I’ve written before a number of times about the long laundry list of reasons why I base myself and most of my business operations in Chile.
I could go on forever about this, but in short the country presents an exceptional mix of business, investment, and lifestyle opportunities that are extremely difficult to find just about anywhere else in the world.
But people ask me a lot– if not Chile, where else?
Colombia is definitely on my short list. In fact if I weren’t in Chile, I’d almost certainly be either here in Colombia, or in Puerto Rico.
Colombia ticks many of the most important boxes.
The lifestyle here is just fantastic. In Medellin in particular, the eternal spring-like weather is hard to beat.
Colombia is also absurdly cheap. The cost of living is low, as is the price of residential real estate.
It’s also a lot of fun. From the city vibes to the laid back coffee culture, there’s something for everyone here, whether you’re a young digital nomad or retiree.
From an investment perspective, Colombia is emerging from decades of civil war, and that opens the door to some pretty extraordinary opportunities.
One of the biggest beneficiaries will be the country’s pitiful infrastructure, which is in desperate need of a major upgrade.
For years, the Colombian government never bothered building new roads and fixing the rail system because they figured the FARC would simply blow it all up.
Now with the peace locked in, massive new infrastructure projects have already begun.
The importance of this work cannot be overstated.
The United States invested heavily in its transportation infrastructure in the 1950s, building roads, dams, airports, power plants, etc.
It had an extraordinary impact on the economy– cheaper electricity, more efficient transportation for goods and services, etc. Trade flourished as a result.
I’ve seen the similar effects first hand around the world, from Panama in the early 2000s to Myanmar today.
The same thing can happen in Colombia.
With modern, reliable infrastructure, trade and transportation will soar, and the multiplier effect across the economy could be phenomenal.
Moreover, the peace process has brought back tourists and foreign investors in droves.
Last year foreign investment in Colombia was 2.5x higher than in 2006, ten years prior. Tourism is up 3x from 15-years ago.
And we’re just at the beginning of these trends.
The sheer volume of capital flowing into this country has the potential to supercharge economic growth.
Real estate will increase in value. Businesses will make more money and the stock market will appreciate. The currency will appreciate.
Entrepreneurs will find a treasure trove of opportunities here as well.
Several of the alumni from our annual Liberty & Entrepreneurship camp live here, and they’ve started some amazing businesses, in some cases achieving success by importing a business model that’s already working in North America.
I’m here in the country for a few days meeting with the Board of Directors of a company we invested in last year.
It’s a unique business– they’ll likely become the largest and most cost effective producer of medicinal-grade cannabis oil in the world, which is a $200 billion industry.
This industry didn’t even exist in Colombia two years ago. Now it does, thanks to recent legislation that has legalized production.
It’s a win/win.
Rather than continue to wage a senseless and expensive war on plants that decimated this country for decades, the new legislation ensures that everyone, from foreign investors to local farmers, can prosper.
It’s a great example of the emerging opportunities that make Colombia place so compelling.
Of course, it’s not all rainbows and buttercups here. There are still risks.
One of the things that makes Colombia difficult is its painful bureaucracy.
Even simple, mundane tasks can be enormously time consuming.
More importantly, the Colombian tax system is extremely cumbersome.
It’s not just the high level of taxes that you have to pay, but the total number of taxes.
For example, in addition to a corporate tax of 25%, many companies have to pay an “income equality tax” of 9%, plus another “industry and commerce” tax, and then a financial transactions tax.
Then there are sales taxes and consumption taxes. Property taxes and payroll taxes. Tons of paperwork to fill out.
It can be debilitating, and they know it.
Last year I met with Colombia’s former president Alvaro Uribe at his home here in Rio Negro, and he agreed with me that the system needs to change.
They’re starting to move in that direction; there’s currently legislation in the works to reform Colombia’s Byzantine tax code and break up some of the bureaucracy.
So it’s definitely the right trend.
When you look at the big picture, it’s pretty astonishing.
A decade ago this country was still in the midst of a bloody civil war and dominated by murderous narco-guerilla groups.
The only two legitimate industries that even existed here were flowers and coffee.
Now Colombia is teeming with tremendous opportunities and has an incredibly bright future.
As one of my colleagues remarked this morning, it’s the biggest transformation story in the world.
In 1927, US Supreme Court Justice Oliver Wendell Holmes famously wrote that “taxes are what we pay for civilized society.”
This quote is enshrined at the Internal Revenue Service, and it’s a rallying cry for people who constantly argue for higher taxes.
Almost everyone completely misunderstands what he meant.
