparison, I feel my discussion of the Bible verses in favor of working and saving far more genuine.

I always get a strong reaction from Christian audiences. This time I talked about the structure of the US economy in terms of four major players:

  • the government that taxes and borrows money and spends it
  • the consumers who earn and borrow money and spend it
  • the bankers who creates the money for the other two
  • and foreign lenders who keep the whole system from collapsing by continuing to lend us money and honor the US Dollar

I told the congregation that the United States transformed itself from a production-based economy to a consumption-based one; that we tried to replace the real wealth acquired by producing and exporting goods with the fake semblance of wealth provided by the printing press. Furthermore, I told them, that what we were now witnessing was not a recession that would subside, but rather a death. We were witnessing the death of the financial system that we had set into motion decades ago.

All in all, I found it a receptive audience. I have been asked back and now have a line on speaking at another church. I am realizing that I need to branch out to speak to other communities, so that’s my next step. As I recently passed the Series 65 exam, and will soon pass the Series 63, I’ll be allowed to call myself a Financial Adviser, and start taking on clients seeking investment advice. I figure, this is one of the better (and cheaper) ways to start building a client base.

Drugs and the FDA: An Argument for Liberty

Cat recently commented:

It’s unfortunate that you pick the FDA as a target, since the FDA has semi-recently deregulated some aspects of its guardianship to the detriment of society. I’m talking about the herbs and supplements industry, which now peddles untested, unverified snake oil at every pharmacy near you. Getting rid of the FDA entirely means more snake oil, not less. The FDA’s practices are not perfect, as medical professionals will tell you. I have heard that drug makers often conceal unfavorable or neutral (no better than placebo) studies and submit only the highly-favorable ones to the FDA. In the absence of all information about a drug, another Vioxx could very well slip through.

I personally think closing that hole is preferable to opening it wide. Peddlers of snake oil already do such cherry-picking of “studies” to sell their concoctions directly to people. I can find Bach’s Flower Remedy (homeopathic garbage) on the shelf next to the Sudafed (proven decongestant), for pete’s sake! I shiver to think of all beneficial medicines being lost in that sea of misinformation. It’s already hard to Google any combination of symptoms without landing upon the webpage of a “naturopath” or a “homeopath”, neither of which require rigorous medical degrees. Journalists, who don’t know science from pseudoscience, keep doing stories about acupuncture, chiropractors, and other sham treatments that are no better than placebo. As a people, what we know about medicine is being directed by insufficiently skeptical people and spiritual nonsense in the name of making a buck.

In the Libertarian quote above, it says (tellingly) “For example, during a 10-year delay in approving Propranolol (a heart medication for treating angina and hypertension), approximately 100,000 people died who could have been treated with this lifesaving drug.” Note it does not say that the treatment would have saved any of those 100,000 lives. It just says that they could have been treated with the drug had it been approved sooner. Well, yes. But so what? How many would have actually been saved? How many would have died of a heart attack anyway, or an embolism or a stroke? High blood pressure (mostly) comes from lifestyle factors that predispose people to other risks of premature death.

Propranolol was the first drug of its type. Ten years isn’t a terribly long time to study the effects of something new before giving it to human beings. Is there any specific incompetence being alleged, or is this just about delays? Getting something faster isn’t always better. Drug companies mix up untold numbers of completely crap drugs for every drug that might show a little promise. Fast-tracking them all into human guinea pigs is fixing the problem of “delays” by supplanting it with the problem of “untested drugs hurting people”.

I tend to read a lot of medical blogs and there’s a lot of controversy surrounding the use of experimental drugs. For one thing, they’re usually insanely expensive. Cancer, which is a huge magnet for experimental drug treatments, involves lots of drama and controversy and heart-wrenching stories. So-and-so didn’t get Experimental Drug A and died. What they don’t tell you is that So-and-so would have lived maybe 4-6 extra months at a cost of $200,000 to be paid by somebody else (usually Medicare). Nobody would ask for $200,000 experimental drugs if the bill wasn’t going elsewhere (unless they were very rich). A staggering number of people get cancer now because they are living long enough to get cancer. The risk grows with age. They get old, they get cancer, and we throw pots of money at them to treat them even though the cancer likely won’t kill them before something else does.

I go back and forth on this. Extending life is precious, but at what cost? The most expensive years of a person’s life are currently their last ones, and those are the years which suck Medicare dry. Old people stacked like cordwood in nursing homes, scarcely able to talk or feed themselves, getting run by ambulance to the super-expensive ER periodically because the attendants don’t want to take any chances of getting sued for the slightest missed symptom. Eventually the oldest wind up in an ICU where the relatives, upset and unwilling to let go, demand that everything possible be done. They’re not paying, so why not ask for every life-extending measure possible?

