It started in 1921.
World War I was over. The Treaty of Versailles had been signed two years before.
And Germany, the biggest loser from the war, had been stuck with both the blame and the bill.
Germany’s war debt– which it owed not only for its own war-related expenses, but also for reparations to the victors– was devastating.
They didn’t have the money, so they started printing it.
Not surprisingly, the German mark began to sink. It started slowly at first, but by 1921 hyperinflation had taken hold until prices soared by thousands of percent.
One of my favorite stories from this period, was of the elderly man who went to the police to report a robbery. Thieves had stolen a wheelbarrow of money.
It was common at the time to use wheelbarrows to transport the huge sums of cash that were required to buy even the most simple things like bread and milk.
When the police asked him how much was in the wheelbarrow, the man corrected them saying that the thieves had only stolen the wheelbarrow, and had left the cash behind.
Undoubtedly the entire society was upturned by this hyperinflation. But as history shows, in any situation, there are always winners and losers.
Pensioners and people who responsibly saved their money were wiped out; whereas people who had borrowed to invest in real assets did extremely well.
Owners of residential real estate suffered under government imposed rent controls, whereas owners of farmland thrived.
For people who saw the decline of the mark coming and bet against it, generational fortunes were made in a matter of years.
In the case of Germany in the 1920s, few people probably expected that hyperinflation would ensue.
Even the president of their central bank, Dr. Rudolf Havenstein, firmly believed that there was zero connection between price levels and the amount of money he printed.
Yet it happened, and those who saw the warning signs and took steps to reduce their risk did very well.
Today there is no shortage of risk in the financial system either.
Negative interest rates are becoming more and more common in developed nations and they’re on their way to America as well.
Every time there’s a recession, the government cuts interest rates by easily half a percent to a percent.
So with interest rates already at zero, when the next recession comes (and it absolutely will), you can expect interest rates to go negative.
Meanwhile, Western banking systems are highly illiquid, meaning that they have very low cash equivalents as a percentage of customer deposits.
This isn’t some wild conspiracy theory. You can see it for yourself in the financial statements banks publish every quarter.
Solvency in many Western banking systems is also highly questionable, with many loaded up on the debts of their bankrupt governments.
Banks also play clever accounting games to hide the true nature of their capital inadequacy.
We live in a world where questionably solvent, highly illiquid banks are backed by under capitalized insurance funds like the FDIC, which in turn are backed by insolvent governments and borderline insolvent central banks.
This is hardly a risk-free proposition.
Yet your reward for taking the risk of holding your money in a precarious banking system is a rate of return that is substantially lower than the official rate of inflation.
And in many cases, it’s even negative. Rates are already negative in Europe, and again, it’s coming to the US. Either way, you’re guaranteed to lose money.
Risk is a funny thing. The reason why it’s so frequently misdiagnosed is because there’s often a huge discrepancy between the actual risk and the perceived risk.
You can see that very clearly with banking.
People perceive the risk in their banking system to be zero.
And while I’m not suggesting that there is some imminent collapse, the data clearly indicate that the actual risk is significant.
Given the meager and even negative interest rates, the risk-reward ratio just doesn’t add up.
To address different types of risk in the system, I see four main solutions:
One is to hold physical cash, enabling you to effectively be your own private banker and giving you an excellent short-term hedge against risks in your domestic banking system.
However, this comes with additional physical security risks and potential political risks such as civil asset forfeiture or cash bans.
Another option is to establish a foreign bank account in a jurisdiction where banks are liquid, well-capitalized, and backed by a government with minimal debt.
It’s hard to imagine you’d be worse off for having a portion of your savings in a safe, stable, debt-free jurisdiction.
Then there’s gold and silver, which are excellent long-term hedges, not only against risks in the banking system, but the monetary system at large.
Last but not least, it is 2015, and I would be negligent if I didn’t mention cryptocurrency as a viable option to hedge risk in both the banking and financial system.
Today’s podcast goes into comprehensive detail about these risks and their solutions. I invite you to listen in here.
In astronomy, there’s an important concept known as ‘parallax’, which refers to how a star’s position appears to change based on the position and motion of the observer.
The earth is constantly moving along its orbit around the sun. And as this happens, the position of a star in the night’s sky will appear to change slowly, gradually over time.
There’s a great view of the Southern Cross constellation from our farms in the south of Chile. But as the seasons change, the constellation appears to move very slightly, even though the stars themselves haven’t budged an inch.
Small children discover an earthly example of parallax when they find that the position of an object appears to change slightly as they alternate closing their left and right eyes.
The idea is that the exact same object can appear to be different, even though neither you nor the object has moved an inch.
Examples of parallax are everywhere– just look at China.
If you close your left eye, China appears to be in a massive financial crisis thanks to a bursting credit bubble that has the potential to drag most of Asia, and possibly the world, into an era of massively depressed trade and asset prices.
But if you close your right eye, China has already become the world’s second largest economy (and by some measurements the largest), and has accumulated more savings than every other nation on the planet.
Plus the Chinese renminbi’s acceptance in foreign reserves, global payments, and international trade settlement is growing rapidly, and it even looks likely that the renminbi will be be anointed soon by the IMF.
These are two completely conflicting views of China. And yet they’re both accurate.
Or you can look at the US.
If you close your left eye, the US dollar is strong. The labor market has recovered to its pre-crisis levels. The US is affluent and free.
But if you close your right eye, the dollar is astonishingly overvalued based on nearly every objective metric that exists, and the Federal Reserve is nearly insolvent on a mark-to-market basis.
The labor market has been completely hollowed out as the US work force now constitutes the lowest percentage of the American population since Jimmy Carter was President.
The US government itself is flat broke, based on its own financial statements.
Nearly every major program and institution, from Social Security to the Pension Benefit Guarantee Corporation, to the FDIC, is either insolvent or precariously underfunded.
The government cranks out 75,000+ pages of new laws, rules, regulations each year, many of which carry severe criminal penalties and govern the most private details of our lives, including how we are allowed to raise our own children and what we can/cannot put in our own bodies.
Police forces have turned into federally-funded paramilitary units, and a grand surveillance state now dominates over the citizens.
Civil Asset Forfeiture, the deliberate theft of citizens’ private property by the government with absolutely zero due process, is on an alarming rise.
And many of the basic freedoms guaranteed by the Constitution have become watered-down aphorisms rather than inalienable rights.
Again, two completely opposite views that are both accurate. And there are more examples everywhere.
Financial markets are on a knife’s edge. Yet there are some absolutely incredible investments out there– high quality, profitable companies that are trading for less than cash, and beautiful properties that are selling for less than the cost of construction.
Terrorism abounds. Risk abounds. But so does opportunity.
That’s our world. It is simultaneously full of risk AND reward. The important thing is to look with BOTH eyes.
Know the risks. Be guided by objective data to understand them, and take action to minimize them.
But don’t be overwhelmed by negativity. Don’t panic. Instead, take simple, sensible steps to ensure your livelihood doesn’t become a victim to someone else’s stupidity.
Only then, with both eyes open, will you be able to see all the incredible opportunity that awaits, and be able to seize it from a position of strength.
[Editor’s note: This letter was penned by Tim Price, London-based wealth manager and frequent Sovereign Man contributor.]
Seven years on from the collapse of Lehman Brothers, everything has changed, and yet nothing has changed.
There is no longer a perception of panic. $14 trillion of central bank stimulus has seen to that.
But at the same time, a predicament brought to crisis by too much borrowed money has been exacerbated by much more borrowed money: $57 trillion of it, according to the McKinsey Global Institute.
Perhaps the most prescient commentator before the fall of Lehman Brothers was Tim Lee of piEconomics, who wrote the following back in November 2007, fully 10 months before the failure of a second-rate investment bank triggered a global credit crisis:
“There is little doubt, to my mind, that we are now at a defining moment in financial history, a time that, once it has passed will be referred by economic and market historians in much the same way as the Wall Street Crash of 1929 or the credit and banking crisis of 1973-4 are now.
“Unfortunately, as is becoming increasingly clear, this crisis is not really just about subprime mortgages. It is much more serious than that. It is the beginning of an inevitable realignment of credit and wealth with incomes and accumulated savings… subprime is merely the first part of the credit edifice to give way, rather than the whole story…”
For seven years and counting, only one question has really mattered to investors: inflation, or deflation?