First of all, tax rates in the United States were about 3.5% back in 1927, just a tiny fraction of what they are today.
And Justice Holmes actually wrote that famous statement as part of a larger argument that taxes can sometimes penalize and discourage productive activity.
People always seem to forget that part.
Tax, like most things, is fundamentally about value. It’s not how much you pay, it’s what you get in return.
I have friends in certain parts of the world who pay 40% to 50% of their paychecks in tax.
That’s obviously a lot. But they feel OK about it because they receive so much in return, from university education to quality medical care to ample social benefits.
But if your tax dollars consistently go to support more bombs, body scanners, bureaucrats, and $2 billion websites, it’s hard to feel like you’re getting a lot of value.
There’s nothing immoral about taking completely legitimate steps to reduce what you owe.
Why throw money down the toilet for something that you fundamentally disagree with?
After all, there are countless ways to legally reduce your taxes.
In this letter we’ve talked about a number of tax strategies, everything from maximizing your retirement contributions to setting up captive insurance companies to moving abroad and setting up foreign businesses.
Puerto Rico is a particularly unique paradise in this respect.
The island has a multitude of spectacular incentive programs for investors, retirees, and entrepreneurs.
You can live here for part of the year and earn virtually unlimited investment income completely tax-free.
You can establish a company here that exports services abroad and pay just 4% tax.
(Exporting services covers a LOT of ground and includes just about any service business, consulting firm, or Internet-based enterprise.)
There are so many more tax incentives, far too many to list here.
It’s extraordinary. There are few jurisdictions in the world that roll out such an extended red carpet to attract foreigners.
A few months ago when I was here, I met with a senior government official who proudly proclaimed that Puerto Rico was absolutely a tax haven, no apologies.
At the same time, Puerto Rico is a fairly easy transition, especially for North Americans.
Most people speak excellent English. Your US-based mobile phone works here. Amazon delivers here. It has all the normal shops and amenities that you’re used to.
Last night I had dinner with some Total Access members who live here– one of them told me that he gets 500MB Internet at his apartment.
So the people living here under these incredibly compelling tax incentive programs aren’t exactly suffering.
I’ve also come to appreciate Puerto Rico as something of a hidden gem when it comes to investing.
This is counterintuitive; after all, the Puerto Rican government is flat broke and has already defaulted on its mountain of debt.
So most people would rightfully ignore this place. I avoided it for a long time.
But boy was I wrong.
It’s not exactly blood in the streets, but there are a number of distressed investment opportunities here in large part to Puerto Rico’s ongoing economic malaise.
Some of Puerto Rico’s largest banks collapsed in recent years– another reminder that the banking system isn’t always as safe as we’re led to believe.
The FDIC took over the assets of those failed banks, and now they’re liquidating for pennies on the dollar to private investors.
This morning I met with the person I recently hired to run my private bank’s Puerto Rico office.
He’s a seasoned veteran with more than 20-years at some of the biggest banks in Puerto Rico, and he walked me through several of these deals.
For example, we’re looking at a $2.5 million loan portfolio that is backed by high quality commercial real estate at a 2:1 margin.
This means that for every dollar invested, there’s $2 in high quality collateral. This dramatically reduces the investment risk.
But because the loans can be acquired for so far below their original principal amounts, the effective yield ends up being around 16%. It’s extremely compelling.
Bottom line, this place should definitely be on your radar– great lifestyle, compelling investment opportunities, and incredible tax benefits abound.
That’s not exactly uncivilized.
In a scathing editorial published in the Wall Street Journal today, the president of the Federal Reserve Bank of Minneapolis, Neel Kashkari, blasted US banks, saying that they still lacked sufficient capital to withstand a major crisis.
Kashkari makes a great analogy.
When you’re applying for a mortgage or business loan, sensible banks are supposed to demand a 20% down payment from their borrowers.
If you want to buy a $500,000 home, a conservative bank will loan creditworthy borrowers $400,000. The borrower must be able to scratch together a $100,000 down payment.
But when banks make investments and buy assets, they aren’t required to do the same thing.
Remember that when you deposit money at a bank, you’re essentially loaning them your savings.
As a bank depositor, you’re the lender. The bank is the borrower.
Banks pool together their deposits and make various loans and investments.
They buy government bonds, financial commercial trade, and fund real estate purchases.
Some of their investment decisions make sense. Others are completely idiotic, as we saw in the 2008 financial meltdown.
But the larger point is that banks don’t use their own money to make these investments. They use other people’s money. Your money.
A bank’s investment portfolio is almost entirely funded with its customers’ savings. Very little of the bank’s own money is at risk.
