Worshiping at the Altar of the Inflationary God

“Bow down before the one you serve. You’re going to get what you deserve.”

– Trent Reznor

I listen to Peter Schiff’s weekly podcast “Wall Street Unspun.” He said something in a recent edition that stuck with me. He said that his father, Irwin Schiff (who was also a prominent opponent of the inflationary policies of the US Government) denounced the politicians and central bankers of the world in books such as The Biggest Con: How the Government Is Fleecing You. Peter said that his father described inflation as a “god that they worshiped.” These days it would seem there’s hardly any room left at the altar. 

The power of the ability to create money from nothing was marveled at when it was first discovered. Critics were sure that no one would accept Lincoln’s Greenbacks when they were first issued to help pay for the civil war. The notion that people would accept a paper money that had no backing just because the government told them to seemed rather dubious at the time, but the general public did accept them. The possibilities were not lost on the thinkers at the time.  If fiat money could be created with a printing press and accepted by the general public, then why not use the printing presses to make us all rich? Continue reading Worshiping at the Altar of the Inflationary God

Why Diversification is a One-Way Ticket to Poverty

I got another client for my investment advisory services today; an old friend of mine meet me for breakfast. We always had good conversations, and this was no exception. I thought my readers here would benefit from a condensed version of what we discussed. As we were meeting to discuss investment strategies, the specific focus of our conversation was how to position yourself to survive a crash in the dollar- a topic which I know something about.

My friend brought up the topic of the Weimar Republic. He is quite a history buff and I know that he recently completed reading a book on the rise of the Nazis. Today he was wondering how stocks did during that period. The answer was that the broad stock market took quite a hit during that period, but, as a wealth preserving measure, the stock market certainly did far better than say bonds or cash did (although the calculation are a little complicated because of the currency switching). But if we were to place ourselves in that situation, would we place ourselves into the equivalent of a broad based stock mutual fund.

The answer was an obvious no. Not only would we need to survive hyperinflation and the collapse of the Weimar Republic, but also the ensuring World War that saw the devastation of the country. Who would want to own the German stock market over that time? But, if you owned shared in a company that did survive, such as BMW, you would have an investment that would have preserved at least a portion of the wealth you had put into it. If your investment horizon was even longer, BMW would, I’m sure, show quite a return on your investment- even if you had invested on the eve of the hyper-inflationary affair.

Of course, we are acting here with the gift of hindsight. We have knowledge now that BMW is a good car company in 2009, so if we are picking German companies to have owned in 1920, BMW seems a good one. That brings us to the topic that is on everyone’s mind today: where should I put my money in order to best preserve and perhaps grow it in the future. Many people will tell you that the answer to that question is unknowable without the future knowledge that we possessed in our hypothetical Weimar example. They’re wrong. The future really isn’t as hard to predict if you know where to look.

It should have been fairly obvious to anyone who lived in the Weimar Republic that their currency was in trouble. They had lost a war and been saddled with a war debt that they could not possibly pay. Sure, they may have maintained the debt for a time, but how could anyone have thought that such a debt would eventually get paid off? As it turned out, it didn’t survive the first serious post-war economic downturn.

We are not in such a different situation today. It should be obvious to most anyone that the United States is never going to pay off its debt. It would be far too onerous. Instead, there will come a time when the debt will be rendered worthless either because of default of hyperinflation of the currency. We know that day will come eventually, so it’s not as if our own future is so hard to foretell. Given that knowledge of future events, how should we preserve our wealth?

Gold is the obvious choice. Not only does it become more desirable in times of crisis, it can help you bribe officials when you flee the country… if it comes to that. Try doing that with a mutual fund. But if we wanted to step away from the goldbug position for a bit and recommend broker sold securities so we can be respectable at dinner parties, which ones present themselves as tempting targets?

I talked about two different investment options that I found attractive: foreign Real Estate Investment Trusts (aka REITs) and, my personal favorite, Barrick Gold. Each presents an attractive option; foreign REITs are yielding in the neighborhood of 15% in foreign currencies and Barrick gives you exposure to gold while being a dividend paying stock. Ultimately, it seems he seems to be favoring Barrick. That took me by surprise a bit given that he works closely with real estate projects. I though the foreign REITs would have been a natural choice, but it seems he’s taking the political upheaval possibilities pretty seriously. 