Thus far, the answer seems to have been: inflation in financial assets, deflation or stagflation in pretty much everything else. It’s been difficult to get the macro right because central bankers have morphed from being referees in the game to being the key players, and with the ability to rewrite the rules, and continually move the goalposts, as the game plays out.
The apparent dominance of central bankers over the free market should be of concern to anyone who expects the free market, at some point, to return with a vengeance.
This week’s ‘Economist’ magazine points out that the average US state or local government pension fund assumes it will earn a nominal annual return of 7.7%, according to the National Association of State Retirement Administrators.
Good luck to them. According to AQR, projected nominal returns on a typical American portfolio, given prevailing valuations in the stock and bond markets, are closer to 2%.
But a larger problem is that investors, whether professional or private, have a tendency to succumb to home country bias. If you’re British you invest in Britain. If you’re American you invest in American.
This problem will likely come back to haunt American investors because their home market is one of the more glaringly expensive.
Robert Shiller’s cyclically adjusted P/E ratio for the US market stands at 26.4. Given that its long term mean stands at 16.6, that would tend to suggest that US stocks are trading at a roughly 60% premium to fair value.
US interest rates are widely expected to rise next month. Not by much, but any kind of rise may mark the end of a three-decade secular bull market in rates.
That has implications for all financial assets. And sceptics will have noticed two recent trends: a growing number of profits warnings on the part of large cap businesses internationally; and a growing tendency for US companies to ‘engineer’ better returns for their senior executives shareholders simply by buying back their stock at egregiously expensive levels.
Stock buybacks conducted at a discount to book are value-enhancing. Buybacks conducted at whopping premiums to book, on the other hand, destroy shareholder value.
If the US stock market looks dangerously overpriced, where should equity investors be looking?
We think the answer is: in Asia, and more specifically in the likes of Japan, Korea and Vietnam.
The shareholder return ratio in Japan, for example, stands at 36.6% – a derisory level compared either to Europe (71.4%) or to the US (82.9%).
Japanese shareholders historically have been given a meagre slice of the pie. The good news is that their share of the pie is likely to go up.
Both dividend payments and share buybacks as a percentage of profits in Japan are already on the rise, and we think they have plenty of room to catch up towards other ‘Western’ levels.
The managers we invest with in Japan report that the change in Japanese corporate behaviour, especially amongst mid-cap businesses, is real.
Since Japan also offers us highly profitable companies on p/e ratios of around 10x and price/book ratios of around 1, we simply don’t need to overpay to own the US market like the rest of the herd. (The prospect of more QE in Japan doesn’t exactly hurt – though we clearly prefer to have our currency exposure hedged, especially if US rates do rise.)
The Korean market is inexpensive too, trading on a p/e of roughly 10 and a price/book of around 1x.
Vietnam is admittedly more of a ‘frontier’ animal, albeit one that’s widely expected to be recategorised as ‘emerging’ by the leading index provider in the fullness of time. Though Vietnam has the lowest ratio of market cap to GDP in Asia, at just 30%.
At a time when many investments are looking desperately mispriced, yes, we truthfully are finding attractive opportunities in the stock markets. We’re just looking at different markets.
Sometimes you just have to stand in awe at the level of corruption and incompetence in government.
Case in point, the new highway bill in the Land of the Free. And, trust me, you’ll love this.
The latest version of the highway bill is called the “Developing a Reliable and Innovative Vision for the Economy Act.”
And yes, they abbreviate it as the DRIVE Act.
I cannot even begin to imagine how large the team of monkeys is that works on these silly acronyms. And as is typical for legislation, the more high sounding the name of the law, the more destructive its consequences.
On the surface, the DRIVE Act aims to fund the federal transportation network and investments in highway infrastructure for the next several years, as well as recapitalize the Highway Trust Fund.
Federal trust funds are supposed to responsibly and conservatively manage money that has been set aside for a specific purpose to benefit taxpayers.
There are so many of these trust funds. There are the big ones like Social Security’s “Old Age Survivor’s Insurance” and “Disability Insurance” (which is literally days away from running out of money).
And there are many more you’ve probably never heard about, like the “Black Lung” trust fund and the “Leaking Underground Storage Tank” trust fund.
Most of these funds are insolvent, or at least pitifully undercapitalized, clearly proving the government to be one of the worst asset managers in history.
The Highway Trust Fund is no exception: it has completely run out of money, and at this point literally has a ZERO account balance. The DRIVE Act intends to fix that.
And even though it has nothing to do with funding highways, the bill also aims to re-authorize the Export-Import Bank.
The Ex-Im Bank was created during the Great Depression and is designed to facilitate trade. That’s code for ‘boost the profits of Boeing and General Electric.’
Even the government’s own Congressional Research Service found that “more than 60% of Ex-Im Bank’s loan guarantees, by dollar value, supported the sale of Boeing airplanes in foreign countries”.
Ex-Im is essentially a gift on a golden platter from the taxpayers of the United States to a handful of mega-companies.
The Bank’s charter lapsed earlier this year. But rather than let it die, they’re jumpstarting Ex-Im with even more taxpayer money.
Clearly the government needs cash. They need to fund Ex-Im, the Highway Trust Fund, and all the improvements for America’s dilapidated infrastructure.
And their solutions to address this cash crunch are nothing short of remarkable.
For example, they plan to steal $300 million from the Leaking Underground Storage Tank trust fund (LUST… yes, that’s really what they call it), and transfer that money to the Highway Fund.
The only problem is that LUST is insolvent. So they’re stealing from one insolvent trust to fund another insolvent trust. It’s genius!
One of my favorite sections in the bill is a directive to sell off 100+ million barrels of oil from the Strategic Petroleum Reserve.
Only a politician could think to sell off oil supplies at a time when oil price is at multi-year lows.
(It also really gives you a sense of how broke the government really is that they’re driven raise cash by selling off strategic assets.)
Another gem buried in the 864 pages of the bill is a provision that allows the government to revoke your passport if they believe that you owe more than $50,000 in federal tax.
There will be no judicial review, and no due process. You don’t get to go in front of a judge first to have a fair and impartial hearing over whether or not the government’s tax allegations are accurate.
The language in the law is very clear: they can simply revoke your passport if you owe them money in their sole discretion.
Once the law is passed, this would go into effect on January 1, 2016, and they claim it will generate $40 million per year in tax revenue.
There was one more provision that proposed raising revenue from the biggest banks in America by reducing the dividend they receive from the Federal Reserve.
Curiously, though, this specific provision was defeated yesterday after a heated committee meeting in Congress.
So while the banks’ profits are off-limits, and the government will spend billions of taxpayer dollars to boost profits at Boeing, American citizens are threatened with having their passports revoked in order to raise money.
It couldn’t be any more obvious how much the system is stacked against the little guy.
They treat you like a dairy cow that exists only to be milked dry… like a medieval serf tied to the land and forced to serve his overlords.
It’s revolting. But it doesn’t have to be this way.
You can take sensible, rational steps to divorce yourself from this madness, or at least have a Plan B to protect yourself from it.
If the government is threatening to take away your passport, for example, there are countless ways you can obtain another one from a country that will roll out the red carpet for you.
If you’re sick and tired of having your income confiscated so that you can bail out big companies, there are completely legal steps you can take to reduce what you owe.
It’s hard to imagine you’ll be worse off being more free and having more control over your life and finances.
Lately when I talk to my friends around the world, I get the distinct sense that there’s a dark cloud hanging in the air.
I feel it particularly from those in North America and Europe.
Terrorism is on everyone’s mind. All the headlines have to do with ISIS, who’s been killed in police raids, new threats to cities like Washington D.C. and New York, etc.
It goes without saying that this has led to a pretty serious level anxiety. And with good reason.
There’s a laundry list of major problems in the world.
Terrorism is an unfortunate reality.
So are bankrupt governments, insolvent financial systems, underfunded pension programs, and giant police and surveillance states.
But it’s become easy to forget that there’s actually a lot of great news in the world, and plenty of reasons to be excited.
Here in Chile they have a program called Startup Chile, where entrepreneurs from all over the world receive funding for their businesses and a community of other entrepreneurs to learn from.
There have been some very successful companies to come out of it.
Candidly I’m not wild about any government taxing the income and property of its citizens for any reason.
However, since I don’t get to live in my fantasy world where there’s no tax anywhere, I will happily acknowledge that funding game-changing businesses adds more value to the world than dropping bombs and going to war.