You can see the stark contrast here.
If you as an individual want to borrow money to invest in something, you’re obliged to put down 20%, perhaps even much more depending on the asset.
Your down payment provides a substantial cushion for the bank; if you stop paying the loan, the value of the property could decline 20% before the bank loses any money.
But if a bank wants to make an investment, they typically don’t have to put down a single penny.
The bank’s lenders, i.e. its depositors, put up all the money for the investment.
If the investment does well, the bank keeps all the profits.
But if the investment does poorly, the bank hasn’t risked any of its own money.
The bank’s lenders (i.e. the depositors) are taking on all the risk.
This seems pretty one-sided, especially considering that in exchange for assuming all the risk of a bank’s investment decisions, you are rewarded with a miniscule interest rate that fails to keep up with inflation.
(After which the government taxes you on the interest that you receive.)
It hardly seems worth it.
Back in 2008-2009, the entire financial system was on the brink of collapse because banks had been making wild bets without having sufficient capital.
In other words, the banks hadn’t made a sufficient “down payment” on the toxic investments they had purchased.
All those assets and idiotic loans were made almost exclusively with their customers’ savings.
Lehman Brothers, a now-defunct investment bank, infamously had about 3% capital at the time of its collapse, meaning that Lehman used just 3% of its own money to buy toxic assets.
Eventually the values of those toxic assets collapsed.
And not only was the bank wiped out, but investors who had loaned the bank money took a giant loss.
This happened across the entire financial system because banks had made idiotic investment decisions and failed to maintain sufficient capital to absorb the losses.
Nearly a decade later, Kashkari says that banks still aren’t sufficiently capitalized.
(He also points out that banks today are obsessed with pointless documentation and seem “unable to exercise judgment or use common sense.”)
The banks themselves obviously don’t agree.
As Kashkari states, banks feel that they currently have TOO MUCH capital.
Bizarre. They’re basically saying that they want to be LESS safe, like a stunt pilot complaining that his helmet is too sturdy.
I’ve written about this many times– the decision for where to hold your savings matters. It’s important.
In addition to solvency and liquidity concerns, there are a multitude of other issues, like routine violations of the public trust, collusion to fix interest and exchange rates, manipulation of asset prices, and all-out fraud.
(I personally got so fed up with our deceitful financial system that I started my own bank in 2015 to handle my companies’ financial transactions. More on that another time…)
Yet despite these obvious risks, most people simply assume away the safety of their bank.
They’ll spend more time thinking about what to watch on Netflix than which bank is the most responsible custodian of their life’s savings.
There are countless ways to figure this out, but here’s a short-cut: much much “capital” or “equity” does the bank have as a percentage of its total assets?
These are easy numbers to find. Just Google “XYZ bank balance sheet”.
Look at the bottom where it says “capital” or “equity”. That’s your numerator.
Then look above that number to find total assets. That’s your denominator.
Divide the two. The higher the percentage, the safer the bank.
Kashkari thinks the answer should be at least 20%, especially among mega-banks in the US.
About 20 years ago when I was still a cadet at West Point, my economics professor organized a class trip to the Federal Reserve Bank of New York.
The part of the trip that I remember most was touring the Fed’s high security vault, 80 feet below street level beneath the bank’s main office building downtown.
This vault houses the largest known depository of gold in the world.
None of that gold, of course, belongs to the Fed. The Federal Reserve doesn’t own a single ounce of gold.
Almost all of that gold is owned by foreign governments and central banks.
It’s been that way since the end of World War II—European governments wanted to store their wealth overseas, out of the reach of the Soviet Union.
As a kind of professional courtesy among governments and central banks, their gold has been stored for free by the Fed for the last 70+ years.
Even after the Soviet Union fell, most governments still chose to keep their gold in New York.
It was safe. America was a rich, trusted ally. Why bother moving it?
Fast forward a few decades and the world has clearly changed.
The US government is in debt up to its eyeballs. It has been caught blatantly spying on its own allies. And it’s much less predictable than ever before.
Germany was among the first out the door.
Even as early as 2013, the German government announced that they would bring back at least half of their country’s gold reserves (the second largest in the world) by the end of 2020.
They’re ahead of schedule.
Late last week the German government moved $13 billion worth of gold from New York to Frankfurt.
That shipment puts them nearly at their goal, almost four years earlier than planned.
It’s easy to understand why.
The entire global financial system requires having a great deal of trust.
If you have an online brokerage account, you may be surprised to know that you don’t actually own a single stock in your portfolio.