We got here in part because of malpractice lawsuits. An 80 year old woman passes away in an ICU and the family is looking to collect. The doctors can’t say “no” to unrealistic demands because a jury of non-scientific, non-medical people will judge their actions and render a verdict on their professional competence. Such juries are easily swayed by emotional appeals and pseudoscience. Very few people think, “Well, grandpop is pushing 90, he had a good life, let’s put him in a hospice and let him die peacefully.” The doctors and nurses themselves are starting to become very upset about how much they must prod and poke and torture people who are clearly dying because it’s the family’s wishes and the victim can’t speak up. This is the medical system that lawyers have won for us.

In many countries where medical care is paid for in part by the government, they’re beginning to do studies on various treatments to see which ones are the most cost-effective. It’s a hard thing to do — to put a price on a few hours or months of life — but it needs to be done as scientifically as possible. Those treatments which do not offer cures but merely prolong life (such as Propranolol) need to be scrutinized. Many older drugs are, surprisingly, as effective as newer drugs, but for a fraction of the cost. That’s why insurance companies keep coming up with tiers of drug coverage. They want to direct treatment first to the old standbys before paying out the nose for the newest tiny tweak of the same old molecular structure.

In Norway, when my blood pressure began to rise, my doctor there was confident enough to say “get some exercise and it will fix itself”. He didn’t shove me out the door with a bottle of diuretics in one hand and a bottle of statins in the other. And you know what? He was right. I made the effort and my blood pressure is now below average. Denying people Propranolol for ten years might have resulted in a few dying who might not otherwise have died, but how many of those people could have been saved (for free) by modifying their lifestyle?

 

The thing about life is that no one really has the answers. We come into this life with the promise that we will someday die. The decisions that we make could hasten or delay it. Smoking is an activity that is virtually guaranteed to shorten the length of your natural life, and yet people smoke. Part of it must stem from their desire to shorten their life, and part of it probably had to do with the pleasure they seem to get from smoking. The state could step in and outlaw smoking, and then we would all live healthier lives. Is the state justified in doing so?

What this question is really asking is to whom our body belongs. If our bodies belong to the government, then the government is right to step in and enforce actions to protect its property from harmful habits such as smoking. If, on the other hand, our bodies are entirely our own property, then the state is far out of bounds to do so. Obviously, this is the ideological framework from which I view the question.

If we start with the notion that our bodies are all our property and it is our responsibility to care for them,  then let’s look at the question of drug use. If a drug is not falsely advertised and we have all the information needed to make an informed decision as to whether to use it or not, then on what authority is the state to step in and say that we can not use it? Why should the FDA take ten years to approve or disapprove of a certain drug? Would not their time be better spent ensuring that the drug was properly represented to the people who wished to take it?

Bringing up the issue of Nutraceuticals, Cat wishes the the FDA would take a more heavy handed approach with the industry. This is an area where I feel that the FDA is adopting the correct approach by policing the  claims that the industry makes rather than the products themselves. If we’ve established that a given substance isn’t going to kill you, and there may be some anecdotal stories to suggest that it might help with such and such, then I don’t see the problem with selling the product with the claim that it might possible help with such and such. If the product is advertised truthfully, as something that “might” help, then what’s the harm in someone deciding to buy it? 

Sure, there might be some more effective product out there, but the placebo effect of expectation often corrects the problems that we might be having. And for consumers who are more serious about their health, they can do more serious research and find far better solutions. I think the people that buy most Nutraceutical products buy them on impulse as they walk through the store. If they keep buying them, then they must find some good in them. Or perhaps they buy them for the same logic as people buy lottery tickets. “Eh, couldn’t hurt.”

I do wonderful it Cat has thought the entire issue through when she brings up the notion of bringing down blood pressure through lifestyle and exercise. The truth is that a lot of American’s problems are lifestyle related, and I think on some level we all know that. There is not pill that can make up for poor diet and exercise. All pills can do is treat the symptoms. So if we understand that, as Cat and her Norwegian doctor seemed to, then why adopt the position that we need stricter government rules regarding the FDA and Nutraceuticals. The truth is that virtually all of the products offered by the Nutraceutical industry treat areas that are largely lifestyle choices: depression, sex drive, and the common cold. We all know that there’s no easy fix for these things, yet we seek them anyway. 

Furthermore, the medical profession is an excellent example of what happens with too much government regulation. The medical profession got a monopoly from the government to dispense healthcare. Now, working together with the pharmaceutical industry, they dominate American economic life by controlling inordinately larger portions of our paycheck for products that, for the most part, are poor replacements for the lifestyle choices we have all made. To me, this just shows the end result of what happens when the government tries to use regulation and bureaucracy to shield us from ourselves; corporations take over and industries set out to pad their own wallet. 