We attended a “demo day” a few days ago where several of the Startup Chile participants presented their businesses.
Much of what we saw was incredibly inspiring.
One project addressed the issue of Styrofoam waste, which can’t easily be recycled and just builds up in landfills, by coming up with an innovative way to turn it into something commercially useful.
Meanwhile, a group from Bulgaria is tackling a dangerous epidemic that is wiping out the bee population worldwide by introducing smart beehives that can be tracked, managed, and controlled through the cloud.
Then there was one that really hit home for a number of my team members—one that uses predictive text and machine learning software to enable stroke victims and others with speech disorders to communicate effectively and with dignity.
This sort of thing is happening on a daily basis, and entrepreneurs worldwide are coming up with game-changing ideas, many of which can revolutionize staid industries.
Through our private investment service, we funded one company last year that is already making a dent in the financial system.
The company has launched a new digital currency system that is now being used officially across an entire nation.
My sense of optimism extends far beyond entrepreneurship and startups.
Colombia is a great example. It used to be synonymous with violence, civil war, and chaos.
Now Colombia is peaceful, blossoming, and prospering. There’s so much opportunity, I find it one of the most exciting places in the world.
There are so many other bright spots, and so many amazing things that are being created on a daily basis.
Yes, there are some serious risks out there, and the system is absolutely rigged against you.
But there are solutions.
If your banking system is in poor condition, move some funds outside of it.
If your government is completely bankrupt, don’t keep 100% of your assets under their control.
And if terrorism is that much of a scare, consider making some adjustments in your personal life, including even moving to a place that makes you feel safer and more free.
Don’t be dominated by fear and anxiety. Have a rational view of the risks, and take sensible steps to reduce them– freeing you up to concentrate on all the amazing opportunities in the world.
I want to tell you about a time when I was really scared. Terrified.
It was back in 2003, right as George W. Bush made his final decision to send the ‘coalition of the willing’ north into Iraq.
Saddam Hussein knew he was finished. And, in a fit of desperation, he started launching loads of Scud tactical ballistic missiles towards the invading forces.
Missile attacks are pretty scary. You can’t hide behind a rock and duck the blast. And, at least as an individual, you can’t shoot back.
I distinctly remember being outside as the missile alarms were going off, looking up into the sky, and thinking, “Well I hope I don’t die.”
I’m not going to tell any tough guy stories– I was afraid. And given that there was nothing I could do, I felt totally helpless.
It’s that feeling of helplessness that is the closest thing I can tap into in my own experience for the horror and tragedy of a terror attack.
And I know my own experiences don’t begin to compare– we were in a warzone and knew the risks.
With a terror attack, one minute you’re enjoying dinner, the next minute it’s blood and death and chaos. It’s levels beyond anything I’d ever experienced.
And in a situation like that, the desire for revenge is understandable. Emotion is palatable. People want action. They want their governments to DO SOMETHING.
And sure, it’s very comforting to think that we could just send the military over to kick everyone’s ass and bomb the terrorists back into the Stone Age.
But I hope we can agree that most decisions that we make when we’re emotional don’t tend to work out very well. Emotional decisions are usually bad decisions.
They make us feel better, but they seldom deliver positive long-term outcomes.
Right now everyone wants to feel better. The world is on war footing, and few people want to think rationally. This is understandable.
But when people’s lives and livelihoods are on the line, the situation absolutely demands clear, level-headed thinking. After all, actions have consequences. And it’s imperative to make important decisions in full light of the consequences.
I discuss these consequences in today’s podcast, along with some astonishing facts and history that you have probably never heard before.
Given how uncomfortable and emotional the topic, this might have been the most difficult one that I’ve ever had to record. Take a listen here.
On April 5, 1793, decorated French military commander Charles Dumouriez caused a sensational panic in Paris when he fled the country and defected to Austria.
It had been nearly four years since French peasants stormed the Bastille, the event that historians generally regard as the start of the French Revolution.
And hardly a week had gone by since without some major crisis, emergency, or tragedy in France.
There were regular violent riots across the country– in Paris, other major cities, and even the rural countryside. Widespread massacres were commonplace.
And given that one of the key goals of France’s new revolutionary government was to eliminate Christianity from the nation, civil war between religious factions broke out as well.
To cap things off, France was under constant threat of foreign invasion.
Austria and Prussia were not only waging conventional war against France, but both nations had sent highly trained agents to infiltrate French borders to pursue violence and chaos from within.
It was exhausting. French people were living in perpetual fear, and the wanton death of innocents had become an unfortunately normal part of life.
So when it was found that Dumouriez (a French citizen) had defected to the enemy, people hit their breaking points. Enough was enough. And they cried out to the government to save them.
The government listened.
The very next day, on April 6, 1793, the new French government established the Committee of Public Safety (though it was originally known as the Danton Committee).
The Committee was given broad, emergency powers since it was a time of such crisis.
And under the leadership Maximilien Robespierre, the French people got their protection.
Robespierre passed the ‘Law of Suspects’, allowing the government to essentially imprison anyone they wanted for any reason.
It was impossible to tell friend from foe back then; you never knew if someone was a loyalist, or a Christian, or an Austrian spy, or any number of counter-revolutionaries.
So people were required to carry special certificates indicating that they were good and dutiful citizens. Those without would be imprisoned, and potentially executed.
The University of Chicago estimates that nearly 30,000 either died in prison or were executed as a result of this law.
Then there was the Law of the Maximum, which attempted to stabilize an ongoing financial crisis by fixing the prices of goods and services in the country. The law also imposed the death penalty on those who did not follow the rules.
They also passed the Law of 22 Prairial, which awarded the Committee even more power to arrest, try, and execute anyone deemed to be suspicious or disloyal.
The law also prevented anyone accused of a crime from being able to call witnesses or have defense counsel.
Plus it required that ALL citizens report potentially suspicious or disloyal neighbors to the Committee. If you see something, say something.
As you are likely well aware, this period in French history became known as the Reign of Terror, or often simply ‘the Terror’.
Coincidentally, this is where the first modern use of the word ‘terrorist’ is found.
Except that it wasn’t used to describe the counter-revolutionaries. Or the rebels. Or the foreign agents.
It turns out that “terrorist” was originally a term used to describe the government officials who created and executed these oppressive tactics under the guise of keeping people safe from their enemies.
Governments have a dangerous tendency to never let a serious crisis go to waste.
The US government spent trillions of taxpayer dollars to fight a War on Terror that made the world less safe and Americans less free, all to protect them from a threat that has a statistical likelihood of 0.0%.
(You’re far more likely to be shot by a police officer than to ever even see a terrorist.)
Yes, the desire for revenge runs deep. And that’s understandable.
But the greatest thing to fear is not men in caves. It is the consequent loss of freedom and the never-ending cycle of costly, destructive war.
[Editor’s Note: This letter was written by Tim Price, London-based wealth manager and frequent Sovereign Man contributor.]
Léon Walras is the patron saint of modern economics.
In other words, he was a clueless failure who hijacked immutable principles from the world of physics and misapplied them to the economic realm.
The result, predictably enough, is that modern economics doesn’t work.
It doesn’t work because it masquerades as a science when it is really just a combination of dogma and very crude modelling. The modelling doesn’t work because garbage in equals garbage out.
Sadly, this doesn’t stop the governor of the Bank of England from advocating overly simplistic policies in a highly complex world.
What is alarming today is that almost nobody dares challenge the mandate or even ongoing existence of central banks as prime fixers of prices in the financial markets. (Spoiler warning: price fixing doesn’t work.)
“Attempts to control and fix prices and wages span most of recorded history,” writes David Meiselman in the foreword to the definitive history of economic hubris, ‘Forty centuries of wage and price controls’ (Robert Schuettinger and Eamonn Butler).
“Price and wage controls cover the times from Hammurabi and ancient Egypt 4,000 years ago to this morning..
“The experience under price controls is as vast as essentially all of recorded history, which gives us an unparalleled opportunity to explore what price controls do and do not accomplish.
“I know of no other economic and public policy measure whose effects have been tested over such diverse historical experience in different times, places, peoples, modes of government and systems of economic organization..
“The results of this investigation would merit attention for the light it sheds on economic and political phenomena even if wage and price controls were no longer seriously considered as tools of economic policy.
“The fact that wage and price controls exist in many countries and markets and are being seriously considered by others, including the United States, compels attention to the historical record of wage and price controls this book presents.
