Thirteen years ago my life changed forever.
Colin Powell, then US Secretary of State and the most credible person in George W. Bush’s cabinet, made the case for war in Iraq on February 5, 2003.
As a young military intelligence officer at the time, watching from a makeshift army base in Kuwait not far from the Iraq border.
Back then I was a true believer, trusting that the government was a force for good “making the world safe for democracy. . .”
But that night it all changed.
Powell told the world unequivocally that Iraq had weapons of mass destruction, an assertion that history has proven categorically wrong.
But within the intelligence community, many people knew the appalling truth immediately.
That night it became clear to me that the government was lying and that the whole case for war was being fabricated.
It was crushing, like finding out everything I’d been told throughout my life was total bullshit.
So for the first time, I broke out of the spell and began questioning. Everything.
I started learning about the extraordinary political power of the military industrial complex that President Eisenhower warned about.
That led me to the fraud of many previous wars going as far as the Mexican War in 1845, one deeply criticized by Abraham Lincoln himself.
That led me to the Constitution, to which all military officers swear an oath to support and defend…
… and it surely didn’t seem like supporting or defending the Constitution in waging an ill-conceived, illegal war.
Needless to say I couldn’t talk to my professional colleagues. Everyone was so gung-ho, I felt like an outcast.
When I returned home, things didn’t improve.
While I was away the country had noticeably turned into a police state.
Yet people seemed oblivious to the change, drinking in the propaganda like a spiked punch bowl.
All the loud, bombastic nonsense and pledges of allegiance were merely illusions masking modern day serfdom.
It was the summer of 2004, I remember hearing on TV that the Libertarian Party’s national convention was starting in Atlanta.
I immediately hopped in the car hoping to find some sympathetic minds.
And at the convention I did meet some wonderful, freedom-minded people.
But the event was an unproductive circus, something like a cross between a high school pep rally and a Star Trek convention.
People in costume ran up and down the aisles chanting for their favorite candidate and getting into impromptu debates about the Constitution and Ayn Rand.
As nice and intelligent as everyone was, it felt like a giant freedom pity party.
I didn’t just want to complain. I wanted to fix it. I wanted to do something about it. And solutions were sorely lacking.
So I started educating myself more.
I dove into the federal balance sheet. I learned about the petrodollar and the debt.
That led me to the complete scam of central banking, fiat currency, and the fractional reserve system.
I realized that the political and banking elite have given us more war, instability, and epic financial crises.
They’ve turned Western civilization into a giant police state. And they’ve managed to brainwash the great masses so effectively that the people are crying out for more.
And after this emotional, gut-wrenching awakening, I spent years traveling to more than 100 countries looking for freedom and opportunity.
Eventually I learned that education, prudent planning, and global thinking can rebuild much of our stolen liberty.
Yes, things are crazy.
Freedom is in decline. Governments are bankrupt. Central banks are borderline insolvent.
The financial system is in precarious condition barely held together by a patchwork of negative interest rates, currency manipulation, and misguided confidence.
We award our most esteemed prizes for intellectual achievement to phony scientists who tell us to spend our way into prosperity and borrow our way out of debt.
We give absolute power to control the money supply (and hence manipulate the price of nearly everything) to unelected bureaucrats who have a track record of failure.
Yet we call ourselves ‘free’.
It’s complete madness. And it gets crazier with each passing month.
But history shows that in any episode of great turmoil, there are always winners and losers.
I learned that by taking some basic, sensible steps, it’s possible to drastically eliminate my exposure to the risks and avoid being a loser.
So no matter what happens or how crazy things get, I know I’ll be OK.
For years I’ve called this my “Plan B”.
I know I won’t be worse off for being able to grow my own organic food, holding some savings in a well-capitalized bank outside of my home government’s jurisdiction, or keeping some physical gold and cash.
Having another passport gives me more freedom to live, work, and travel.
Legally reducing my tax burden helps me vote my conscience with my dollars and put my money where my mouth is.
I’ve learned that all of these steps make sense no matter what happens. Or doesn’t happen.
But should the negative trend in freedom and global finance get worse, I know I’ll be OK.
This confidence has allowed me to focus on all the incredible opportunities I’ve seen.
Institutions that have existed for centuries are now being disrupted by digital technology.
Banking as we know it, for example, is finished thanks to digital technology.
The digital age is even changing the way we organize ourselves as a society.
Geography no longer matters, and nearly everything is global.
A billion people are rising into the middle class in Asia and Africa. Countries are emerging from war and isolation. Wealth and power are shifting.
These extraordinary changes bring extraordinary opportunity.
So as crazy as things are, I think this is an incredibly exciting time to be alive.
I’m grateful to be active in a time that future scholars will likely regard as one of the most tumultuous and revolutionary in history.
And I’m grateful for having started the philosophical journey that began thirteen years ago today.
It’s news that seems ripped from the pages of The Onion. Or perhaps Atlas Shrugged.
But incredibly enough it’s actually true: earlier this week, Congress proposed a new law authorizing the US Postal Service to provide banking and financial services.
It’s called the “Providing Opportunities for Savings, Transactions, and Lending” Act, abbreviated as… wait for it… the POSTAL Act.
And it provides explicit authorization for them to provide banking services including checking and savings accounts, money transfers, and “other basic financial services as the Postal Service deems appropriate in the public interest.”
Bank of the Post Office. It’s incredible when you think about it.
The US Postal Service hasn’t turned a profit in a decade.
As a matter of fact, its total accumulated losses now exceed $51 billion, easily ranking it among the least successful companies in history.
And the only way USPS can continue to maintain its operations is with regular bailouts from the American taxpayer.
The statistics are just horrendous. Mail volume is down dramatically, which means that revenue continues to fall.
Yet the Postal Service’s expenses and pension costs keep growing, along with its debt.
Just like the US government, the US Postal Service has its own debt ceiling that’s set by Congress.
USPS reached this debt ceiling back in 2012 and has remained at that level for years.
The only way they survive is by moving liabilities off-balance sheet and regularly going back to Congress with hat in hand.
Wow, talk about a responsible financial partner– this sounds like EXACTLY the place we should want to deposit our hard-earned savings!
Seriously, why would these people even consider an idea so absurd as to let an organization with a history of failed operations take over people’s savings?
Simple. It’s a cheap source of capital.
The Postal Service desperately needs cash. So what better way to raise capital than to sucker unsuspecting Americans into opening up Postal bank accounts?
When you deposit money in a bank, you are effectively loaning the bank your money.
In exchange, they pay you a whopping 0.01% interest.
This is what almost all banks do– they borrow money from depositors and (hopefully) make credible investments and loans with other people’s money.
Except in this case, the Postal Service needs to ‘borrow’ depositors’ savings to cover losses from its other operations.
There’s a term for this. It’s called a Ponzi Scheme.
Even before his coronation in 1626, King Charles I of England was almost bankrupt.
His predecessors King James and Queen Elizabeth had run the royal treasury down to almost nothing.
Costly war and military folly had taken its toll. The crown had simply wasted far too much money, and brought in too little.
To make matters worse, King Charles was constantly at odds with parliament.
The English government was completely dysfunctional, with constant bickering, personal attacks, and very little sound decision-making.
Parliament refused to pass the taxes that Charles needed to make ends meet. But at the same time, the King was legally unable to levy his own taxes without parliamentary approval.
So, faced with financial desperation, he began to look for alternative ways to raise revenue.
One way was relying on practically ancient, obscure laws to penalize his subjects.
The Distraint of Knighthood, for example, was based on an act from 1278, roughly three and a half centuries before Charles’ coronation.
The Act gave him the legal authority to fine all men with a minimum level of income who did not present themselves in person at his coronation.
Charles also commandeered vast amounts of land, restoring the boundaries of the royal forests to where they had been during the time of King Edward I in the 13th century.
He then fined anyone who encroached on the land, and resold much of it to industries that were supportive of his reign.
King Charles even resorted to begging; in July 1626, he requested that his subjects “lovingly, freely, and voluntarily” give him money.
When that didn’t work, the King levied a Forced Loan, effectively confiscating people’s funds under the guise of ‘borrowing’ it.
He raised about £250,000, the equivalent of about $7.5 billion today.
Emboldened by his success, Charles eventually seized assets directly, including all the gold on deposit being held at the Royal Mint– money that belonged to the merchants and goldsmiths of England.
At one point Charles even forced the East India Company to ‘loan’ him their pepper and spice inventory. He subsequently sold the products at a steep loss.
If any of this sounds familiar, it should.
Today there is no shortage of nations facing fiscal desperation. Most of Europe. Japan. The United States.
In the Land of the Free, the government has spent years… decades… engaged in the most wasteful folly, from multi-trillion dollar wars to a multi-billion dollar website.