Now it may be that in an entirely Socialized system where their is no profit motive present in healthcare, that the common sense advice given by your doctor is more common place. The doctor would have no monetary incentive to suggest a drug, therefore the more common sense approach is offered. This avenue, while seemingly desirable, is arrived at by the government forcing individual resources toward the system that it desires best and the resulting hard choices of spending money to prolong life left to a system that is trying to spend as little as possible for the benefit of the collective.

Ideologically, I must reject such a system. Were individuals able to make their own choices in regards to how they spent their health dollars, there would certainly be a fair amount of snake oil sold. However, I feel that a fair amount of snake oil will be for sale anyway, because a quick fix has always been the most deeply coveted solution in any crowd. By, despite money spent by consumers to chase false promises, we would also have individuals looking at their own healthcare and making their own decisions and some of these decisions would be very enlightened. Indeed, in a world where false advertising is forbidden and the consumers are able to make all of their own choices, I think we would see a result were some people made extremely rational decisions and some made rather poor ones. That is always the result when people are left to their own devices. To try to collectivize everything means that one central body must make the hard decisions for all of us and that’s a world where the individual choice has been removed. Would it not be more rational to allow each of us to make these choices for ourselves?

Why Stay in America

Cathy, or Cat as she likes to be called, left this comment a while ago:

 

Hey Preston, have you looked into living somewhere else? I don’t mean that in a rude way. I mean, have you looked into the countries of the world and found one that is not entirely ruled by corruption and bankers? One that’s a bit more your style?

I feel another way we can create change is to vote with our feet and take our value with us. If you have enough money to invest or have needed skills, most countries in the world will be happy to accept you.

Norway was a great experience for me because it taught me that you can have a fiscally conservative yet socially liberal government. Norway not only wasn’t in debt, it had money to spare. Taxes were high, costs were high, but I felt like I was part of something much bigger than myself. Most people I knew there didn’t feel outrage about paying those taxes because the government generally did good things for the people with the money. There was a bit of corruption, there were scandals sometimes, but on the whole it was a great place and I often wish I could return.

France taught me that it is possible to have an engaged society that debates everything. I had many long lunches with friends, questioning life, politics, philosophy… everything. France has its problems, to be sure. They are different problems than the USA faces, in many regards. It was eye-opening to realize that countries could have their problems yet still function on a basic level. That you could move somewhere and trade one set of problems for another set of problems that was more to your liking. A doctor paid me a house call — a house call! — after I had been ill for a week with strep throat. Sometimes the bus drivers or the metro drivers would go on strike and make it really hard to get the laundry done but… house calls!

The luckiest thing that ever happened to me, I think, was that I had to have emergency abdominal surgery the week before I came back to the USA. The cost was minimal. Once I came back to the USA, no health insurer would accept me because of “pre-existing conditions”. Had I come down with peritonitis just a week later, I would have been on the hook for tens of thousands of dollars in emergency care despite the fact that I was financially able to pay $500 a month or some other ungodly amount for free-market health insurance.

I think some of the more “socialist” countries in Europe have struck a nice balance (Norway, Sweden, Denmark, Finland, Holland). Some haven’t (UK, France, Germany, etc).

Maybe there’s a place in the world where you would feel such a nice balance has been struck?

PS: The reason my name changed to “Cat” is because many European languages have no sound for “th”. Rather than become “Kat-ee” or “Kaz-ee” I decided that almost anyone could pronounce “Cat”.

 

 

OK Cat, if that’s what you’d like to be called. :) To answer your question, no I haven’t considered living some place else. There are three main reasons for that:

 

  • My daughter lives here and she needs a father. 
  • I really do love this country and I feel it needs people like me in the crisis that it is going through. The “common people” are going to be blindsided by this and are going to be looking for answers and I’d like to provide them some. 
  • This is going to be a worldwide depression. There are few safe places to go. Macroeconomic theory and policy has permeated virtually every government on the face of the planet, so almost every government is going to be making the same mistakes. The advantage of being in the United States is that this country was the birthplace of the free-market economy. If it can’t take root again here, then I can’t see it doing well anywhere else.

In regards to your experiences in Europe, I appreciate you sharing them here. Socialism tends to do best in countries that have a high amount of natural resources per capita. It also needs for its citizenry to be rather homogeneous because in Socialist countries the government has a lot of power of its citizenry. If the government and the citizenry agree on what is “best” then the the two can live in harmony. If, on the other hand, the citizenry is diverse, then there is no consensus on what is “best” and the government will tend to take actions that are only pleasing to a few select groups.