“What, then, have price controls achieved in the recurrent struggle to restrain inflation and overcome shortages? The historical record is a grimly uniform sequence of repeated failure. Indeed, there is not a single episode where price controls have worked to stop inflation or cure shortages.
“Instead of curbing inflation, price controls add other complications to the inflation disease, such as black markets and shortages that reflect the waste and misallocation of resources caused by the price controls themselves. Instead of eliminating shortages, price controls cause or worsen shortages.
“Despite the clear lessons of history, many governments and public officials still hold the erroneous belief that price controls can and do control inflation. They thereby pursue monetary and fiscal policies that cause inflation, convinced that the inevitable cannot happen.
“When the inevitable does happen, public policy fails and hopes are dashed. Blunders mount, and faith in governments and government officials whose policies caused the mess declines. Political and economic freedoms are impaired and general civility suffers.”
Interest rates across the developed markets have been kept at emergency levels (and all time historical lows) for seven years. Do we think that allowing banks to access essentially free money is more or less likely to give rise to the sort of malinvestments that caused the financial crisis in the first place?
If you believe that the answer is ‘less likely’, there is a job at your local central bank with your name on it. (It will help secure the position if you have previously worked at Goldman Sachs.)
David Meiselman again:
“[D]espite all the evidence and analyses, many of us still look to price controls to solve or to temper the problem of inflation.
“Repeated public opinion polls show that a majority of U.S. citizens would prefer to have mandatory controls. If the polls are correct, and I have no reason to doubt them, it must mean that many of us have not yet found out what forty centuries of history tell us about wage and price controls.
“Alternatively, it raises the unpleasant question, not why price controls do not work, but why, in spite of repeated failures, governments, with the apparent support of many of their citizens, keep trying.”
In the aftermath of this weekend’s horrible events in Paris, religious dogmatism is rightly condemned. If only dangerous economic dogmatism could be similarly repudiated.
In 1875, right around the time the United States overtook the UK as the largest economy in the world, the American Express Company established the very first private pension plan in the US.
American Express had a simple goal: attract the best and brightest employees by giving them retirement security.
At the time, this was a revolutionary idea. The concept of “retirement” was practically martian.
Back then, most people worked until they were no longer medically fit to do so.
To voluntarily stop working and live out your golden years on perpetual vacation was a complete fantasy.
But a century after American Express, thanks in large part to rising prosperity in the 20th century, retirement had become the norm.
Private companies’ pension plans covered over 40% of the American workforce and millions of Americans were receiving Social Security by the 1970s.
Then in 1974 the government passed the Employee Retirement Income Security Act, establishing Individual Retirement Accounts (IRAs) to help people save for retirement in a tax advantageous way.
Fast-forwarding to 2015, we can see that none of this turned out quite like they’d expected. The state of retirement in America is now pretty abysmal.
First and foremost, Social Security is desperately, woefully unfunded.
Again, this is not Simon Black’s conjecture. The Treasury Secretary and the Labor Secretary both sign an annual report stating that Social Security is close to “trust fund depletion”.
In fact one of Social Security’s major trust funds is literally days away from running out of money.
Federal retirement trust funds across the board, like the Railroad Retirement Fund, are also nearly exhausted.
Meanwhile, private companies have followed the government’s example, with many private pension funds similarly approaching insolvency.
You see this frequently in the news as the cost of their pension funds push airlines and manufacturers into bankruptcy. They simply cannot pay their retirees.
Not to worry, the federal government has an agency called the Pension Benefit Guaranty Corporation to bail out guarantee insolvent private pensions.
It’s like the FDIC for private pension funds.
There’s just one problem. The PBGC itself needs a bailout.
PBGC’s latest report shows a net financial position of NEGATIVE $62 billion, which is how much more they have in liabilities than assets. There’s another word for that: insolvent. So there goes that idea.
Last, there are individual retirement plans, like IRAs and 401(k)s.
Unfortunately, most Americans’ individual retirement plans are woefully underfunded.
According to the Employee Benefit Research Institute, the median IRA balance in the US was just $32,179 at the end of 2013.
And the median amount saved by baby boomers amounts to just 13% of what their projected retirement needs are.
But not to worry, once again the federal government is to the rescue.
Last week the Obama administration officially rolled out its MyRA program.
MyRA is a special form of IRA that ‘helps’ Americans save for retirement by making it easy for you to loan your money to the federal government.
Like a retirement account, the idea is to save a little bit every month or every year to be set-aside in a tax-advantageous way for retirement.
The big catch here is that for MyRA accounts, there’s only one investment: US government bonds.
At present, US government bonds fail to pay interest rates that meet the government’s officially published rate of inflation.
So with these MyRA accounts, when adjusted for inflation, you’re guaranteed to lose money.
The Obama administration, of course, entirely dismisses this criticism, saying that these MyRA accounts are for “people who aren’t saving and who have a fear of losing their principal.”
It’s pretty appalling when you think about it.
Private pensions are nearing insolvency, and the government’s guarantee agency is insolvent.
Public pensions and retirement funds are also nearing insolvency. And individual retirement funds are completely undercapitalized.
This will become an epic retirement funding crisis..
Yet the government ‘solution’ is to encourage Americans who are at risk of losing their retirement to loan their money to the greatest debtor that has ever existed in the history of the world at interest rates that don’t even keep pace with inflation.
The government claims that MyRAs are guaranteed.
But the only thing guaranteed is that you’ll lose money… whether through inflation, default, or confiscation.
The lesson here is clear: don’t rely on the government for your retirement. YOU are a far more reliable manager of your own money.
But as with anything, financial success starts with financial education.
So before you invest your money, invest your time in learning about winning investment strategies, unconventional investments, and real retirement options.
You might find that you could live in absolute luxury somewhere overseas for a tiny fraction of what it would cost you back home. (Colombia comes to mind)
Or that you can generate substantial rates of return from buying high-yielding private businesses, or through asset-backed peer-to-peer lending programs.
You won’t hear about any real solution from the government. But with a reset in thinking, that dream of sipping Mai Tai’s by the pool can still be a realistic vision.
On September 25, 1794, US President George Washington issued a proclamation authorizing the use of military force against a group of defiant citizens.
It had all started a few years before when a handful of politicians had succeeded in passing an excise tax on liquor, something that became known as the Whiskey Tax.
The Whiskey Tax was the brainchild of Treasury Secretary Alexander Hamilton, who was under pressure to pay off the government’s debts from the Revolutionary War.
The thing is, much of the debt had been originally owed to soldiers who fought in the war. They had been paid in IOUs, many of which had been scooped up by bankers in New York for pennies on the dollar.
Hamilton had family connections to prominent New York banks– the first example of Wall Street infiltrating the Treasury Department. It wouldn’t be the last.
(Over 200 years later, the American taxpayer would again be on the hook to bail out banks.)
Back then the Whiskey Tax was a big deal. America was a ‘whiskey nation’.
Whiskey was such a prevalent part of American culture in the 1790s, in fact, that it was even commonly used as a medium of exchange in parts of the country.
So you can imagine that the government’s intent to tax whiskey distillation was met with pockets of staunch opposition, especially once people found out that the entire reason for the tax was to pay back the New York bankers.
In some cases the opposition was militant. Parts of Pennsylvania, Maryland, and Virginia swelled with local resistance to the point that people began physically assaulting federal tax collectors and forming rebel militias.
Washington eventually had to dispatch federal troops (which he personally commanded) to put down the insurrection.
The rebels lost. But this conflict between government and the taxpayer continued to run deep.
It still exists to this day. It’s ingrained in the DNA of the nation, and in every free individual around the world.
At its core, taxation is an elaborate form of theft based on deeply flawed premises that we all have a claim on each others’ earnings, and that the government knows how to spend your own money better than you do.
There are certainly some places where people do receive value for the taxes that they pay.
Norwegians are commonly cited as tolerating their incredibly high levels of taxation because they receive relatively good quality medical care, education, etc. in return.
But for most people in the West, taxes fund wars, debt, dropping bombs on brown people by remote control, and yes, bailing out banks.
It’s perfectly natural to be enraged at such immoral waste, and people deal with it in different ways.
Some take the approach that if we’re going to be screwed then we should all be screwed together, equally.
They throw childish temper tantrums when anyone uses perfectly legal means to reduce their taxes, labeling them ‘tax dodgers’.