US debt just hit $19 trillion a few days ago. And it’s only going higher.
We can already see the government’s financial desperation.
Over the years, the government has effectively levied a ‘forced loan’ totaling more than $2.6 trillion on the Social Security Trust Fund, whose ultimate beneficiaries are the taxpayers of the United States.
Bottom line, they’re ‘borrowing’ YOUR money.
Last year the government stole more from Americans through ‘Civil Asset Forfeiture’ than all the thieves in the United States combined.
In December, the US government confiscated $19.3 billion from the Federal Reserve, which, by the way, was already very thinly capitalized.
Even if you want to believe the propaganda, it’s clear that these are not the actions of a healthy, solvent government that embraces liberty.
In fact, the government published over 80,000 pages of laws, bills, regulations, and executive orders last year. Just this morning they published another 308 pages.
It’s impossible for anyone to keep up with all of these rules. And yet each can carry civil and criminal penalties, including a fine now for not having health insurance.
As Mark Twain used to say, history may not repeat, but it certainly rhymes.
Financially insolvent governments of major superpowers do not simply go gentle into that good night.
They don’t suddenly turn over a new leaf and start embracing economic freedom.
Instead, they get worse. More desperate. More destructive.
Should we honestly believe that they can continue racking up more debt than has ever existed in the history of the world without any consequences?
This is madness. At some point, fiscal reality always catches up. Maybe not at $19 trillion. Maybe not even at $20 trillion.
Maybe it takes 3 months. Or 3 years. But somewhere out there is a straw that can break the camel’s back. And that has serious consequences.
Never forget that if something is predictable, then it’s also preventable.
And facing such obvious trends, it makes all the sense in the world to take some simple, rational steps to put together your own Plan B.
In case you missed it, yesterday we alerted you that the United States government has now officially accumulated $19 trillion in debt.
This time it took them just 427 days of printing to pile on this last trillion dollars, compared to the over 75,000 days it took to rack up the first trillion dollars in debt.
They’re definitely getting better at this.
The thing is—most of the mainstream new sources that have printed this news still aren’t sounding the alarm.
What is another $1 trillion in debt when the government can just keep printing?
After all, they claim, we owe it to ourselves.
And they’re right.
The government owes most of this debt to you.
YOUR pension fund.
The banks where you hold YOUR money.
The central bank that controls YOUR currency.
Check out this infographic we’ve put together to see for yourself how this all breaks down:US public debt timeline
Create your own infographics
On October 22, 1981, the national debt in the United States of America hit $1 trillion for the first time in history.
It had taken the US federal government over two centuries to reach that mark. And in that period, America had won its independence and built a nation from scratch.
They created an army and a navy, and used them both to aggressively expand the nation’s domain.
They fought an incredibly bloody civil war in dispute over the most fundamental concepts of freedom.
They engaged in worldwide imperialism, stretching the country’s influence to faraway overseas colonies.
They suffered through the Great Depression and introduced one of the most expensive public spending programs in history.
They fought two world wars and defeated the Nazis.
They developed nuclear technology. They sent people into space.
And all of that– across over two centuries of US history– collectively registered one trillion dollars in debt.
(More than half of that period was an era devoid of any income tax whatsoever!)
Yet despite taking two centuries to hit $1 trillion in debt, it took just a few decades to add another $9 trillion, growing the debt ten fold.
On September 30, 2008 the debt crossed the $10 trillion mark for the first time. And it’s never looked back since.
Now, in that 27-year period from 1981 ($1 trillion in debt) to 2008 ($10 trillion in debt), one could argue that the US had defeated the Soviet Union making the world “safe for democracy”.
They waged war in the Middle East multiple times on multiple fronts.
They waged the War on (of) Terror.
And when financial crisis struck yet again, they bailed out the US banking system.
Look, I disagree with the vast majority of this spending.
It turns my stomach to think about all the debt that was accumulated to bail out irresponsible banks, wage wars, or engage in genocide.
But even though I don’t agree with all of it, it’s at least clear where the money went.
For the first $1 trillion in debt, there were some pretty tangible results. Independence. Defeating the Nazis. Etc. Big stuff. There was some return on that investment.
For the next $9 trillion, you could at least argue that there were some actual results, like vanquishing the Soviet Union.
Today, less than eight years after hitting $10 trillion, the US government reports that it hit the $19 trillion mark (which technically happened on Friday).
But what do they have to show for it?
It’s not like anyone defeated the Nazis or Soviet Union over the last 8 years.
By 2008 the banks had been bailed out, and the world had supposedly been saved.
Where did all the money go? What real, tangible results do they possible have to justify the last $9 trillion in debt?
Even more strikingly, compare the first trillion dollars in debt (which took two centuries to accumulate) versus the most recent trillion (which took 14 months).
What grand act took place in the last 14 months to justify another trillion dollars in debt? Nothing.
Yet in the past 14 months, both the Disability Trust Fund and the Highway Trust Fund ran out of cash.
And the Federal Reserve became insolvent on a mark to market basis.
It’s extraordinary. They have reached such diminishing returns now that they can manage to squander a TRILLION dollars and have absolutely nothing to show for it.
To me, that’s the scariest part of the debt story.
It’s not the total amount of the debt.
It’s how quickly and easily they can fritter away $1 trillion dollars on absolutely nothing without any trace of benefit.
It doesn’t take a rocket scientist to see where this is going. In fact, even the government knows where this is going.
The Congressional Budget Office recently reported that government debt will reach $30 trillion within a decade.
Given that it took them just 9 years to rack up the last $10 trillion, I’m sure that’ll happen much more quickly than they expect.
But whether you decide to believe me or the government, either way it’s clear that this is only going to get much worse.
This leaves you with essentially two options:
1) Stick your head in the sand (or somewhere else) and pretend like this can go on forever without consequence;
2) Recognize how ludicrous this situation is, and prepare for the obvious consequences.
It’s been nearly a dozen years now that I’ve been living abroad as an expat.
In that period I’ve lived in at least half a dozen countries and traveled to more than 100 on all seven continents.
People often ask me questions like when am I going ‘back home’, as if my leaving the mother ship was the result of some temporary insanity.
But when I look back on that decision, it really feels like one of the best I’ve ever made in my life.
Being an expat can really be an exceptional adventure (though certainly one with its ups and downs).
As I explain to people who find the lifestyle unusual, foreigners almost always get better treatment wherever they go.
Governments treat their own citizens like medieval serfs… dairy cows to be milked dry and taxed into the grave.
But with foreigners it can be the exact opposite as governments often need to attract new investment capital or skilled labor.
They roll out the red carpet with special incentives; here in Chile, for example, the government has a lengthy tax-free regime on worldwide income for foreigners, as well as a brand new foreign investor incentive.
In Panama they created the famous ‘pensionado’ incentive program to attract foreign retirees many years ago.
Plus as a foreigner, you’re pretty disconnected from the local system.
When you’re born and raised in a country, the government talons dig deeper into your flesh every year.
But when you move to a new country, they don’t have decades of records on you.
It’s like starting over with a blank slate where you can actually live below the radar quite easily.
Foreigners can even have an easier time in the US, especially non-resident aliens.
Bloomberg recently demonstrated how the US is the #1 tax haven in the world, something that we have been saying for years here at Sovereign Man.
Foreigners can register an anonymous Delaware LLC and stash ill-gotten gains in the US banking system with total privacy. US citizens would go to jail for this.
Foreigners can also invest in US stock markets and pay absolutely zero capital gains tax. Citizens, on the other hand, can pay 23.4% up to 39% or more.
Taxation is actually a major benefit of being overseas.
Most nationalities don’t tax their non-resident citizens.
A French couple, for example, can completely (and legally) escape France’s tax insanity simply by moving to Panama.
US citizens are nearly alone in the world in being taxed on their worldwide income, even if they don’t live in the US.
But there are plenty of exceptions.
My tax bill last year was $0.00. And I expect to pay zero tax this year, all because I’ve taken advantage of the Foreign Earned Income Exclusion which allows you to earn over $100,000 tax-free subject to basic foreign residency requirements.
Your spouse can take advantage of it as well, doubling the benefit. Plus you can receive a housing deduction as well, boosting your tax savings to $80,000 or more.
Imagine having an extra $80,000 in your pocket each year.
Better yet, imagine the feeling of no longer providing financial support to a government that murders children by remote control drone strikes.
With the tax savings alone, you may achieve a huge bump in your lifestyle, especially as the cost of living abroad can be lower than back home.
Even here in Chile, which is nowhere near the top of the list of cheapest places in the world, you can buy a small organic farm for about $250,000.
That price gets you about 10 acres of mature, productive fruit trees that generate a healthy profit, plus 15 acres more for a private garden, plus a well-constructed home, plus multiple sources of water.