The United States has embraced virtually all tenants of Socialism. As former Presidential Candidate of the Socialist Party of the United States Norman Thomas said, “”The American people will never knowingly adopt socialism, but under the name of liberalism, they will adopt every fragment of the socialist program until one day America will be a socialist nation without ever knowing how it happened.” I find it hard to identify anyway that we are not a Socialist nation, outside of the field of medicine as you pointed out. 

The field of medicine is touchy. There’s aren’t a whole lot of easy answers. But, prompted by Cat’s comment, I visited the Libertarian website and viewed their official position on Healthcare. Here’s what they had to say:

Making Healthcare Safe and Affordable

 

As recently as the 1960s, low-cost health insurance was available to virtually everyone in America – including people with existing medical problems. Doctors made house calls. A hospital stay cost only a few days’ pay. Charity hospitals were available to take care of families who could not afford to pay for healthcare.

Since then the federal government has increasingly intervened through Medicare, Medicaid, the HMO Act and tens of thousands of regulations on doctors, hospitals and health-insurance companies.

Today, more than 50 percent of all healthcare dollars are spent by the government.

Health insurance costs are skyrocketing. Government health programs are heading for bankruptcy. Politicians continue to pile on the regulations.

The Libertarian Party knows the only healthcare reforms that will make a realdifference are those that draw on the strength of the free market.

The Libertarian Party will work towards the following:

1. Establish Medical Saving Accounts.

Under this program, you could deposit tax-free money into a Medical Savings Account (MSA). Whenever you need the money to pay medical bills, you will be able to withdraw it. For individuals without an MSA, the Libertarian Party will work to make all healthcare expenditures 100 percent tax deductible.

2. Deregulate the healthcare industry.

We should repeal all government policies that increase health costs and decrease the availability of medical services. For example, every state has laws that mandate coverage of specific disabilities and diseases. These laws reduce consumer choice and increase the cost of health insurance. By making insurance more expensive, mandated benefits increase the number of uninsured American workers.

3. Remove barriers to safe, affordable medicines.

We should replace harmful government agencies like the Food & Drug Administration (FDA) with more agile, free-market alternatives. The mission of the FDA is to protect us from unsafe medicines. In fact, the FDA has driven up healthcare costs and deprived millions of Americans of much-needed treatments. For example, during a 10-year delay in approving Propanolol Propranolol (a heart medication for treating angina and hypertension), approximately 100,000 people died who could have been treated with this lifesaving drug. Bureaucratic roadblocks kill sick Americans.

I have long maintained that the FDA is just another example of a government “watchdog” organization that has been taken over by the companies it was supposed to be regulating. There have been a number of drugs that were approved by the FDA that had to be recalled because they killed people. Eliminating the FDA would be an excellent step towards lowering the tax burden. 

I will discuss healthcare at greater length in a future blog.

Will The Dollar’s Value Ever Reach Zero?

Mark, who frequently reads and comments, recently wrote:

Preston,
On Christmas day I would have agreed with your assessment and conclusions for the most part. But, by the very next day I had been exposed to an opposing view, which leads to a very different scenario.
Somehow in my Internet quest to learn more and more about the crisis we face I discovered Andrew Gause (www.andygause.com) who is described as a monetary historian and contemporary expert on American and international banking systems. I began listening to archives of his weekly radio shows at http://www.oneradionetwork.com starting with the most recent 12/24 broadcast:http://www.oneradionetwork.com/content/view/689/136/ (you’ll have to sign up for his free newletter to listen) and continued backward week by week.
It is clear to me that this guy understands money, the Federal Reserve, US monetary history, and the current crisis far better than anybody I’ve followed to date. Like Peter Schiff and a few select others he was able to predict the mess we’re in which he documented in his interviews and in the two books he published, The Secret World of Money and Uncle Sam Cooks the Books. His predictions for the future, however, are far different than Schiff’s (and yours.)
I can’t recommend too highly that you take the time to listen to his archived broadcasts.
You’ll recall that I recently suggested that a “one world currency” was coming our way. Gause chuckles at that by saying “you’re predicting the past”. He says we already have it, the US dollar. He feels the Fed and the International banking cartel that owns them (including Citigroup, JPMorgan Chase, and Goldman Sachs being the top 3) are already in control of the world’s banking systems and can keep the dollar going forever by simply adding zero’s (i.e. inflation).
He explains that the current deflation (or disinflation) caused by the 1 trillion dollars recently sucked up by the treasury and deposited into the (NY) Fed will end with the big banks and their corporate buddies buying up recently devalued assets (like GM) for pennies on the dollar as the tsunami of liquidity is suddenly pumped into the market leading to a 70’s style inflation (but short of collapse) over the next several years.
Fascinating stuff!! 3 thumbs up…

I haven’t yet had time to digest the digital media. My girlfriend Auby, my mother, and family friend Pam, were watching the entire Californication – Season One tonight. I liked it. It’s good to see David Duchovny in a high-profile series again. I enjoyed him in The X-Files, and even in that movie he did, Playing God. I remember this one piece of dialogue from that movie where he’s confronted with a thug:

DUCHOVNY: Are you going to hit me?