Usually this is an emotion grounded in petty jealousy and ignorance, wanting everyone to be equally miserable, and failing to realize that tax mitigation solutions are open to everyone.
Right now there’s actually an entire town in Wales called Crickhowell that is ‘protesting’ how big businesses use the tax code to slash what they owe.
They’re angered that Facebook, Google, Amazon, etc. pay very little tax.
And to voice their frustration, the butcher, the baker, and candlestick maker decided to employ the exact same tax strategies used by big companies to reduce their own tax burdens.
As the proprietor of the local smokery put it, the plan is “jolly clever.”
Clever indeed. Because they’ll soon realize the tremendous power and freedom of using completely legal solutions to keep more of what you’ve earned.
Doing this is not immoral or unpatriotic.
In fact, if you believe that your government makes your country worse off and less free, then reducing the financial resources available to them is a highly effective expression of patriotism.
Rather than people whining about everyone else paying less tax, it would be a much better use of time to learn about ways to reduce their own taxes.
This is a far more powerful way of voicing your opposition to a government than standing in a voting booth. And you’ll be better off financially as well.
To be fair, most of these concepts aren’t far fetched or complicated.
How many of us have gone shopping at a duty-free store in order to save a few bucks from not paying taxes?
Plenty of people already incorporate businesses in no-tax states like Delaware. Or they’ll work in a place like Boston (high tax) but live nearby in New Hampshire (zero tax).
There are plenty of other solutions. US taxpayers who live on investment income can move down to the beach in Puerto Rico and pay 0% tax.
Or you can move abroad and earn over $100,000 per year (per spouse) tax free.
There are also more complicated solutions such as setting up captive insurance companies to reduce business profits tax, trust structures to eliminate estate tax, and much more.
These aren’t ‘loopholes’ where you need teams of lawyers to misuse or take advantage of some cryptic language in the tax code.
It’s all right there in black and white, part of the law.
Criticizing a very sensible, legal strategy to keep more of what you earn is like criticizing someone for driving the speed limit, claiming that it’s some sort of traffic ‘loophole’.
There are completely legal options out there for everyone. Taking advantage of them just makes sense.
I’ll admit that when I was a kid, I used to spend hours watching wrestling on television.
Hulk Hogan, the Macho Man Randy Savage… I loved all the old-school guys from the WWF, as they used to call it back in the 1980s.
It was mesmerizing, a bit like I’d imagined gladiator combat would be.
But I’ll never forget when the dream completely collapsed.
My father took me to a live match when they came to our town and we had great seats near the front row.
For the first time it was obvious to me, even from a young age, that it was all fake.
I was devastated. I had actually believed that there were good guys versus bad guys beating each other up in the ring.
It turned out to be a complete hoax, something that’s known today as “sports entertainment”.
In fact, it’s essentially the same with elections today, which I see as “political entertainment”.
Watching Hilary Clinton debate Bernie Sanders—or like yesterday evening, Jeb Bush against Donald Trump—doesn’t strike me as too different from when Hulk Hogan faced off against Andre the Giant in Wrestlemania.
It’s all fake. It’s sound bites, jabs and jibes, and pointless banter completely devoid of any real substance.
Having lunch yesterday with a good friend from the UK, he asked if I thought that any political candidate was worth it.
I told him that I’m sure they’re all very nice people. Many of them might even mean very well and have very good intentions.
I’ll also admit that occasionally they have decent ideas and that there are small steps in a positive direction.
But the truth is, none of it really matters.
As I explained to my friend, the United States objectively speaking is far past the point of no return.
The government’s own financial statements prove beyond all doubt that they are flat broke to the tune of more than $60 trillion, and that they lose hundreds of billions of dollars more every year.
In 2013, for example, the government lost $805 billion according to the Government Accountability Office.
Every major pension program is either already insolvent or desperately unfunded.
This isn’t Simon Black’s analysis; the Treasury Secretary of the United States of America himself tells us that the Social Security’s Trust Funds are nearly out of money.
The Federal Reserve is nearly insolvent, and on a mark to market basis is likely already insolvent.
The FDIC, which is supposed to support the entire US banking system, admits that it fails to meet the minimum capital requirements as required by law.
US banks are precariously illiquid and exposed to trillions of dollars worth of very high-risk assets. Something that even the Fed and the FDIC do not consider to be “sound”.
So to presume that a single individual is going to ride in on a white horse, wave a magic wand and fix all this is just a childish fantasy.
The hope is that “the right person” can at least start to steer the ship in the right direction.
This is the delusion every election cycle; people end up believing the entertainment is real, and that the right person can start to fix everything.
Then a few years later, they realize that the ‘right person’ is almost exactly like the last person.
Not to mention, ‘righting the ship’, mathematically speaking, is an impossibility.
The government now spends almost all of its tax revenue just to pay interest on the debt, and the mandatory programs, like Social Security and Medicare.
Both of which, by the way, are expenses that grow every year.
There is no way out. It’s like trying to change directions for a ship that’s already half-sunk.
At that point, it really doesn’t matter who’s the captain of the ship. All that matters is if you have a seat on a lifeboat.
This is not intended to be a downer.
It’s a little dose of reality, but in it there’s actually good news. Because all the tools and resources exist for you to build your own lifeboat.
You don’t need to rely on a government to fix the problems that they themselves created.
And with a little bit of planning, backed up by small, common sense action, you can ensure that you’re an amused spectator to this bizarre entertainment, rather than a victim of it.
This morning at 7:30am, I was the first one to arrive at our new office.
As I unlocked the door and let myself in, the sun was just inching it’s way up over the Andes.
It was beautiful, one of those moments where I had to stop and reflect on the long path in life that ended up with me standing on the 41st floor in South America overlooking the city.
Life is absolutely about the choice; we either define our realities by the choices we make, or our realities become defined by the choices that we don’t make– choices that others make for us.
That’s fundamentally what freedom is all about. Being free is a choice… one that’s backed up by small actions.
Think of it like losing weight or getting fit. It starts with a choice. Sure, there are lots of reasons to get out of shape. Life gets in the way. Commitments. Family. Etc.
But never forget that being healthy is natural. We’re supposed to be healthy, just like we’re supposed to be free.
We’re all born free. We have to LEARN how to be unfree through a lifelong diet of propaganda that teaches us to subordinate ourselves and be afraid of men in caves.
You become more fit and healthy by making a choice– choosing a healthier lifestyle, and backing it up with small, steady action.
Similarly, you can become more free by making a conscious decision to adjust your thinking, that having a government tell you everything from what you can/cannot put in your own body, to how you can educate your own child, is NOT the way it’s supposed to be.
And then back that decision up with small, steady action.
Today I invite you to listen in to today’s podcast as we discuss the ways in which you can choose to be free, how to back it up with real action, and what it really means to be a Sovereign Man.
(Or Sovereign Woman!)
Late last week, a consortium of financial regulators in the United States, including the Federal Reserve and the FDIC, issued an astonishing condemnation of the US banking system.
Most notably, they highlighted “continuing gaps between industry practices and the expectations for safe and sound banking.”
This is part of an annual report they publish called the Shared National Credit (SNC) Review. And in this year’s report, they identified a huge jump in risky loans due to overexposure to weakening oil and gas industries.
Make no mistake; this is not chump change.
The total exceeds $3.9 trillion worth of risky loans that US banks made with your money. Given that even the Fed is concerned about this, alarm bells should be ringing.
Bear in mind that, in banking, there are three primary types of risk, at least from the consumer’s perspective.
The first is fraud risk.
This ultimately comes down to whether you can trust your bank. Are they stealing from you?
MF Global was once among the largest brokers in the United States. But in 2011 it was found that the firm had stolen funds from customer accounts to cover its own trading losses, before ultimately declaring bankruptcy.
It’s unfortunate to even have to point this out, but risk of fraud in the Western banking system is clearly not zero.
The second key risk is solvency.
In other words, does your bank have a positive net worth?
Like any business or individual, banks have assets and liabilities.
For banks, their liabilities are customers’ deposits, which the bank is required to repay to customers.
Meanwhile, a bank’s assets are the investments they make with our savings. If these investments go bad, it reduces or even eliminates the bank’s ability to pay us back.
This is precisely what happened in 2008; hundreds of banks became insolvent in the financial crisis as a result of the idiotic bets they’d made with our money.
The third major risk is liquidity risk.
In other words, does your bank have sufficient funds on hand when you want to make a withdrawal or transfer?