All of that in a lovely valley with expansive views of the Andes and 300+ days of sunshine annually, about 3 hours from the capital.
One of the things that I value most as an expat is being left alone– especially being left alone to do what I want with my own property.
I’ve had three different houses built in this country alone.
And despite all those projects, I have applied for a grand total of zero permits, licenses, and other nonsense. I just sent in crews and started working.
Granted, there were probably some regulations that I violated. But no one seems to care.
That’s been my experience in many countries around the world as a foreigner– there’s a general feeling of being totally disconnected from the state.
You may be thinking right now, “Sounds great. I’d love to escape this madness and live a better, cheaper, more profitable, more free lifestyle abroad. But I have too many constraints.”
I get it. Family. Work. Not everyone can just pick up and go.
But even if you’re not able to walk away right now, it still makes sense to have a plan.
What are the key triggers that would make you ready to walk away? What resources would you need to make that happen? Where would you go? What steps can you take in the meantime to increase your freedom?
If you start educating yourself now, you can learn enough to set goals and make a plan to achieve them.
It’s just like anything else. You’re not going to double the size of your savings without first understanding the markets and planning your investment strategy.
You’re not going to get in shape without first learning about diet and nutrition, and then planning out your meals and workouts.
Good things require a little bit of effort and investment. So does freedom. But you can get there.
If you’d like help, I’m going to be holding a webinar soon, designed to teach you about tools and tactics that are necessary in creating your own Plan B.
For now, I’m not planning to charge anything for the session, so you can sign up here for more information on how to attend absolutely free.
This week I’ve been down in Southern Chile with the Board of Directors of our agricultural company.
It’s summertime right now, and the weather is absolutely gorgeous.
Last night, after a long day visiting one of the farms I had a chance to sit down with Tim Price to share a bottle of our very own Sovereign Valley wine and record a podcast.
It’s been about two months now since the last episode, so I invite you to listen to our comeback with the Podcast Awakens.
Over the course of a few glasses we dive into discussion about oil prices, financial markets, and an entire investment class that most people haven’t even heard of. One that’s likely to do VERY well this year.
We invite you to clink glasses with us and listen in as we share the best kept secret in finance.
Let’s take a moment to compare the world today to before the Global Financial Crisis struck roughly eight years ago.
In this short period of time, US federal government debt has DOUBLED.
The Federal Reserve now holds $2.4 trillion of that debt, up from $479 billion.
Interest rates, which were between 2-4%, are today just a hair above zero.
The Federal Deposit Insurance Corporation, which is expected to guarantee bank accounts, now has liabilities 530% greater than the cash and cash equivalents they are holding, compared to just 14% before the crisis.
Meanwhile, the banks that were deemed “too big to fail” 8 years ago are now even bigger, yet engaging in similarly foolish practices and accounting tricks.
In “saving” the system, all governments did was prevent anything from being actually fixed.
And in the process, they exhausted all the tools at their disposal.
The system is more precarious than ever, and eventually these bankers’, politicians’, and bureaucrats’ bad decisions will catch up with them.
To prevent your life’s savings from being the victim of others’ stupidity and misjudgement, one important (and obvious) step is to consider moving a portion of your savings into a safer, more stable jurisdiction abroad.
How can an overseas bank account see you safely through crisis? Let me explain—Protection from Financial Shocks
Threat 1: Your bank is highly illiquid and potentially insolvent.
Think your bank actually has your money? Guess again.
Most people don’t give a second thought to where they deposit their money, assuming that if it’s been approved by the government as a financial institution that it must be safe.
Unfortunately that didn’t work back in 2008, and it won’t work now.
Most Western banks in the West, encouraged by government guarantees, keep very little in reserves and loan as much as they possibly can.
This can give them very high returns when the market is going strong, but is a dangerous bet in case things go south.
If confidence in a bank wanes and a large number of customers decide they want their cash, a bank could become completely illiquid.
And if the market falters and a significant number of the banks’ loans and investments go bad, they could quickly become insolvent.
Both of these things can literally happen overnight, and suddenly depositors can find themselves cut off from their savings. Or worse.
Unfortunately the FDIC, which insures these deposits, is in no position to bear this burden as the FDIC itself admits that it is undercapitalized.
Securing your assets in this case comes not just from putting your savings into any institution overseas, but into a foreign bank with ample reserves in a stable, well-capitalized jurisdiction.
Shifting yourself from a high-risk to a low-risk environment simply means that you’re less likely to face this threat to your savings in the first place. It’s the logical thing to do.Protection from Asset Seizure
Threat 2: Your assets can be frozen in an instant.
You may not even know it, but US banks filed 1.6 million suspicious activity reports (SARs) last year. Chances are that your bank submitted one about you.
Even withdrawing or transferring a low 5-figure amount can trigger the bank to submit a suspicious activity report, as they are forced to spy on and rat out their customers.
If some government agency decides that your financial transactions are potentially linked to illicit activity they can seize your account with just one click. They don’t need to have any proof of actual illicit activity to do so, it is solely up to their discretion.
Of course you can sue them to try to prove your innocence, but with your accounts frozen what funds would you use to do that?
Here, having an account overseas in a foreign jurisdiction means that for whatever reason, your home government can’t freeze with just a phone call.
It’s a great way to keep some funds out of their immediate control.Protection from Capital Controls
Threat 3: Bankrupt governments almost invariably resort to capital controls. Are you willing to bet it all that this time is different?
It’s widely known how deeply in debt the US government is. And despite what politicians might think, governments cannot keep borrowing and printing forever. Some day their credit will run out.
Historically when people start to sense that things are going south economically in their country, they start moving their money towards the exits.
It’s precisely what’s happening in places like Greece, and even China, where depositors are pulling billions out of the banking system.
Governments take steps to prevent this from happening by imposing capital controls.
They restrict foreign exchange transactions, wire transfers, and even withdrawals, all to prevent you from taking money out of their precious banking system.
Moving a portion of your savings to a safer jurisdiction with minimal debt can substantially reduce this risk.
Regardless of the threat, whether it comes from the financial system or your government, you can take steps to protect yourself by diversifying your assets and securing them in a safer, more stable jurisdiction abroad.
This is an incredibly important step in a solid plan B.
It’s also by far the easiest step one can take, as there are many overseas accounts that you can start without even leaving your living room.
On August 24 in the year 79 AD, one of the most famous natural disasters in history struck the Ancient Roman city of Pompeii, and its surrounding area.
We have an eye-witness account from Gaius Plinius Caecilius Secundus, whose letter to Roman historian Tacitus vividly describes how the eruption of Mount Vesuvius rained down hot, black cinders and smoldering ash onto the towns below.
Pompeii was buried in about six meters of volcanic ash, and the town’s inhabitants were frozen in time in the exact positions that they stood when they died.
Curiously, despite the volcano nearly wiping out the nearby civilizations, the Ancient Romans rebuilt more towns at the foot of the volcano.
Yet unsurprisingly Vesuvius continued erupting.
The eruption of 472 AD was so severe that volcanic ash fell as far away as Constantinople, over 1,000 km away.
Forty years later the eruptions were so damaging that surviving locals were exempted from taxation.
Mount Vesuvius has barely let up since ancient times, erupting 12 times in the last two centuries alone.
Italian officials are now starting to sound the alarm bell, suggesting that Vesuvius could erupt again, this time endangering the 3+ million inhabitants of nearby Naples, and especially the 600,000 inhabitants within the volcano’s danger zone.
I can’t help but see the obvious parallels in our modern financial system.
This system almost came crashing down eight years ago under the weight of so much stupidity and debt.
Bank balance sheets were stuffed full of worthless garbage, like giant pools of no-money-down mortgages and home loans made to dead people.
Central banks have also been blamed for keeping interest rates far too low for far too long, spurring excessive and idiotic financial excess.
Governments also had a major role to play in the crisis, completely abandoning all fiscal discipline and going deeply into debt.
And consumers fanned the flames by overextending themselves and running up record levels of personal debt.
Yet after the great eruption of the financial system in 2008, the Romans of our time made the most bizarre decision to rebuild at the foot of the volcano.
They ‘fixed’ a financial cataclysm caused by too much debt, and interest rates that were too low, with even more debt, and even lower interest rates.
In other words, they’ve done the exact same things that caused the first crisis, but in far greater volume.
Yet somehow they expect a different result.
No one, of course, knows precisely WHEN Mt. Vesuvius may erupt again. Or when the next financial eruption will occur.
But researchers can certainly monitor geological activity to look for warning signs.
Plus people living within the danger zone can take some sensible steps to ensure they’re ready in case an eruption should occur.
So can we. And when you look around the financial system, those warning signs are everywhere.
Just in the last few days we’ve seen that corporate bond defaults are at the highest level since 2009.