We also reviewed his tax situation. I told him about a maneuver he could use to make his kids private school tuition tax deductible. It’s perfectly legal and it should save him a fair amount of money. I took real pride in knowing the difference I can make in people’s lives. When the whole world’s going down the tubes, the smallest victories have meanings. I vaguely remember the closing lines of the movie City of Joy with Patrick Swayze. The movie was brutal in its depiction of life in India, and, at the end, Om Puri says something like “The odds are stacked against being human.”

Swayze’s character replied, “That’s why it feels so good to beat the odds.”

Peter Schiff’s Predictions for How the Bailout Will End

Peter Schiff, author of the book Crashproof, was recently interviewed on CNBC debating Stephen Leeb. Peter’s position was that the US economy was crashing just as he had predicted, but, in regards to the bailout, the cure would be far worse than the disease. Schiff correctly points out that the money for this bailout will have to come from somewhere, and that somewhere is going to be the Federal Reserve’s printing press. Schiff in further on target when he says that we got into these positions by bailing out the economy before, and that what we really need in this country is a recession. My favorite point of Schiff is how eleoquent he is in simply pointing out that “We’re broke.” That sums up our position pretty well. When you look at it, how can we bail ourselves out of the poor house? Isn’t it just going to take the long hard road of saving your earnings? That’s what household’s have to do. Shouldn’t it be that way for nations as well?

I had real problems with Stephen Leeb’s position, and I wanted to go through it point by point. First, he argues that at the cost of only $700 Billion, the US taxpayers would have the chance to make an investment in something that might just show a profit. He’s not specifying whether he’s talking about a nominal profit or a real one. Just showing a nominal profit (i.e. you receive more dollars than you purchased it for) means very little in a highly inflationary scenario. It’s only a real profit that counts, and how exactly are we going to show a real profit by using the printing press to go further into debt to buy other people’s debt?

Leeb’s main position was that this $700 billion bailout would somehow save trillions of dollars for the owners of real estate and equities. What Leeb doesn’t explain, is how $700 billion is going make up for the trillions lost. Is it really that easy to make money for everyone? Just throw some money into a bailout and far more than that will be made on secondary markets? How will that work? If it’s really that easy, why haven’t we been doing it all along? The truth is, it’s never that easy. You can’t predictably add some money to one side of the equation, and far more money to be made on the other side. And since that isn’t the case, the question becomes why exactly we the taxpayer need to share in the loses for foolish homeowners and bankers. I’m not even going to reply to Leeb saying that the market will be freer from government control by empowering the Treasury to directly intervene in it. 

Lastly, Leeb makes an open appeal to preserving the American Empire. When countries such as Russia have stopped backing down, it’s a sign that we need to… to… bailout Wall Street? Leeb’s position is very insightful here. We need to bail out the American markets so that our international competitors will continue to bow to our will. Should our markets fail, we won’t command the necessary stature on the world stage. All we’re missing here is Leeb making an empassioned plea with tear in eye as he looks to the camera and says that “We must bail out Wall Street… for America.”

But what is it that makes America so great? Why do we deserve to be able to command other nations of the world? If it’s because of our freedoms, as our President likes to say, then we shouldn’t worry about losing our stature so long as our freedom is not endangered. If it’s because of our society is the greatest bastion of capitalism ever, then let the participants in the market place learn that they need to be able to look after themselves and not count on handouts from the US taxpayer. 

On the other hand, if it’s just because we’re the biggest and strongest right now because we’ve used a stretched a fiat currency to its breaking point financing the largest military in the world, then we have no moral grounds upon which to command the rest of the world to do our bidding. And perhaps a bailout will help to prop up the empire as Leeb is arguing, but there can be little doubt that the ultimate fate of all this will be exactly as Schiff predicts. A total collapse of the US dollar and the economy that relies on it.