Most banks only hold a very small portion of their portfolios in cash or cash equivalents.
I’m not just talking about physical cash, I’m talking about high-quality liquid assets and securities that banks can sell in a heartbeat in order to raise cash and meet their customer needs to transfer and withdraw funds.
For most banks in the West, their amount of cash equivalents as a percentage of customer deposits is extremely low, often in the neighborhood of 1-3%.
This means that if even a small number of customers suddenly wanted their money back, and especially if they wanted physical cash, banks would completely seize up.
Each of these three risks exists in the banking system today and they are in no way trivial.
Very few people ever give thought to the soundness of their bank, ignoring the blaring warning signs that are right there in front of them.
Every quarter the banks themselves send us detailed financial statements reporting both their low levels of liquidity and the accounting tricks they use to disguise their losses.
Now we have a report from Fed and the FDIC, showing their own concern for the industry and foreshadowing the solvency risk I discussed above.
Every rational person ought to have a plan B to hedge these risks. And I would propose three methods:
1) Transfer a portion of your funds to a much safer, stronger banking jurisdiction, preferably one with zero net debt.
2) Hold physical cash. Physical cash serves as a great short-term hedge against all three risks, with the added benefit that there’s no exchange rate risk.
All you have to do is go to your nearest ATM machine, take out a small amount at a time and build up a small pool of cash savings.
3) Hold gold and silver.
While physical cash is a great short-term hedge against risk in the banking system, gold and silver are excellent hedges against long-term risks in the monetary system and global financial system as a whole.
There may be a time where we are faced with the consequences not only of a poor banking system, but also of decades of wanton debt and monetary expansion.
At that point, the only thing that will make any sense at all is direct ownership of real assets.
[Editor’s Note: This letter was written by Tim Price, London-based wealth manager and frequent Sovereign Man contributor.]
If you’ve seen the movie The Usual Suspects, you know that wonderful line “The greatest trick the Devil ever pulled was convincing the world he didn’t exist.”
We believe the greatest trick central bankers ever pulled was convincing the world they were acting in the interests of anyone other than the banks.
With that in mind, it’s almost surreal to see former Fed Chairman Ben Bernanke making victory laps around the world to celebrate the launch of his new book, curiously entitled The Courage to Act.
Does it really take courage for unelected economic bureaucrats to print up trillions of dollars of taxpayers’ money in order to bail out Wall Street banks?
I’m sure it will certainly take courage if the taxpayer finally wakes up to the ruse before it fails.
And sooner or later, every ruse does fail, even when run by the world’s most powerful cartel.
The Fed, along with its cousins in Europe and Asia, is up against a force of nature in the form of the free market. A banking cartel can clearly achieve a lot in its own interest, but in the fullness of time, the market will win out.
To suppose otherwise is to believe that central planning works. As if putting Janet Yellen in charge of the Soviet Empire would have somehow averted the fall of Communism.
Here in the UK, we have a crime known as High Treason: the crime of disloyalty to the Crown. “Adhering to the sovereign’s enemies, giving them aid or comfort” is a High Treason offence.
So is “counterfeiting money”.
Destabilizing the monetary system to the point of potential collapse would probably qualify, we think, perhaps on both grounds.
So the next time a central banker (the Bank of England’s Chief Economist), or one of their banker buddies, proposes that the abolition of physical cash or the introduction of negative interest rates, is in the best interests of the taxpayer and not the banks, they should be grateful that we no longer have the death penalty for High Treason.
November 5, 2015
Sovereign Valley Farm, Chile
They called it the Bank Secrecy Act (BSA). But it’s one of the most poorly named pieces of legislation in US history.
They might as well have called it the “Bank Sell-Your-Customers-Out Act”, because that’s ultimately what it amounts to.
The BSA is a cornerstone regulation that requires banks in the Land of the Free to be unpaid spies of the government.
One of its many commandments is for banks to file ‘suspicious activity reports’ (SARs) when customer transactions might possibly indicate tax evasion, money laundering, or some nefarious criminal activity.
One of the most common types of SARs includes “Transactions With No Apparent Economic, Business or Lawful Purpose.”
It’s amazing that spending your own money without a clear purpose is considered suspicious now in the Land of the Free.
This is in effect financial pre-crime.
One key threshold is that banks must file a report for any deposit, withdrawal, exchange, etc. that involves $10,000 or more.
Back in 1970 when Richard Nixon signed this into law, that was a massive amount of money.
$10,000 would have bought you two brand new Chevy Corvettes with plenty left over. Median household income at the time was only $12,000.
Not that there’s any inflation, but $10,000 just doesn’t go as far as it used to 45 years ago.
Yet the currency threshold hasn’t changed a bit.
Perhaps that’s why banks today submit nearly 55,000 Suspicious Activity Reports (SARs) every single day.
And the BSA requirements extend not just to banks, but to nearly every industry that deals in cash, including: casinos, payday lenders, gold dealers, money changers, check cashers, etc.
Now they’re expanding further into “rewards-based crowdfunding platforms”, sites like Kickstarter which help entrepreneurs find money to start a business.
There’s even an entire agency devoted to making sure that all these companies are filing an appropriate number of SARs.
It’s called the Financial Crimes Enforcement Network (FinCEN).
And their big concern right now is that a “statistically significant” number of credit unions in the US haven’t filed a single SAR in nearly two years.
I find it quite convenient that the US government considers it suspicious when banks don’t rat out their customers.
It gives you a pretty clear snapshot of what the government thinks about its own citizens– that an entire agency is up in arms because Men in Caves might get funding on Kickstarter. It’s surreal.
The financial system has become completely Orwellian.
Just like law enforcement agencies who have sadly deviated from their original purpose of serving and protecting, banks simply no longer exist to be responsible custodians of other people’s money.
They make horrible bets with your hard-earned savings and maintain precariously illiquid balance sheets.
They’re supported by an undercapitalized deposit insurance fund and an insolvent government.
They’re constantly being fined for price fixing and market manipulation.
They treat you like a criminal if you try to withdraw too much of your own money.
They’ll freeze you out of your own funds in a heartbeat. They routinely report you to government agencies.
And your reward for all this trouble is a whopping 0.1% interest.
Stepping back and looking at the big picture, it’s pretty nuts to keep 100% of your life’s savings tied up in a system that is clearly rigged against you.
Fortunately there are alternatives.
The technology now exists for nearly every possible financial transaction—savings, borrowing, foreign exchange, money transfers, etc. to be conducted better, faster, and more secure without using banks.
And even if you find new financial technology to be a bit esoteric or complicated, at a minimum, consider at least holding 1-2 months’ worth of living expenses in physical cash.
On August 14, 1935, President Franklin Roosevelt arrived at his desk to sign the Social Security Act into law.
It had been a contentious legislative process, something like the Obamacare of its day.
Fiscally conservative politicians derided the program for its obvious long-term costs, the massive bureaucracy that it would create, and the huge tax increase that it represented on workers.
But Roosevelt was able to find support, and the law was passed.
And just before signing it, he proudly proclaimed that the law would go down in history “as a protection to future administrations of the Government against the necessity of going deeply into debt to furnish relief to the needy.”
Needless to say, that didn’t happen. Quite the opposite, actually.
Just like most western governments, the US government has gone deeply into debt to fund its social insurance programs.
Officially, the US government is now $18.5 trillion in debt, and Social Security is the biggest financial sinkhole in America.
Social Security’s various trust funds currently hold about $2.7 trillion in total assets; yet the government itself estimates the program’s liabilities to exceed $40 trillion.
And Social Security’s second biggest trust fund, the Disability Insurance fund, will be fully depleted in a matter of weeks.
The trustees who manage these massive funds on behalf of the current and future retirees of America are clearly concerned.
In the 2015 report of the Social Security and Medicare Board of Trustees they state very plainly:
“Social Security as a whole as well as Medicare cannot sustain projected long-run program costs…”, and that the government should be “giving the public adequate time to prepare.”
Now, we always hear politicians say that ‘Social Security is going to be just fine’. So this Board of Trustees must be a bunch of wackos. Who are these guys anyhow?
The Treasury Secretary of the United States of America, as it turns out. Along with the Secretary of Health and Human Services. The Secretary of Labor. Etc.
These are the folks who sign their name to the report saying that Social Security is going bust, and that Congress needs to give people time to prepare.
And prepare they should.