The Italian Finance Minister is publicly acknowledging that Italy’s banking sector is woefully undercapitalized.
Many trade statistics, including railroad cargo and airfreight volumes, sea freight rates, and the World Trade Monitor index, signal drastically reduced global trade.
The Federal Reserve, on a mark to market basis, is now completely insolvent.
And at least one veteran central banker has forecast an ‘avalanche of bankruptcies’ and suggested that central banks no longer have any remaining ammunition to fight off a financial crisis.
These are all rather obvious, recent indications that the next eruption may be approaching.
Fortunately, moving out of the danger zone doesn’t need to be complicated.
If your banking system is pitifully illiquid or even undercapitalized, don’t keep all of your savings there. Simple.
It’s 2016. Today it’s possible to move some savings to a stronger, more stable jurisdiction overseas, all without leaving your living room.
You can establish an account to hold precious metals, or even physical cash, in one of the safest depositories in the world, all while you’re sitting in your underwear.
The breadth of opportunities that we have available to us thanks to our modern technology is extraordinary.
And these are solutions that make sense no matter what happens.
I hardly consider myself worse off because I produce my own organic food.
Or because I have multiple passports allowing me to live, work, travel, and invest easily in dozens of places across the world.
Or because I hold a portion of my savings at an incredibly well-capitalized bank in a jurisdiction with no debt that has never had a banking failure ever.
Financial crises and eruptions have occurred over and over again since ancient times.
Governments and policymakers keep making the same mistakes and expecting different results.
But you and I now have more options at our disposal to do something about it than ever before in history.
This is exciting, and taking action should be a no-brainer.
To help you get started, I’ve asked my team to pull some of the most educational articles from our archives to send to you this week while I’m in southern Chile with the Board of Directors of our agricultural company.
And in early February, I’ll put together a special webinar to teach you about some of the most critical components of creating your own Plan B. More to follow.
In 2014, the Journal of Neuroscience published the results of a unique study that probed deep into human emotion.
Two Dutch scientists had conducted an experiment in which they exposed test subjects to a wide range of scenarios to evoke some of the most primal human emotions– joy, anger, etc.
Subjects were hooked up to an electro-encephalogram (EEG) in order to quantitatively measure their brains’ cognitive response to powerful emotions.
And the results were pretty conclusive: the most powerful emotional experience, as measured by the sheer volume of human brain activity and neurological reaction, was humiliation.
This really explains a lot when you think about it.
Deep down we human beings are social creatures. We seek acceptance from the group.
It’s why conformity is so much easier than standing apart from the crowd, even when the crowd makes absolutely no sense.
And those who don’t conform and think independently are labeled radicals.
Our financial system is a great example of this.
They’ve spiked the punch bowl with so many lies. Home prices always go up. The debt doesn’t matter because we owe it to ourselves. We can always print more money.
None of this nonsense is true. But the financial establishment tells us so. Big media repeats it over and over again. Eventually hundreds of millions of people believe it.
And anyone who dares question the sanctity of this system is labeled a radical.
(This goes for just about everything now. Eerily, governments are now branding people who disagree with the state as radicals.)
This is total BS.
You’re not a radical because the federal government’s own balance sheet shows that they are hopelessly insolvent to the tune of negative $17.7 trillion.
You’re not a radical because the US Federal Reserve’s balance sheet shows that, on a mark to market basis, they too are insolvent.
You’re not a radical because the balance sheet of the FDIC shows that they don’t maintain the minimum amount of capital as required by law to adequately insure the banking system.
You’re not a radical because the financial statements of some of the largest banks in the country show that they only keep a tiny percentage of your savings on reserve, and park the rest of your money in some foolish investment fad, or loan it to a bankrupt government.
You’re not a radical because the annual reports of the largest trust funds in the US retirement system show that they are either pitifully underfunded, or entirely out of cash.
You’re not a radical because you think that, maybe just maybe, there might be negative consequences at some point down the road from all of this insanity…
… that, maybe just maybe, when nearly every major component of the financial system is either highly illiquid or completely insolvent, that there could possibly be trouble down the road.
Most of all, you’re not a radical because you have a Plan B.
It hardly seems outlandish to look at objective, publicly available data and think “wow, this entire banking system is built on a house of cards…” and then to actually do something about it.
There are so many options.
You might look abroad to hold a portion of your savings where the banks are extremely liquid and well capitalized, located in a jurisdiction with minimal debt.
Or you might simply consider holding some physical cash, or a mix between physical cash and precious metals.
These aren’t radical ideas. It’s sensible to take astute, rational steps to protect yourself from the consequences of such obvious risks.
Chances are you’ve never heard of William White.
You might have heard of the organization that he used to manage—the Bank of International Settlements (BIS).
The BIS is often called the central bank of central banks; their role is essentially to facilitate international financial transactions among the world’s central banks.
So they are a major component in the international financial system, just like the IMF and World Bank.
William White is a central banker who used to be on the BIS management committee. And this makes him a key member of the global financial establishment.
It’s not too often that central bankers are particularly transparent with the public.
Ben Bernanke famously told the world in July 2005 that there wouldn’t be a nationwide decline in home prices in the United States.
Then just a few months later when home prices did fall, he told Congress that the adverse effects of the housing market were ‘contained’ and wouldn’t affect the broader economy.
He was dead wrong on both accounts. And one of the biggest financial crises in history broke out shortly thereafter.
Central bankers seem to always miss the crisis just around the corner.
That’s pretty scary given that they have the power to dominate and control just about everything in the entire economy.
And despite a serial track record of failure, we’re just supposed to trust them to be smart guys. It’s madness.
A few days ago, however, William White gave an interview stating some things that you never hear coming out of the mouth of a central banker. Ever.
According to White, the global financial system is dangerously unstable.
“The situation is worse than in 2007,” he said, and went on to explain that central banks no longer have the ammunition to fight off a major crisis.
He railed against the mountain of government debt that has accumulated worldwide, saying that “it will be obvious in the next recession that many of these debts will never be serviced or repaid.”
White also suggested that banks, particularly in Europe, will have to be recapitalized on an unimaginable scale.
And due to all the new regulations, it will be depositors who have portions of their accounts confiscated by the state in order to fund the bank bailouts.
William White is not alone.
Michael Bury, the man who made $100 million betting against the last housing crisis, sees the same thing.
In an interview last month, Bury spoke about the “absurdity” of the massive level of debt in the system, and the Federal Reserve’s pitiful balance sheet.
When he gave the interview, the Fed’s balance sheet was leveraged 77:1. Today, barely a month later, it’s over 100:1. Incredible.
Financial markets have been in panic mode since the beginning of the year.
Just in the first few weeks of January, US stocks are down more than 10%. In China, the epicenter of the chaos, stocks are down 20%.
Commodity prices continue to fall. Pessimism abounds.
Look, maybe this is it. Maybe the global financial system has truly reached its limit.
Maybe the world has realized that the path to prosperity is not in conjuring money out of thin air, raising taxes, or going deeper into debt.
Maybe people have finally figured out that an insolvent government and insolvent central bank cannot possibly continue to underpin the entire financial system.
Or maybe not.
Maybe this will all be forgotten in a few weeks. And this coming Christmas no one will remember the great crisis of January that almost was.
But to me the incredible thing is how much panic there has been, particularly in banking and financial markets, just at the mere HINT of problems in the system.
It’s a clear indication of how quickly people can lose confidence and an entire system can become unglued.
Maybe things drag on like this for years, with government continuing to pile up debt and central banks continuing their slide into insolvency.
Maybe interest rates can become even more negative, and banks can become even less liquid.
But one day that confidence will turn. And as this month shows, it can all happen in an instant.
Look, I’m an optimistic guy.
Crisis always brings opportunity for those who can see the obvious realities. And I think what’s starting to unfold is tremendously exciting.
Economics isn’t complicated. The Universal Law of Prosperity is very simple: produce more than you consume.
Governments, corporations, and individuals all have to abide by it. Those who do will thrive. Those who don’t will fail, sooner or later.
When the entire financial system ignores this fundamental rule, it puts us all at risk.
And if you can understand that, you can take simple, sensible steps to prevent the consequences.
We’ll discuss some of these steps in upcoming letters.
If you believe the official propaganda, no other nation in the history of the world has advanced the cause of humanity more than North Korea.
According to the North Korean Ministry of Truth, their great nation has cured cancer, ebola, AIDS, SARS, MERS, and much more.
Now they’re saving the world again, this time having invented an extra-strength adult beverage that won’t leave you feeling like a train wreck in the morning.
It’s hangover-free alcohol. Perhaps next they’ll invent Calorie-free chocolate.
Clearly this is an idiotic fantasy.