THUG: Why are you afraid?

DUCHOVNY: I’m just trying to plan my day.

The stoic sarcasm that Duchovny brings to his characters reminds me a lot of myself. Which is to say, I enjoy his work.

At any rate, the gist of Mark’s point is the idea that the central bankers of the world have realized their ultimate goal of one world currency in the US Dollar, and are not going to let that default. While I’m sure that the person Mark is citing, Andrew Gause, has done his homework and knows what he’s talking about, I’m going to have to stick to my guns on this one: The dollar is going to default in the not-too-distant future. But, before I really tackle this question, I think it’s important to review a bit of history.

Bankers have always jealously guarded the power to create money; such power is as much a part of banking as the force is to George Lucas’s Jedi Knights: it is the source of all their power, and thus zealously defended by them. Remove from a banker his ability to create money, and all you’re left with is someone in formal clothes. Of course, money-creation creates problems of its own as well-documented by economists like Murray Rothbard in his book, The Case Against the Fed, as the blog readers who’ve been with me for a while are no doubt aware. It creates a devaluation of the currency as new money enters the system and, as the process continues, will prompt investors to put their money in another currency.

Hence, alternative investment options always create problems for the bankers. If they get too carried away and create too much money, they run the risk of people feeling the currency and eventually having it lose relevance altogether in a hyper-inflationary scenario. That’s why John Maynard Keynes proposed a currency that would circulate universally world over, which he named the “Bancor.” Now, in such a scenario, there is no alternative currency to run to, because this one would have legal tender power all over the world. Think of it as Keynes’s interpretation of Tolkien’s “One ring to rule them all.”

The argument has been put forward that the US Dollar is the de facto universal currency, and therefore, we are living in Keynes’ dreams today. The problems with this argument, is that it’s missing the whole point. The US Dollar does not have legal tender power everywhere, it simply has legal tender power for the world’s most dominant power. Now, yes, that may be good enough for most purposes — but there are competing factions that will not accept US Dollars; some powers, like Iran — who are politically motivated to see the US fall from grace, consequentially pricing their dollars in Euros or Yen instead of dollars. Others simply see the US Dollar as having lost much of its buying power, and therefore prefer to deal in local currencies — as we saw in the news this year where they stopped taking US Dollars at the Taj Mahal.

You see, this is all just a replay of the classic story: The Federal Reserve has created so much money to fund so much debt that the entire edifice of debt now towers over our entire economy and threatens to bring it down, which has lead people to start quietly moving towards the exits. The whole idea of a currency such as the Keynesian Bancor is that there is no exit: the world banking system would oversee the currency, inflating it a bit in each country — which is a far cry from one part of the world inflating the living hell out of its currency and expecting the rest of the globe to play along.

Think of it this way: governments all over the world are envious of the US Government’s ability to simply turn to the Fed in order to run perpetual deficits. These governments would like to do this themselves, but, to do that, they would need to displace the US Dollar as the world’s reserve currency. Thus, we are not in a situation where we could really have one-world currency. Furthermore, this argument supposes that: all the bankers of the world value this idea of one universally accepted inflationary currency, and that they would gladly watch their own people suffer the effects of perpetual inflation brought by a foreign power, rather than take moves to stop it.

I feel that that thinking is too conspiratorial for my taste. Central bankers have always fawned over the governments that oversee them since it could take away their money-creation abilities at any time. Governments allow the mischief of money creation on behalf of their banks because it has always made it easier for said government to run a large debt.

I just don’t think that that nation state-centered thinking is going to change anytime soon.

Honestly, can we really expect the central banks of countries such as China to just keep on honoring devaluing their own currency so they can keep honoring the dollar on, and on, and on, with no expectation that the Chinese themselves might want to become the ones issuing the world’s reserve currency?

It’s human nature.

Someday, someone somewhere is going to decide that they want their power to become the next global empire, and you’d better believe that on that day, they’ll tell the US Federal Reserve just where they can deposit all of the dollars it’s flooded the world with.

When that day comes, do you really think the dollar will be left with any value at all?

Answering Cathy’s Questions

Cathy, good friend and frequent blog commentator, recently left the following comment:

A nice series, even if it doesn’t have a happy ending. For those of us who already live austere debt-free lives yet have no money to invest, how would you suggest we prepare for what is coming?