The US Government Accountability Office recently released a report showing that tens of millions of Americans haven’t saved a penny for retirement; and roughly half of Baby Boomers have zero retirement savings.
This means that there’s an overwhelming number of Americans pinning all of their retirement hopes on Social Security.
Bad idea. In a recently proposed resolution, H. Res 488, Congress states point blank that Social Security “was never intended by Congress to be the sole source of retirement income for families.”
Apparently they got the message from the Social Security Trustees and they want to start preparing people for the inevitable truth.
This is no longer some wild conspiracy theory.
The Treasury Secretary is saying it. Congress is saying it. The numbers are screaming it: Social Security is going to fail.
Ultimately this is a just another chapter in the same story– that government cannot be relied on to provide or produce, only to squander and fail.
Sure, their intentions may be noble. But this level of serial incompetence can no longer be trusted, nor should we be foolish enough to believe that some new candidate can fix it.
If you’re in your fifties and beyond, you’re probably going to be OK and at least get 10-15 years of benefits.
If you’re in your 40s and below, you have to be 100% prepared to fend for yourself.
Fortunately you have time to recover. Time to build. And time to learn.
Financial literacy is absolutely critical here, which includes the ability to both generate income and manage money, two things that aren’t taught in the government controlled education system.
You might also consider some lifestyle adjustments, which may include moving abroad where your money can go much, much further.
Ultimately, learning to rely on yourself is no easy task, but it is an incredible opportunity to become more free.
And in doing so, one day you will no longer panic about the decisions being made by incompetent bureaucrats, because you will be the one in control of your own fate.
It was back in May 2010 that the very first ‘real world’ Bitcoin transaction was conducted: 10,000 bitcoins traded for two Papa John’s pizzas.
Today that transaction would be worth nearly $4 million, probably making those the most expensive pizzas in the history of the world.
But back then it was considered revolutionary to trade a ‘digital’ currency, something that few people really understood at the time, for a real product.
People are still skeptical of digital currency. But the concept itself is not so esoteric.
As Jim Rickards reminded me some time ago, MOST currencies are digital, even the US dollar.
The Federal Reserve’s estimate of US dollar money supply is $12.1 trillion; yet only about 10% of that is physical cash in circulation.
The rest—more than $10 trillion—is simply a series of entries in banks’ core system databases.
In other words, the money in your savings account isn’t piled up inside your bank’s vault. Far from it.
Your savings doesn’t really exist. It’s all just digits in an electronic account ledger.
And yet we transact with these digital currency units all the time.
Whenever you use a credit card or send a bank transfer, you’re using the digital form of your currency.
This concept actually dates back to the Middle Ages when Italian bankers realized that they could conduct their transactions without physical money.
Rather than risk transporting gold coins across the countryside, medieval bankers merely annotated their ledgers with debit and credit entries.
They didn’t have the computers, but it was the same concept– they kept track of transactions and balances on account ledgers, instead of with physical money.
In the late 1960s, the IMF took this idea to the next level when they created their own digital currency for the exclusive use of governments and central banks.
They’re called Special Drawing Rights (SDR, or XDR).
And even though the IMF’s balance sheet totals nearly 300 billion SDR (around $211 billion USD), not a single SDR exists in physical form.
100% of the SDR money supply is digital. Just like Bitcoin, it exists in computer databases, making it the digital equivalent of a 500-year old accounting system.
There is one key difference, though.
No one controls Bitcoin. But dollars, euros, SDR, etc., are controlled by central banks.
Federal Reserve, Banque du Canada, Bank of Japan, etc. all decide how much of their currencies to create.
The SDR in particular is a total scam; the entire reason it was created was because the system didn’t have enough real savings.
So they ‘solved’ the problem by creating a new digital currency that allowed them to easily conjure more money out of thin air.
But the even bigger risk is the commercial banks, which control your account balances. They keep all the records and ledgers, they hold all the keys.
This means that the ‘money’ in your savings account isn’t really yours. You don’t actually have any savings.
What you really have is a claim on your bank’s savings. Your account is just an entry in the liability column of their digital ledger.
When you make a deposit, you’re trading your money for a banker’s promise to repay you.
And there are countless regulations giving them the authority to break that promise.
(If you want to test this premise, try withdrawing $25,000 just to see how your bank reacts.)
That’s the system that controls your wealth today. It’s almost entirely digital. And it’s run by unelected bureaucrats whose interests are not aligned with your own.
This is not a free system. And any rational person should consider parking at least a rainy day fund outside of this system.
Bitcoin is certainly one option.
No one controls it, which is a novel concept in an era when governments and central banks control everything from the value of your savings to what you can/cannot put in your own body.
But if Bitcoin isn’t your flavor just yet, consider other options.
Gold and silver still have incredible merit since they cannot be conjured out of thin air by central banks.
And even holding physical cash is a much better alternative than keeping everything inside a highly centralized banking system.
World champion boxer Roy Jones Junior is something of a Renaissance Man.
Roy Jones raps. Roy Jones fights. Roy Jones farms. Roy Jones designs fragrances (‘the scent of victory in a bottle’).
Roy Jones refers to Roy Jones in the third person. And Roy Jones loves Roy Jones.
This latter quality was on display back in August when the Champ sat down with Russian President Vladimir Putin during a visit the disputed territory of Crimea, formerly/kinda sorta part of Ukraine.
After the initial love-fest wore off, the conversation ended like this:
Vladimir Putin: I hope you will succeed in business here in Russia as well.
Roy Jones: That’s why I want to come here. That’s why I’m also here. Because I want to aks you about maybe having a passport to go back and forth so that I can do business here. Because all the people here seem to love Roy Jones Jr. And I love when people love me.
Vladimir Putin: Your name is very well known among sports and boxing fans in Russia. If you plan to spend a significant part of your life working in Russia, we would certainly be happy to fulfill your request to receive a Russian passport, Russian citizenship.
So, Jones basically asked Vladimir Putin point-blank for a Russian passport. And not only did Putin agree, but he actually made it happen.
Roy Jones Jr. was granted Russian nationality less than a month later. Last week, he traveled to Moscow where he was awarded his passport from Vladimir Putin directly.
Now I’m sure there are some who will blast Jones for being ‘unpatriotic’ or some such nonsense.
After all, how could a US citizen ever possibly desire another passport, let alone the passport of ‘Marica’s #1 arch-enemy?
He did it because a second passport just makes practical sense.
Look at Jones’s case: if he wants to travel to Russia for business, or even for a fight (he takes on Enzo Maccarinelli in Moscow next month), he has to jump through a bunch of ridiculous hoops to obtain a visa.
Now, as a Russian citizen, he can enter the country without any problems.
It also opens up several other countries that he can travel to without a visa, or other hassles.
US citizens traveling to Argentina, for example, must pay a $160 reciprocity fee before entering the country; it’s Argentina’s way of doing to Americans what the US government does to Argentine citizens.
(Canadians and Australians have the same challenge.)
But Russian passport holders can enter Argentina visa-free, fee-free.
I’m not trying to convince you that a Russian passport is the greatest thing since the invention of the wheel. Far from it.
But the point is to look at a passport for what it is: a tool.
It’s just a piece of paper; a passport doesn’t define who you are as a person, and it’s not something to get emotional about. It’s a practical tool that has tremendous advantages.
Right now if you only have a single passport, your entire life is subject to the command of a single government– one that has likely reduced your freedoms, and whose interests are not aligned with yours.
Having a second passport fixes this problem by ensuring that not all of your eggs are in one basket.
And it opens up more places to live, work, travel, invest, and do business… without having to be 100% reliant on a single bankrupt government.
More options mean more freedom. If something happens in one country, you always have a Plan B. This just makes practical sense.
Now, Roy Jones Jr. is a celebrity-ish, so he was able to obtain citizenship directly from Vladimir Putin in one month.
But don’t be jealous. He had to spend twenty-six years getting punched in the face to get famous enough to do this.
So in reality it took Roy Jones Jr. 26 years and one month to obtain a second passport.
You can get a second passport in a tiny fraction of that time.
In Singapore, Argentina, and Peru, you can qualify to apply for citizenship in as little as 2 years.
Israel’s Law of Return provides a path for all Jews to obtain citizenship.
And if you happen to have ancestors from Ireland, Poland, Italy, etc., you might end up with almost instant citizenship.
Every country on the planet has its own laws governing passports and citizenship. There are literally dozens and dozens of options.