Alcohol has chemical properties which have a severe physiological impact on the human body when consumed in excess.
If you drink too much alcohol, there are consequences. Both short-term and long-term. Simple.
Yet the North Korean government is deceiving an entire nation of devout followers that they have invented a cure-all panacea.
Drink as much as you want and don’t worry about the consequences!
Now, we can poke fun at North Koreans’ gullibility.
But frankly I don’t find the idea of ‘hangover-free alcohol’ any dumber or less deceptive than the idea of ‘consequence-free debt’. Or the idea that you can print your way to prosperity.
North Koreans may be delusional enough to believe their government. But so are most Westerners.
People in the ‘advanced’ world believe crazy fantasies all the time.
We’re told that the national debt doesn’t matter, nor does it make the nation poorer, because “we owe it to ourselves.” (Nobel Prize winner Paul Krugman, 9 February 2015)
It’s as if the federal government being unable to pay the debts it owes to Social Security recipients, or to bank depositors in the US, is somehow less ‘bad’ than stiffing China.
We’re told “the State of our Union is strong” (Barack Obama, last week).
Yet trust in government is near an all-time low, wealth inequality is extreme, the Middle Class is no longer the clear majority in America, and the national debt is at an all-time high of nearly $19 trillion.
We’re told that “Medicare and Social Security are not in crisis” (Barack Obama, 13 July 2015).
Yet the annual report from the Treasury Secretary of the United States tells us that one of the programs’ major trust funds is completely out of cash, and the rest are running out.
We’re told that running huge budget deficits don’t matter because “the government can print more money.” (Paul Krugman, 31 January 2013)
… because apparently there are absolutely zero consequences when the Federal Reserve conjures money out of thin air.
Except that there are consequences. Every dollar the Fed prints weakens its balance sheet and pushes it into insolvency.
In fact, the Fed’s own weekly financial report shows that its level of capital is a pitifully small 0.8% of its total assets. In other words, the Fed has almost zero margin of safety.
And on a mark to market basis, the Fed is already insolvent.
Yet the Federal Reserve claimed in a November 2014 white paper that its own insolvency “would not create serious problems,” as if decades of wild partying with their printing presses would be consequence free.
Western newspapers are certainly having a chuckle today at North Korea with headlines making fun of the hangover-free alcohol hoax.
But just imagine the fun they’d have if Kim Jong-un announced to the world that he had invented ‘consequence-free debt’ or a perpetual money printing machine.
Western media would have a field day with such propaganda, arrogant and clueless that this is already our own reality.
Hangover-free alcohol is pretty silly.
But in the West, we believe the biggest lies of all… that you don’t actually have to do anything, that your nation can simply print and borrow its way to prosperity until the end of time.
All lies eventually collapse, and reality settles in.
Given the panic in global financial markets just in the first few weeks of 2016, that reality may be quickly approaching.
Julius Caesar was kind of a deadbeat.
The guy was in debt up to his eyeballs, and had borrowed so much money to finance his rise to power that he threatened to skip town forever if he lost an election.
Back in Caesar’s day, interest rates in Rome were about 12%. In ancient Mesopotamia, interest rates could be as high as 25% or more.
In ancient Greece, 10% to 15%. During the Song Dynasty in Medieval China, rates were around 7% to 10%.
Today interest rates are basically nothing; in some cases, rates are even less than nothing.
If you take your hard-earned savings and loan it to a bankrupt government in Europe, you can guarantee a negative rate of return.
There are even some banks in Europe that are starting to charge their depositors negative interest rates.
A friend forwarded me a hilarious note over the weekend informing him that his bank has a “new” interest rate they’re paying on deposits: 0.001%.
Think about that number: 1/1000th of 1%.
Let’s put 0.001% in context just to demonstrate how absurdly small that number is:
* 0.001% is roughly the same as your odds in poker of ending up with a straight flush, and 30 times less than your odds of getting struck by lightning at some point in your life.
* A bank balance of $100,000 earning 0.001% would generate a whopping $1 in interest after an entire year.
* If at the time of his assassination in 44BC, Julius Caesar had put the equivalent of $100 in a savings account earning 0.001% compounding annually, he would have received a grand total of $2.08 in interest over the last 2,000+ years.
In other words, after 2,060 years, Caesar’s bank balance would have grown from $100 to just $102.08.
* If you deposit $1 earning 0.001% and then have yourself cryogenically frozen for over 9,000 years… a period longer than all of recorded human history… you will have received about 10 cents in interest by the time you wake up.
* At 0.001%, it would take your money 69,315 years to double in value. So if our forebears during the Paleolithic era had put a few abalone shells on deposit earning 0.001%, we’d barely collect twice as much today.
* The half-life of the isotope Plutonium-240 is 6,563 years. This means that
the nuclear fallout from Chernobyl and Fukishima will have undergone 11 half-lives and be almost untraceable in the environment, and you still wouldn’t have doubled your money yet.
There’s something clearly broken with this financial system.
Modern day economists who pretend to be ‘scientists’ tell us that conjuring money out of thin air will lead to prosperity.
So they’ve set interest rates at the lowest level we’ve ever seen in human history.
How has that strategy worked out after eight years?
Well, the Wall Street Journal reported this morning that China’s economic growth has slowed to a 25 year low.
Economic growth worldwide is grinding to a halt.
Chances of a US recession are higher than they’ve been in years.
Yet simultaneously, national debt levels around the world have skyrocketed. US debt has nearly doubled to almost $19 trillion.
Bankrupt nations are now able to borrow money at negative interest rates, with some banks passing negative rates on to their customers.
In Europe, interest rates are so low that the Swiss canton of Zug doesn’t want to collect local income tax for fear of having to pay negative interest rates to the bank.
The sheer volume of money in the system has led to the return of financial lunacy—like a San Francisco bank handing out $2 million home loans with no money down.
Or venture capital investors assigning a $67 BILLION valuation to a five-year old company that can’t manage to turn a profit.
Yet the middle class has been so vanquished in America that it no longer comprises the majority of the population.
Wages have stagnated. When adjusted for inflation, median household income in the US is lower than it was more than 15-years ago.
Bottom line, this system of historically low rates has led to more debt, slower growth, reduced prosperity, and a lower standard of living.
It doesn’t take a rocket scientist to see the bubble… the risks… the potential consequences.
No one has a crystal ball. We can’t circle a date on the calendar and say “this is the day that the bubble bursts.”
Maybe it happens today. Maybe tomorrow. Maybe five years from now. Maybe never.
That said, you’re not going to be worse off for having a Plan B and taking sensible steps to protect yourself, your family, and your livelihood from such obvious risks.
As a kid I remember hearing it all the time. It was an idea that was drilled into my head over and over again.
It was in movies and legal dramas. You could see it in the newspapers. We learned about it in textbooks.
“In America,” people would say, “you are always innocent until proven guilty.”
I didn’t really understand what that meant as a child. But it sounded great.
My teachers clung to the idea, explaining to me how this core bedrock value of American justice is what separated us from the Soviets.
It was one of the things that made us free.
But only decades later when I had finally grown a brain and started thinking for myself that I realized the ‘innocent until proven guilty’ nonsense was as much of a myth as Zeus hurling thunderbolts from the top of Mount Olympus.
You can see this everywhere now in the Land of the Free, and all over the western world. Especially when it comes to money.
On October 27, 1986, Ronald Reagan signed the first-ever Anti Money Laundering (AML) legislation into law in the United States. It made money laundering a crime.
Then they passed another anti money laundering law two years later in 1988.
Then again in 1992. And 1994. And 1998. Then 2001. Etc. Etc. Etc.
Every few years they pass more AML legislation.
Now, I’m sure we can all agree that terrorists and criminals are bad people.
But with each successive law and regulation, they tighten their stranglehold on the financial system, to the point that even the most innocuous activity is considered grounds for suspicion.
As a result of these ridiculous AML laws, walking around with too much cash is now considered an indication of criminal activity.
And thanks to the Civil Asset Forfeiture rules in the Land of the Free, police have the authority to confiscate your cash.
There’s no trial. No jury. They simply steal your money.
Believe it or not, the AML rules also apply to coin and jewelry dealers. So buying too much gold is now an indication of money laundering.
Having too many transactions in your bank account is considered ‘suspicious activity’.
(Of course, if you have too little financial activity, your bank account can be considered ‘dormant’ and turned over to the state.)
Even going to the bank to withdraw your own money is now considered suspicious. It’s madness.
The latest craze for the anti-money laundering crusaders is going after people who buy luxury real estate without a mortgage.
Last week the US Treasury Department issued new ‘rules’ demanding substantial scrutiny over real estate transactions involving more than $3 million in New York City, and $1 million in Miami.
Property buyers will now have to jump through all sorts of bureaucratic hoops to prove that they aren’t criminals or financing terrorists.