I am also curious as to how guys like Madoff figure into all of this. If the SEC wouldn’t investigate when told the fund was likely a Ponzi scheme, then the SEC is useless. We should get rid of it. What would be a Libertarian answer to fraudsters like this?

So far, most “Libertarian” answers I have heard (from those who claim to be party members) involve non-answers like, “don’t get fooled, protect yourself”. I call it a non-answer because it means that everyone would have to be superhumanly smart and educated in order to know everything. It means that those unable to care fully for themselves would still be at the mercy of shysters. You’d still need somebody whose opinions you trusted… and Madoff was a very trusted name!

What would be your solution? Cheers!

For your first question, that fact that you are out of debt is very important. You also seem well-prepared for whatever calamities might next befall our society. But, if you’re looking to do more than just survive — and actually prosper — then I’d recommend you pick up a copy of my book. I give some very practical advice in there about how to save money including a section on how to get credit card fees refunded — yes, even if customer service denies you the first time around. In addition, I go over the specifics of how to start and grow a portfolio that’s going to do well over the next few years.

Going forward, America will still have an economy and building wealth will require that you participate in it. So you’re going to need to find that niche in that economy that best pays you for the talents and training you already possess. (If you’re lacking, then this is a good time to acquire it.) That the dollar will eventually default is almost a given in the future, so any student loans you take out to go back to school may end up being a free roll.

In terms of picking out skills for the economy, keep in mind you need to look to the economy of the future — not the present. Language skills will be at a premium. I can think of no language that wouldn’t be useful in some way. Asian languages such as Chinese would suggest themselves, but Europe will remain a training partner of ours as well which means that any of the traditional languages commonly accessed through your local college will be in demand.

Now as far as the SEC goes, I’m afraid I have the same non-answer as the other Libertarians: “Caveat Emptor”, (‘let the buyer beware’). Yes there will be frauds in the areas of finance just as there are frauds and cheats in all walks of life. The individual needs to be very aware of where his money is and how it is being put to work — which, incidentally, is called “transparency” in the field of accounting. Bernard Madoff did not have any transparency to his operation. His operations were a black box into which people out money. In return for it, Madoff would send them statements telling them they had made a profit when they really hadn’t. He didn’t provide any explanations for how their money had grown, just that it had.

Meanwhile, private industry will respond to the investors’ needs for information on where they can safely put their money. Accounting firms will audit records, and those with audited seal of approval from a prestigious accounting firm (which Madoff also did not have) can also go a long way towards keeping the cheats out of the system.

Now, I know this isn’t a perfect answer — in fact, you seem to feel it’s a “non-answer” — but keep in mind that the traditional answer failed, too: the Government’s oversight group, the Securities and Exchange Commission, investigated Madoff twice in the past 4 years and both times came up with nothing. All that did was give people the illusion that Madoff was running a clean ship when, in fact, he was not. Regulatory agencies such as the SEC and the FDA tend to have a horrible record in terms of fulfilling their charter. There have been a number of drugs that made it to market only to kill people under the watch of the FDA just as the largest financial scandals in history have been under the SEC. These agencies do little but chew up taxpayer money and give the organizations they preside over an aura of legitimacy.

In essence, what your question boils down to is, “What can be done about evil in the world?” There is no one answer to that. Evil will always exist and it will never be eliminated entirely. In terms of limiting our exposure to it, there is no substitute for learning the art of skepticism and critical reasoning. Those mental tools will keep most people out of an awful lot of trouble. And, of course, there will always be organizations that will come along and say that they can vouch for various clients of theirs. Then you have to decide whether you want to trust the vouching organization. Sometimes it’s private, and sometimes it’s a government agency.

I haven’t seen any studies to support the notion, but I’m putting my money on the free market to provide better watchdog agencies than the Government.

Mr. Poulter Presently Indisposed

Ah, the holidays.

‘Man down! Man down!’ It isn’t the most popular battle-cry amidst Christmas cheer. In entertaining younglings, however, Preston has been reminded of how truly fierce the little ones can be. Journalists may not be into hurling their footwear at our soon-departing President, but nieces and nephews rather delight in the practise. Not quite down for the count, some ice, and a rather charming photo complete the picture.

A true Libertarian; takes a lickin, keeps on tickin.
A true Libertarian; takes a lickin', keeps on tickin'.

So, Happy Holidays, Season’s Greetings, and all that rot, to you, yours, theirs, the guy down the street, the kittens in the box, the woman up the block, and, well, did I already mention you? There’ll be much more to come from everyone’s favourite doomsaying economic pundit — or at least, your favourite. And that’s all that matters, right?

He’ll be back in action soon. The economy, however, erm … yeah.

Be warm, be safe! And hell, be merry!