There are probably several that are right for you. And as far as I am aware, none of these options requires getting punched in the face.
[Editor’s note: What follows is Tim Price’s hilarious, satirical take on a recent Financial Times fawning article on “Lunch with Ben Bernanke” by associate editor Martin Wolf.]
After literally saving the universe while at the helm of the US Federal Reserve, its former chairman is now quietly pursuing lucrative speaking engagements and sinecures at hedge funds. Marty Fox meets him in Chicago:
At the allotted time of 2pm I am sitting at a booth at Bavette’s Bar and Boeuf steakhouse in Chicago. My mobile phone rings. It is Neb Nerbanke’s personal assistant. It transpires that I have gone to the wrong restaurant.
Fortunately it only takes my chair carriers five minutes to carry me hurriedly to the right venue. The restaurant is empty, cold and dark. It is also raining. Inside. Which is weird.
Nerbanke, 61, is waiting for me. He is wearing a plain brown suit and a luminous cravat. I have met him often since he became a governor of the US Federal Reserve in 2002. I am very important. He is very important. We are both very important.
It was good fortune indeed that this academic, scholar, raconteur, philosopher, lounge singer, poet, ladies’ man, acrobat and healer of sick people was chairman of the Fed during the biggest crisis that the Fed ever caused.
His new book, ‘I Am Neb Nerbanke’, provides a fascinating account of the effort to save the world from yet another Fed-caused catastrophe.
I start by praising his cravat, and then asking him how much the book tour will net him. “A few million dollars,” he replies.
I suggest he will probably be considerably richer when it is over. “Yes,” he answers.
And what will he be doing afterwards ? He reels off a list of lectures that would probably intimidate someone less intelligent than I.
Meanwhile he is based at the Money Institute, a centrist lobby group in Washington. He is doing some consulting. A little plastering. Some juggling. He plays the Andean nose flute. He does weddings. He is also on the speaker circuit.
The waitress takes our orders. I choose devilled peasant with a side order of minced pauper. He selects grilled sharecropper lightly drizzled with a blue cheese sauce.
I ask him whether he still takes an interest in the economy. “Why should I start now ?” he replies. I snicker, sycophantically.
I ask him how he coped with the mild criticism sometimes leveled at the Fed. “Well, haters gonna hate,” he replies, toying with his portion of sharecropper and nibbling at it from time to time.
Many critics point out that the Fed essentially funneled billions of dollars to Wall Street while trashing the rest of the economy and destroying savers in the process.
So what does he say to those critics who accuse him of being an academic, living in an ivory tower far away from the concerns of ordinary people?
“f(x)=a0+Z(ancosnX+bnsinL)sin a+cos Xnx-b(a/xLn).”
I add that after so many trillions of dollars were conjured by the Fed out of thin air, many critics still fear the prospect of hyperinflation. “No. Because we’ve never had hyperinflation in the US. So clearly we never can and never will. Only an idiot would think that.”
I hate idiots, too. But I love Neb Nerbanke. And I think he loves me back.
What about QE? Skeptics might say that having expanded the Fed’s balance sheet by $4 trillion, QE has done nothing to aid the wider economy or the man in the street – it’s merely made bankers richer.
Can I ask you about the efficacy of QE? “No.”
Fair enough, I might add. On to communications policy. The Fed has had its fair share of critics over the much-heralded strategy of ‘forward guidance’. So what do you say to those critics who accuse the Fed’s guidance of being difficult to follow?
“Fnnr gurrnn pffrumph trrwzzle zwiqshlgrpff twngzkzk arpffqfpkwzkk !”
Thank you. Moving on, could the Fed have prevented the failure of Lehman Brothers in 2008? “Absolutely not. It was completely unavoidable. Besides, Goldman Sachs asked us not to.”
But didn’t the Fed then bail out every other Wall Street firm and allow the likes of Goldman Sachs to convert to a bank holding company and thus qualify for Fed liquidity assistance direct, even though it isn’t actually a bank? “I must be going, Marty. As ever, it’s been a pleasure.”
I tell him the pleasure was all mine. Mmm. I worship Neb Nerbanke. I would willingly sell my house and all its contents just to have the untrammelled joy of sucking at the soles of his shoes.
Anyhow, that’s what our lunch was like. Just another day speaking truth to power.
McMorack & Schmuck’s
48E Upper Wacker Drive
Devilled peasant with minced pauper $22.99
Grilled Alabama sharecropper in blue cheese sauce $27.74
Double espresso $6.99
Fed balance sheet expansion to date $4,400,000,000,000
High up Yuntai mountain in China’s Henan province is a glass bridge that lets tourists walk out across the sky and look down at the lush valley floor over 3,000 feet below.
Glass walkways like this are quite popular across China, stunning visitors with both beauty and the thrill of danger.
Recently, this one cracked. And many tourists took to social media claiming that pieces of glass in the walkway broke away altogether.
The government of course is spinning a different story.
They reported that the glass walkway is completely safe, even though they’ve decided to close the bridge ‘temporarily’.
This is probably the best metaphor for the entire Chinese economy right now, because the glass is cracking everywhere.
China’s manufacturing sector has been weak for months, and its industrial sector is completely in the dumps.
This week the deputy head of the China Iron and Steel Association said that “China’s steel demand has evaporated at unprecedented speed as the nation’s economic growth slowed.”
There are more signs of contraction all across the economy.
Most notably, years and years of idiotic capital allocation are beginning to muster serious consequences.
In an effort to stimulate growth and create employment, China’s national, provincial, and local governments have spent unfathomable amounts of money on useless infrastructure, primarily funded with debt.
You’ve heard of these infamous bridges to nowhere and empty train stations.
Now several Chinese companies have started to default on these debts, including two state-owned enterprises.
The bursting of this debt bubble has already caused major problems in the banking sector (which is a massive 3x the size of China’s economy), as well as in financial markets.
Chinese stocks saw a major collapse several months ago, and we may see a major crisis in the banking sector very soon.
Local Chinese with any real savings have been scrambling for months to move their money offshore.
And this ‘capital flight’ is reaching epic levels. In August alone, $141 billion was sucked out of China. That’s more than the entire GDP of Nevada or Ukraine.
Sooner or later (probably sooner) the combination of loan defaults and capital flight is going to cause major problems in the Chinese banking sector.
Chinese banks simply won’t have enough liquidity, or reserve capital, to remain operating.
I expect we’ll see the mother of all bank bail-ins and withdrawal controls in China.
But what really gets me is the Chinese government’s Jekyll and Hyde approach to the crisis.
The Chinese are known for being strategic thinkers. This goes back thousands of years to the days of Sun Tzu. Leaders don’t act haphazardly, they make long-term plans and execute in a disciplined manner.
But it’s becoming pretty obvious now that the Chinese government is in REACTION mode.
The stock market crash over the summer wasn’t planned. So they reacted. Poorly, at that.
In response, they jailed stock speculators, and even did the unimaginable–encouraging citizens to borrow money using their homes as collateral, then invest the loan proceeds in the stock market.
They promised several times to not devalue the renminbi. But then they did.
Then in order to stem the debilitating capital flight, they imposed even more severe capital controls and withdrawal restrictions for Chinese citizens traveling overseas.
But then yesterday in a nod to the IMF, they announced a pilot program to EASE capital controls and allow citizens to directly purchase foreign assets.
Last week they went on a crazy anti-corruption binge, banning excessive drinking, golf, and even extramarital sex.
And now, poof, they ended three decades of the One Child Policy.
None of this makes any sense. There’s no common thread or direction in Chinese policies anymore. No more long-term thinking.
Now it’s all extremely reactive. The grand plans and strategy have gone out the window, and instead they’re taking it day-by-day, making it up as they go along.
To me, this is a sign of how bad things really are.
Their system is based on a bunch of unelected policymakers sitting in a room and making decisions to control one of the largest economies in the world.
This just doesn’t work.
As China’s example shows, there are too many moving parts, too many levers to control. And it’s impossible to expect that some committee is going to get it right without eventually faltering.
But as you can probably realize, it’s not just the Chinese who have engaged this absurd system. Most of the world does it too. In fact, the West invented it.
The US and Europe have their own unelected committees sitting in rooms making policy decisions that affect the lives and livelihoods of everyone engaged in economic activity.
And for us to simply sit back and trust them to be smart enough to flawlessly steer the ship is incredibly foolish.