Plus anyone who buys real estate through trusts and corporate entities must now publish the details of the ultimate beneficiary.
This is bad news for George Clooney who owns property through his “George Guilfoyle Trust”.
And Leonardo Di Caprio. And nearly every other celebrity out there, who, for obvious privacy reasons, don’t attach their names to the properties they buy.
(Barack Obama has done the same thing, as neither he nor Michelle is listed as the official property owner at the couple’s multi-million dollar mansion in Chicago.)
It’s quite sad that seeking a little bit of privacy to be left alone in your own home is now considered possible grounds for criminal activity. But it really fits the trend.
Every month, every week, often every day, there’s something else. There’s a new rule. A new restriction.
It’s strange that the government is willing to make life more difficult for 99.99% of the population because of the actions of a handful of people who might be criminals.
This doesn’t exactly adhere to the ‘democratic’ principles they claim to uphold where the majority rules.
In truth, ‘innocent until proven guilty’ died a long time ago.
Now nearly anything we do can be deemed suspicious, especially if it involves our own privacy.
You are presumed guilty, then forced to prove that you didn’t do anything wrong.
Or at a minimum, deal with demeaning hassles, paperwork, and inconveniences, including the inability to withdraw your own money from the bank without being treated like a criminal terrorist.
This isn’t how it’s supposed to work in a free society.
But it’s what happens when a government goes bankrupt.
Governments who have a strong financial position don’t treat their citizens like criminals.
Solvent governments have no need to constantly pass a barrage of debilitating regulations.
This is what bankrupt governments do.
They continually squeeze freedom and justice, turning their entire population into a nation of suspects in a scramble for every penny they can get their hands on.
Bottom line, your freedom is inextricably linked to the financial health of your government.
There are nearly zero historical examples of a bankrupt government going gentle into that good night without plundering its citizens first.
This is an important lesson to remember now, as US national debt is about to hit $19 trillion.
What’s your Plan B?
[Editor’s note: This letter was penned by Tim Price, London-based wealth manager and editor of Price Value International.]
In a crisis, it helps to have good counsel. Consider the following sage advice from investment strategist Mike Tyson:
“Everyone has a plan ‘til they get punched in the mouth.”
Or as German military strategist Helmuth von Moltke the Elder put it, somewhat more formally:
“No battle plan ever survives contact with the enemy.”
The enemy has been quick to show himself this year, in the form of a bear market, at least for stocks.
This bear has so far been quick, and indiscriminate: the US; Europe; China; stock markets have fallen sharply, internationally.
Investors, being human, have scrambled in search of an explanatory narrative.
Some have blamed the Fed’s baby steps towards raising interest rates. Some blame the collapse in the oil price.
Last week’s movie night showed David Cronenberg’s 2012 thriller ‘Cosmopolis’, which has Robert Pattinson playing a 28-year-old hedge fund billionaire losing his entire fortune in a single day due to the unexpected rise of the Chinese renminbi.
Other than getting the direction of the renminbi wrong, the movie could have been shot yesterday.
But it has certainly been a good week for bears.
Last week RBS told us to “Sell everything except high quality bonds”. This is somewhat problematic since there aren’t actually any high quality bonds out there.
Tuesday brought us SocGen’s Global Strategy Conference, where guest speaker Russell Napier pointed out that growth in emerging market foreign exchange reserves from 2008 to 2014 amounted to the most rapid increase in emerging market money supply in history.
As this process goes into reverse, emerging market growth will clearly suffer.
And since many emerging market countries have over-borrowed in foreign currencies, the fighting in the global currency wars is set to get more intense this year.
As Napier warns, 2016 has also ushered in new rules requiring bond and deposit holders to be bailed in when banks blow up.
The EU (and many of its bank depositors) will come to regret not restructuring their banking system during the seven years post-Lehman when they had the opportunity.
The search for an easy narrative to explain the bear market is probably a waste of time. The financial market is a complex adaptive system and investors are prone to irrational behaviour and mood swings.
They are also prone to overpay. The great ‘value’ investor Benjamin Graham reminded us that,
“Operations for profit should be based not on optimism but on arithmetic.”
The optimists have had things their own way in an almost unbroken line since March 2009. January 2016 so far would suggest that the pragmatists are now in charge.
So the pragmatic response to this month’s volatility – if any is indeed required at all – is as follows:
1) Diversify by asset type.
2) Limit or eliminate exposure to emerging market debt. Raise cash rather than cling to a benchmark with no conviction (and no obvious value).
3) Concentrate any debt exposure to bonds issued by creditors, not debtors.
4) Limit equity exposure to high quality and inexpensive markets offering a ‘margin of safety’. (Most of the US market does not qualify in this regard.)
Russell Napier recommends Japanese equities, currency hedged, and so do we. And in a bear market, you don’t want to own expensive growth, you want to own defensive value.
5) Complement traditional investments with alternatives.
We would advocate systematic trend-following funds (which can profit in bear markets just as they did in 2008), and gold – the one form of currency that comes with no counterparty risk because it is the one asset that is no-one’s liability.
6) Limit your exposure to mainstream financial media, and especially to economists employed by commercial banks.
Eight centuries ago as Marco Polo traveled across the vast dominion of the Mongolian Empire, he encountered what few westerners had ever seen.
One of those astonishing experiences was how the Mongols happily and willingly used paper currency.
Marco Polo was so intrigued by this that he devoted an entire chapter in his famous diaries to the Mongolian monetary system.
Back then, Kublai Khan’s imperial mint was located in the city of Kanbalu, part of modern day Beijing.
Polo describes the ritualistic process of how these Chinese “alchemists” produced paper money “with as much form and ceremony as if it were actually of pure gold and silver.”
This was a major novelty for Polo.
Back in Europe where he had come from, gold coins like ducats and florins circulated across the continent as the standard international reserve currency.
But it wasn’t just the use of paper money that was so surprising for Marco Polo; it was how willing people were to use it.
As he writes in his diaries, “in most states, the issue of government paper is the resource of an exhausted treasury.”
In Polo’s experience, only bankrupt nations issued paper money.
But in the Khan’s empire, the economy was healthy and robust, and people had tremendous confidence in their paper currency.
It lasted for more than a century, but eventually they printed far too much money, confidence eroded, and the system collapsed.
The collapse was so severe that one deposed Mughal ruler was actually charged with inflicting paper currency on to his people.
So just like every other experiment with paper money in the history of the world, it ultimately failed. These things don’t last.
Today paper money is somewhat of a rarity; it and all financial transactions have now become digital.
Your bank balances and credit card transactions are all merely accounting entries stored in electronic databases.
There are very few pieces of paper circulating in the monetary system anymore.
But the basic concept remains the same as it did in the Mongolian Empire: unelected bureaucrats wield totalitarian control over the money supply, creating and destroying money at will.
Money is one of the most important social technologies in history.
Like language or even the Internet, money is something that we all use regularly.
It’s a sad testament to modern humanity that the framework we have selected for this critical social technology is based on a failed model from eight centuries ago.
You’d think that with all the other technology we have at our disposal, money would have been brought into the digital age by now.
Well, in the private sector, it has.
Two of the most important developments in the history of money have recently emerged over the last few years– the Blockchain, and Peer-to-Peer (P2P) platforms.
The Blockchain is revolutionary.
It provides a way to for any data or information to be stored electronically and distributed across the entire user base.
If you’ve ever used a file-sharing application, you’ve seen this in action.
You’re essentially downloading bits and pieces of your favorite movie from dozens, perhaps hundreds of other users who have installed the same software.
The Blockchain has some similarities in that it stores encrypted data with anyone who has installed the software.
Right now that data primarily consists of bitcoin transactions.
But the Blockchain could be used for anything– financial records, property title, stock certificates, bonds, business contract– just about anything.
The second major idea is Peer to Peer transactions.
Centuries ago, banks were vital components of the financial system.
They facilitated trade and commerce by acting as a financial middleman who made loans with their depositors’ money.
That function may have been useful in the past. But now it’s no longer necessary to have a bank in the middle of all financial transactions.
Rather than using a bank, today there are several P2P platforms that can directly match up savers and borrowers, completely cutting out the financial intermediary.
If you want to borrow money to start a business, buy a car, or even a house, you no longer need a bank. You can crowdsource it online.
P2P technology has been applied to so much else; AirBnB is essentially a P2P platform that matches up travelers with homeowners. Uber is the same with vehicles.
The key idea of both of these developments is that they cut out the central authority like a bank or government.
Needless to say, the people in charge don’t like this.
Yesterday a Russian minister told the media that Bitcoin “will represent a real threat to the financial stability of the state.”
But no matter what they do, the power now is trending towards the users. The individual. Not the bureaucracy.