Conversations with Ben Peal

For those of you who don’t know me in my personal life, I have some pretty geeky interests. One of them is collectible card games (CCGs); specifically I enjoy the White Wolf card game Vampire: the Eternal Struggle. Unlike other CCGs, VTES is a multiplayer game which requires the manipulation of the other players rather than simply “playing your deck.” 

My book was a big hit at the last North American Championship in Montreal. Among the players that bought a copy was Ben Peal, who went on to become the only person to win the VTES NAC for a third time with his win this year. He sent me this email, and gave me permission to share it with all of you.

 

 Heya!

 Yeah, I just finished it last night, and I was trying to track you
 down to talk about it.  :)  Definitely a fun and useful read.  While
 I’m not a Libertarian and not a laissez-faire capitalist, I do share
 many of the same concerns you have about where our economy is 
 headed.

 I’m petrified of deficit spending and our national debt, which is
 flat-out running riot.  I’m likewise petrified of the impending
 Social Security problem.  I need to prepare for that two-fold 
 disaster, and the topic of your book definitely caught my attention.
 The book is a very helpful primer on the way our economy actually
 operates, Even if you factor out the national debt and Social
 Security, I think you still illustrate that the cycle of our 
 economy is such that a Depression-level economic disaster is 
 still looming.  Some questions I have:

 Obviously gold (and specie in general) is what you recommend.
 A lot of what you explain in the book is how economics is about 
 the transfer of real goods and services, which is why you focus
 on gold (and also because it’s transportable).  Are there other
 commodities that are worthwhile investments?  It seems as though
 commodities in general would be a good investment in preparation
 for a deflationary period, as they are real goods.

 You describe the conditions under which we can expect to see
 a deflationary period start.  What resources are available for
 one to monitor these conditions?

 Speaking of which, you do a great job of describing how we’ll
 get to the deflationary breaking point, but what happens when
 it’s going on?  How will the banks and government respond?  How
 have they traditionally responded?  What should we be doing
 during this time?

 Who do I sell gold bullion to?  Having managed a game store,
 I know that the whole idea is for a company to buy at less than
 market value and sell at market value or higher.  If I’m selling
 my gold, how can I get market value or higher for it?  

 When do I buy gold?  Under what conditions can I expect the price
 of gold to drop?  Are there price cycles for gold?  What is a 
 good price for gold?

 What conditions lead to an economy getting out of a deflationary 
 period?

 Argh…gotta get back to work…I’ll be more than happy to chat
 with you at some point about what I dislike about laissez-faire 
 markets.  😉

 – Ben

 Here is my reply:

Hey Ben,

Happy to hear you read the book. I try to blog everyday to give people stuff to read. If it’s Ok with you I’d love to post your questions to the blog and my answer to them.

You wanted to know what other commodities are worthwhile investments. You already know my feelings on gold, but strong arguments can be made for oil and silver. The personal investment I’m fascinated with right now (and I’m not legally allowed to recommend investments mind you) is Barrick Gold. They are a Canadian company, and the largest gold miners in the world. They have invested in expanding capacity, and have a solid balance sheet that will allow them to wait out any downturns. Not that there’s been any downturns in the physical gold market- demand has been going up as the economic crisis has worsened. Today it’s trading at PE ratio of 10 and close to their fifteen year low. So I like gold stocks.

Other people (bears) disagree with me. They feel that you either have to hold the physical gold bullion or be an active trader who is willing to get in and out in anticipation of where the market is going. If the market is going down, they want to be short the market to make profits off of the decline- which has been a great place to be. The feel that the pain involved in riding out a downturn in the stock market is just as intense if you’re in gold mining stocks than if you’re in google. The more I look at it, there’s no right answer. There’s all kinds of money to be made in investing with all kinds of different philosophies. So people are long term investors and don’t care where the price goes short-term. Others know exactly when they’re going to get out before they ever get in. Different philosophies. Who can say who’s better. I talk about this in one of my blog posts: http://www.prestonpoulter.com/wordpress/?p=296

That is to say, I see lots of opportunities to make money off of the decline, but what you have to do is decide what kind of investor you want to be and what your strategy is. I can recommend some books and services that I’ve found helpful in that regard, or point you to some other money managers who have similar philosophies. 

In terms of monitoring the progress of a deflationary crisis, it classically goes in three stages: in the first stage, the borrowers go broke; in the second stage, the lenders go broke; in the third stage, the nation goes broke. In terms of monitoring how the stages have progressed, you’d monitor stage one by level of consumer indebtedness compared to income. The easiest statistic to monitor for that is the percent of income saved. If you’re an Econgeek, you can check out the tables yourself at the Bureau of Economic Analysis. Here’s there latest report (http://www.bea.gov/national/nipaweb/Nipa-Frb.asp). If you see that saving’s rates are going down, then people are taking on more debt, which should be inflationary. If saving’s rates plateau or start to rise, then that means that consumer credit is no longer expanding. While not necessarily an direct indicator of economic calamity, it could signal the onset of deflation. The next thing to watch would be rates of credit card and mortgage defaults. I’m not sure a good source of data on this, but you can use google to see if the rates are rising. Other things to monitor are the prices of major asset classes such as real estate and the stock market. Rising savings and falling asset values or a rise in defaults signal that stage one of deflation has begun. 

As for state two, where the lender go broke, you need to follow LIBOR. The London Interbank Overnight Rate. As loans start to go bad, banks start to become insolvent and need to take on cash in order to stay solvent and in business. That would cause a rise rate of interest they loan money out to each other. It also indicates that banks are starting to worry about the solvency of other banks- they don’t want to lend money out if they might not get it back when the bank goes under. Also, the credit spread between US Treasuries and other debt is an indicator of faith investors have in the economy. If the spread is low, then people trust that businesses will do well with their money and only demand a few basis points over US Treasury rates to make it worth their while to take on the extra risk. As people become more fearful, the spread between the yield on US Treasuries and corporate debt will rise. As stage two progresses, you will start to see more and more institutions require bailouts or simply go broke. 

In the final stage of deflation, the government has taken on so much debt, in part due to the inflationary mechanisms that I talked about in my book and in part because of taking on more and more debt in an effort to bail out the various institutions that international investors fear for the solvency of the country itself. The thing to monitor here is the exchange rate of the country’s currency and the interest rate yield on its bonds. As the yields rise on government bonds, investors are trying to make up for the fact that the bonds are riskier and the currency in question is losing purchasing power. 

In terms of how to position yourself for each stage of deflation, cash is a good place to be in stage 1 and 2. Gold or foreign currency assets are best for stage three. Of course, it’s hard to know when to change positions. Things can come up on your pretty quick. This year is going to go down as the worst year in stock market history since 1937, and most of it materialized in the month of October. If you’re a long term investor or just a concerned citizen, then holding gold bullion is an excellent way to protect yourself.

If you’re trying to make profits trading at each stage of the deflationary event, then it’s much harder to adopt a winning strategy because you’re trying to outguess a lot of other people who are trying to do the same thing. And hedge funds greatly complicate things because they take sensible investing advice (such as, “buy gold” for instance) and leverage themselves up in an effort to squeeze the return out of it. Then when the hedge funds go south, they have to unload all of their positions as they get liquidated because of the debt they’ve taken on to stake their positions and you have weird things like Barrick Gold falling almost 50% of it’s market cap at a time when the demand for physical gold is unprecedented. Not to discourage you, I just want you to know the risks of the game. In terms of buying and selling gold, theirs not a ton of margin on gold bullion products such as coins. Ebay is one of the best places to sell your coins to get the best value and, as most bullion dealers are having a hard time keeping up with demand, one of the best places to get the product itself. Right now there’s a fairly dramatic price difference between paper claims to gold (i.e. Commodity market or COMEX trades) and the prices paid for physical gold. I discuss this in a few of my blogs, here is the latest (http://www.prestonpoulter.com/wordpress/?p=366).

If one had deep enough pockets, then you could buy a paper claim to gold and take physical delivery in which case you’d get it at a significant discount. Although, as I’ve also discussed in my blogs, the reason for the price discrepancy is most likely due to an effort to depress the price of gold as so they may deny delivery to all but the best customers in an effort to keep that paper gold market going. Like with gaming, the best margins on products are made in purchasing from the consumer who wishes to trade in his product. That’s where dealers of everything from bullion to comic books have tended to make their profits is off of buying from those who aren’t professionals. I’ve also been hearing of businesses advertised over the radio who will take your gold jewelry and give you cash for it. I’m sure they’re making good margin. As for me, I still feel gold mining companies are one of the best values, but, as I’ve also mentioned, other bears disagree with me. In terms of your last question, I feel the best thing to get out of deflation is to simply let it happen. As Treasury Mellon reportedly told Hoover, “Liquidate labour, liquidate stocks, liquidate the farmers, liquidate real estate. Purge the rottenness out of the system. High costs of living and high living will come down… enterprising people will pick up the wrecks from less competent people.” It was advice hat Hoover ignored. As you now know from the book, we’ve had many an economic crisis over our history, but they have all been fairly brief with the exception of when we’ve had large central banks trying to manage their way out of them. Japan seems to have made it’s deflationary downturn go on for almost two decades now. We need to stop socializing loses and just allow companies to fail. Traditionally this process has taken a good 6-18 months, but I’d prefer that to what Japan has gone through. 


I look forward to hearing from you. 

Take Care,
Preston