This is a major reason why I’m so optimistic about the future.
There’s an incredible amount of risk in the financial system right now. Governments all over the world are broke, central banks are borderline insolvent, many commercial banking systems are dangerously undercapitalized.
The currency wars are back, and currencies are being devalued everywhere.
Debt bubbles are starting to burst, and economic growth worldwide is grinding to a halt.
This is clearly not a consequence-free environment and requires some rational, sensible steps to protect yourself.
But here’s the bright side: no matter how pitifully the people in charge screw things up, in the end, they’ll always lose.
If some politician decides to ban firearms tomorrow morning, we now have the ability to 3D print them.
If they continue to snoop and spy on our emails, we now have state of the art encryption technology that would take them centuries to break.
Even if they try to flip the Internet kill switch, we have mesh network technology to ensure that we stay connected.
No matter how hard they try, they’ll never be able to contain the extraordinary technological developments that propel humanity ever upward.
I had a bit of a housewarming party a few days ago with a pretty diverse group of friends, many of whom had moved here to Chile from foreign countries.
One girl that I know is a tattoo artist from New York.
Now, back in the United States, she has a great reputation as a phenomenal tattoo artist.
But in New York, and in the US in general, she is a phenomenal tattoo artist among many other phenomenal tattoo artists.
Down here, however, she is far and away the BEST tattoo artist in the country.
The quality of her work is unparalleled, especially compared to the local standards, so she commands astronomically high rates. And locals here are happy to pay.
Her rates are so high, in fact, that she can earn an entire month’s worth of living expenses after just a few days of work.
This is one of the things I like best about living abroad.
It’s not all cookies and unicorns overseas; there are frequently surprising, petty challenges to deal with.
But on the balance, being an expat is fantastic.
There are substantial tax benefits, for one. Living overseas often means that you no longer have to pay tax in your home country.
Even US taxpayers can earn over $100,000 tax free by living abroad through the Foreign Earned Income Exclusion, plus tens of thousands of dollars more at very low tax rates through the Foreign Housing Exclusion.
(If you’re married, your spouse can also use the Foreign Earned Income Exclusion, extending your benefit to $250,000 or more.)
The lifestyle benefits of being abroad are also substantial. The cost of living is often much cheaper abroad. High quality medical care can be very inexpensive.
You can become proficient at another language; and for younger children in particular, they can learn the local language to an almost native level.
It’s also a really nice feeling to be completely insulated from all the nonsense in your home country.
I’m completely disconnected from government fear mongering that terrorizes citizens over men in caves, or angry teenagers in the desert armed with weapons provided by the US government.
Living abroad can mean no more gut-wrenching pain as you watch your freedom vanish at an astonishing rate.
Nor is there any BS propaganda crammed down your throat.
But even above all of those reasons, I still find the most compelling benefit of living overseas to be the opportunity.
And my tattoo artist friend is a great example.
As a foreigner living overseas, you’re different.
Almost by default, you have a level of skills and talents that simply don’t exist in your adopted home, especially when you live in a smaller, less developed country.
You know what good service is. You know how an efficient operation should look.
And whether you realize it or not, you’ve been exposed to countless business models that work.
I know a local Chilean here who went to university in California.
He saw the rise of peer-to-peer lending platforms in the US where websites like Lending Club and Prosper match up lenders and borrowers.
In Chile he knew the demand for such a service would be very high– banks can charge absurd rates of interest for something simple like a car loan.
He didn’t have to reinvent the wheel. All he had to do was copy and paste the exact same business model and bring it to Chile.
This even applies to things that aren’t anywhere near as high-tech.
Recently I was joking with an entrepreneur friend that if you start a restaurant here that has bad service and mediocre food, you’re slightly above average.
And while I made the comment in jest, it’s clear that there’s an opportunity for good quality, reasonably priced food accompanied with great service.
Back in our home countries, that’s pretty much the standard. But many places overseas just haven’t reached that level yet.
This creates significant opportunity. And it’s everywhere.
Whatever your skill, whatever your background, there are likely many ways you can earn a very comfortable living while reaping in all the other tremendous benefits of living abroad.
We talk about having a Plan B all the time: take rational steps to protect what you’ve earned, and everything that you’re going to build in the future.
There are far too many risks in the world (bankrupt governments, borderline insolvent central banks, overleveraged financial systems, etc.) to NOT have a Plan B.
We’ve talked about owning physical cash and precious metals. Holding a portion of your savings in a stronger banking system in a jurisdiction with minimal debt.
All of these steps are important components of a Plan B.
But there’s another side to Plan B. Because while there are a lot of risks that need to be addressed, there’s an abundance of opportunity as well.
And it’s not just Chile either. There are plenty of countries where these opportunities exist (I’m quite bullish on Colombia as well).
There are wonderful business, employment, investment, and lifestyle opportunities that go far beyond your home country.
And tremendous benefits are waiting when you start to expand your thinking to the entire world.
If you’re not watching it purely for the entertainment value, sitting through a State of the Union speech ranks somewhere between a colonoscopy and a root canal.
Every year I opt for the former (entertainment value, not colonoscopy).
But because I live overseas, one of the added entertainment benefits is that I’m surrounded by foreigners who are seeing this highly ritualistic propaganda for the first time.
The absurdity starts almost immediately.
The Sergeant-at-Arms introduces the President of the United States, and he receives a massive, five minute standing ovation as he walks across the water to the podium.
The applause finally dies down briefly, until, immediately after, the Speaker of the House formally introduces the President. And then the applause begins anew.
Try explaining that to a foreigner who’s never seen it before.
Foreigner: “Why is everyone clapping again for the President as if they weren’t just clapping for him 30 seconds ago?”
Me: “Because that’s just the way they do it.”
Foreigner: “But why?”
Me: “… ummm… because they’re all trained monkeys?”
But it is at this point that the real propaganda begins, where the President of the United States tells his fellow Americans that they are prosperous and free.
He cited, for example, the 14 million jobs created since he took office.
Of course he failed to mention the more than $8 trillion in debt (77% increase) that has been accumulated since he was inaugurated seven years ago.
If the President truly wants to take credit as the job creator-in-chief, the basic math works out to be nearly $600,000 in government debt for every single job created.
Zerohedge showed yesterday, in fact, that while debt in the US has increased 77% over the last seven years, GDP has only increased by 13%.
Now, you’d think that for each additional dollar the US government was spending and indebting future generations, there would be at least $1 in GDP growth.
Ideally you’d get more than $1 in GDP growth. Duh. Businesses have to do this every single day.
If I borrow $10 million to buy and develop agricultural farmland, obviously the net effect once I’m finished should result in a property that’s worth MORE than $10 million.
But that’s not how it works when governments spend money. It took them $3.71 of debt to buy just $1 of GDP growth.
Yes, the overall result may show that the economy is technically bigger than it was in 2009.
But this ratio is completely screwed up, and it is not indicative of “the strongest, most durable economy in the world.”
In the meantime, there have never been more pages of laws, rules, and regulations ever in the history of the United States than there are today, January 13, 2016.
Just this morning, in fact, the federal government published another 369 pages of regulations. Tomorrow there will be even more.
Should you find yourself out of compliance with any of them, the government can summarily deprive you of your freedom, your property, and even your family.
And it can do so administratively, without a fair and speedy trial in front of an impartial judge and a jury of your peers.
This is not what freedom and prosperity are all about.
President Obama is undeniably upbeat about America. And he’s right, there are a lot of amazing people doing great things in the US.
The United States is a wonderful country. It’s clean. Modern. Reasonably safe. Standard of living is very high.
But decades of insane regulation, government debt, and astonishingly destructive monetary policy have resulted in a society where it is now easier to consume than produce.
Prosperity is not complicated. People figured out thousands of years ago that if you wanted to do well, you had to produce more than you consumed.
But the American system is the exact opposite, favoring those who recklessly borrow and spend, rather than those who work hard and responsibly save.
The President of the United States boldly accused everyone who doesn’t share his view as just making things up.
In his words, “Anyone claiming that America’s economy is in decline is peddling fiction.”
This is an extraordinary (and delusional) statement.
The government’s own numbers show that they are completely insolvent, to the tune of nearly $18 trillion.
The annual reports for the Social Security trust funds show that they are rapidly running out of money.
The Federal Reserve’s own balance sheet shows that it is precariously undercapitalized, with net capital less than 1% of total assets.
The Census Bureau’s data shows that the earnings for middle class Americans are stagnating.
The Labor Department’s numbers show that the number of Americans who have dropped out of the work force hasn’t been at this level since the Carter administration.
USDA figures show that the number of food stamp recipients is near an all-time high, simultaneously when the number of homeless children in America is at a record high.
And all of this, at a time when trust in government is near an all-time low.
These are all facts, not fiction.
The only fiction is pretending that this story has a happy ending.
Switzerland is famous for being punctual.
The trains. The buses. The meticulously crafted, hand polished luxury watches.
The Swiss are so culturally punctual that they even tend to pay their taxes well in advance of the filing deadline.
So it was quite a shock to hear this morning that the Swiss canton of Zug is asking its citizens to delay paying their taxes for as long as possible.
Why? Negative interest rates.
The cantonal government doesn’t want to take in a pile of cash, only to end up paying the bank interest on all the tax revenue.
Interest rates in Switzerland are among the lowest in the world; the official policy rate set by the Swiss National Bank is MINUS 0.75%.
Initially these negative interest rates only apply to banks; minus 0.75% is a wholesale rate pertaining to transactions among banks, and deposits they hold with the central bank.
But banks aren’t exactly charities.
So if a bank is paying interest to hold funds with the central bank, eventually they’re going to pass that cost on to the consumer. Even if that consumer is the government.
According to the Financial Times, the cantonal government of Zug estimates that they will save $2.5 million in negative interest rate charges by delaying tax receipts.
Just consider the magnitude of this decision: the monetary system has become so screwed up that a local government doesn’t want its citizens to pay taxes early.
In fairness, it’s not just Switzerland. All across Europe, interest rates are negative.
In the Euro zone, the main policy rate is only slightly ‘less negative’ at minus 0.3%.
And many of the bonds issued by European governments also yield negative rates.
In other words, you have to pay money for the privilege of loaning a bankrupt government your money.
In Germany, bond yields are negative all the way out to five years. It’s insane.
Clearly any rational individual is much better off simply holding physical cash, rather than keeping substantial funds in a savings account.
Cash doesn’t pay any interest. But it doesn’t cost any either.
It’s pretty sad statement when the 0% you earn from holding physical cash is considered ‘high yield’.
Of course, governments know this. They realize that no rational person is going to want to keep money in a bank, especially as negative interest rates cascade into consumer banking.
And that’s a huge reason why there’s such a push to outlaw cash.
If even a small percentage of depositors decided to close their bank accounts and withdraw all their savings in cash, the banking system would collapse.
There simply isn’t enough physical cash in the system.
Plus most banks are so highly leveraged, and they lack the liquidity to honor any meaningful amount of withdrawal requests.
This is one of the fundamental dangers of negative interest rates.
Central bankers, in an absurd, desperate attempt to generate inflation, are accomplishing nothing more than destroying the banking system.
And even when it doesn’t work– even when the numbers prove that their ridiculous goal of increasing inflation isn’t working– they just keep trying the same thing over and over again, making interest rates even MORE negative.
These people have broken the concept of money.
Money is one of the most important social technologies in the history of the world, almost as important as language.
Money is supposed to mean something. It is supposed to be the metric by which we measure economic value.
But they’ve destroyed that. And it’s so obvious now.
But cutting the price of money (interest rates) so far into negative territory, money has become so worthless that even a government doesn’t want it.
And in doing so they have created the most absurd problems imaginable.
It’s pretty clear that this is not a risk free environment.
And as my colleague Tim Price pointed out yesterday, there is no single solution to protect yourself from the consequences of this madness.
We discussed last week that holding physical cash is a great option to hedge short-term risks in the banking system.
(In Switzerland, the highest denomination is the 1,000 Swiss franc note. In Europe, it’s 500 euros. In the US and Canada, it’s $100.)
But with so many politicians and idiotic economists calling for a ban on cash, plus all the greater risks with fiat currency, physical cash is only part of the answer.
Clearly precious metals make sense as part of a long-term, balanced approach.
But owning gold requires a steely-eyed, willful ignorance of the daily fluctuations in its paper price.
You can’t own gold and fret about it falling $20 in a single day, or 10% in a year.
Gold is simultaneously a form of money… as well as an insurance policy.
Trading fiat currency for gold, only hoping to trade the gold back for more fiat currency at a later date, pretty much defeats that purpose.
But even gold is not a single solution.
It may also make sense to own shares of a productive business– ideally one that’s recession-proof, has minimal debt, and is managed by competent people of integrity.
There are plenty of other options out there, and this short list is by no means exhaustive.
But the larger point is to start thinking in this direction. Look at the obvious risks and determine what makes sense for your situation.
Most people will unfortunately succumb to the default option– doing nothing and assuming that it’s all going to be OK because the smart guys in government will figure it out.
But this is pretty dangerous thinking.
You won’t be worse off for taking sensible steps to protect yourself from undeniable risks.
But should any serious consequences ever arise from this financial madness, they’ll happen very quickly, and it will be too late to do anything about it.
And at that time, looking back, it will all seem so obvious.
[Editor’s note: Tim Price, London-based wealth manager and editor of Price Value International, is filling in for Simon today.]
In the field of mathematics, chaos theory studies the behavior of systems that are highly sensitive to initial conditions.
The idea in chaos is that, like life itself, where you start today has tremendous influence on what happens next.
In chaos, even very tiny changes to initial conditions can lead to wildly divergent outcomes further down the line.
Again, think about life: how different would your outcome be if you’d been born in the next town over? Or to different parents?
The film ‘Jurassic Park’, adapted from Michael Crighton’s novel, brought chaos theory into the popular realm.
A wealthy scientist, John Hammond (played by Richard Attenborough), uses DNA derived from fossilized mosquitoes to recreate dinosaurs on a remote island.
But once brought back to life, won’t they breed?
No, says Hammond. Because all the dinosaurs on the island are engineered to be female, by way of chromosome control.
Dr. Ian Malcolm, a chaos expert played by Jeff Goldblum, has been brought along to assess the project. His assessment is skeptical to the point of hostility:
“[T]he kind of control you’re attempting is not possible. If there’s one thing the history of evolution has taught us, it’s that life will not be contained. Life breaks free. It expands to new territories. It crashes through barriers. Painfully, maybe even… dangerously…
“I’m simply saying that life… finds a way.”
Life -nature- does indeed find a way, and Malcolm barely survives into the inevitable sequel.
Jurassic Park is, of course, a work of fiction.
That central banks that exist today, on the other hand, are fact.
And it is fact that for several years they have been attempting to artificially manipulate the market.
We are seeing this now with the Chinese government’s vain attempts to control the carnage in the Shanghai and Shenzhen stock exchanges.
But Western market observers have no claim to moral superiority.
Western central banks have, for years, been pulling the same failed stunt, propping up the market by manipulating interest rates.
Perhaps they should stop with these policies. But that is not the way of the bureaucrat. The beatings must continue until morale improves.
Since the global financial crisis, the financial markets have been a battleground between the forces of deflation and inflation.
Deflation represents the free market. A free market wants to reset the game, and clear all the redundant pieces from the table.
Inflation represents the State, and the central banks (whose notional independence may be unlikely to survive this ongoing crisis).
The State wants to perpetuate itself, and is indifferent to the costs incurred to its citizens in the process.
Bankruptcy, inflation, deflation, market panics, banking crises, currency crises, capital controls? These are all acceptable losses in the eyes of the State.
But one of the hallmarks of chaos is that it is impossible to make precise long-term predictions, especially in addressing the question ‘when’.
Imagine dropping grains of sand onto a table.
At first it’s just a single grain. Then two. Then three. Then eventually thousands. Soon a pile of sand forms.
For some time, the pile of sand will remain stable.
But at a certain point, the addition of one more single grain of sand can cause the entire pile to collapse. But we cannot predict in advance which grain that will be.
Similarly, we cannot predict which additional dollar, euro, pound, yen, etc. worth of debt will be the one that causes the pile of debt to collapse.
We cannot predict which additional dollar, euro, pound, yen, etc. printed by central banks will be the one to cause confidence in the currency to sink.
But we can see the mountains of debt and paper money growing ever larger, posing greater and greater risks to the system.
Nothing is risk-free in this system of chaos. And there is no longer any easy solution to safely grow or preserve your capital.
Risk is now everywhere. If you invest in the markets, there is risk of temporary or permanent loss of capital.
Even if you do nothing and simply hold cash in a bank, there is bail-in risk and financial repression.
This is our reality now… the consequence of a financial system that’s at least a century old.
In a way, today’s mad scientist central bankers have engineered financial dinosaurs back into our time.
They think they can control the system. But judging just from the first chaotic week in financial markets so far in 2016, life is finding a way.
And anyone who understands this chaos is preparing to survive into the inevitable sequel with an extremely well-balanced portfolio in full view of the risks.
For us that means buying shares of the most pragmatic, attractively priced, high quality businesses run by honest management.
Additionally, we invest in systematic trend-following funds that offer the potential to benefit in both rising and falling markets, along with precious metals, and selected cash holdings.