When you log in to your account and buy, say, Apple shares, the brokerage will typically register those shares in its own name, not your name.
Apple has no idea who you are. The shares are effectively owned by your broker. It’s their asset, not yours.
Now that’s putting a LOT of trust in a complete stranger.
It’s the same when you deposit your money in a bank. It’s no longer your money. It’s the bank’s.
The bank, in turn, uses your savings to make loans and buy bonds, thus entrusting your savings to yet another group of people.
This is how the system works; your money keeps getting passed around, which means there’s an entire daisy chain of other people, or “counterparties”, standing between you and your savings.
“Counterparty risk” is the risk that something goes wrong with one of the many, many counterparties in this daisy chain.
Imagine that you deposit money with X.
X invests the money with Y. Then Y deposits the money with Z.
If something goes wrong with Z, you’re all screwed.
This is the nature of counterparty risk. Someone far down the chain can cause consequences for everyone else.
Now, ordinarily, this isn’t a problem. When the system is functioning normally, institutional counterparty risk is low.
But counterparty risk becomes a BIG deal, and QUICKLY, when the system stops functioning normally.
We saw the effects of this during the 2008 financial crisis. As one bank went down, it dragged multiple others with it.
No one ever thinks about counterparty risk until it becomes a problem… and by then it’s too late.
The simple way to reduce this risk is to reduce the number of counterparties.
Germany used to place a lot of trust in the US government and central bank to store its gold.
But there are obvious signs that Uncle Sam is no longer the reliable, credible, trusted counterparty he once was.
Germany hasn’t quit cold turkey; they’re still going to store a minority portion of their gold in the US.
But they have taken a major step to reduce exposure to a counterparty that’s obviously bankrupt, which hence reduces the risk.
You can do the same thing; it’s why we regularly discuss holding physical cash.
Keeping some physical cash ensures that there’s no more middle men (i.e. counterparties) standing between you, and at least a portion of your savings.
When you eliminate the counterparty, you eliminate the risk.
Having some cash means that if some major crisis should ever befall the banking system, then you’ll at least have some emergency savings that’s not at risk.
But even if nothing happens… even if there’s never a single problem ever again in the banking system… you won’t be worse off holding a bit of cash.
If you’ve been a reader of this letter for any length of time, you may have noticed that I try to spend my weekends and free time at our farms in Chile.
I’m still on the road at least 6 months out of the year and travel to 30-40 different countries annually.
But when I’m not traveling or I’m not needed at our offices in Santiago, I go out of my way to spend as much time as I can at the farms.
It’s paradise for me. I love being surrounded by so much pristine nature, organic food, and absolute quiet.
This past weekend at Sovereign Valley Farm we harvested our almonds.
Almonds aren’t a commercial crop for us; our primary business is blueberries, of which we’ll soon be one of the largest producers in the world.
But we just happen to have a bunch of natural almond trees at the farm.
They’re wild, we didn’t plant them. We don’t even need to maintain or irrigate them.
And yet, each year they explode with an abundance of nuts.
Our harvest method was pretty low-tech; we shook the trees by hand until the almonds fell out, onto a giant blanket that we placed on the ground.
This is pretty much the same way the ancients did it thousands of years ago.
But despite our primitive approach, we harvested a few thousand dollars worth of almonds in about an hour and a half.
Aside from enjoying a bit of time outside on a beautiful summer day, my cost of these almonds was basically zero.
They literally grow on trees. All we had to do was pick them up. Not a bad return.
The whole morning I kept thinking of what my dad used to tell me over and over as a kid– “Money doesn’t grow on trees.”
Well, actually it does.
Perhaps not money itself in the literal sense, but certainly the opportunity to make money.
Agriculture is an obvious example– a single tomato seed creates a plant that can produce 15-25 pounds of tomatoes, not to mention hundreds of new seeds.
At, say, $2 per pound, one seed can generate $30 to $50 worth of organic tomatoes. Nature does all the rest of the work.
This is all small potatoes (NPI), but it’s indicative of the opportunities that surround us.
It’s not just agriculture.
Opportunity is in the ground (gold, silver, other minerals). It’s in the sky (wind and solar power generation). It’s inside our digital devices (cryptocurrency mining).
This is important to remember.
Hardly a day goes by without another eruption of anger and hate, or some bit of news that takes us closer to a trade war (China), financial crisis (Greece), debt crisis (most of the West), etc.
The social divisions in the United States stand out as being especially poisonous.
You may have seen the news from a couple of weeks ago when a bunch of people decided to “resist” by burning an American flag.
Flags are powerful, emotional symbols to hundreds of millions of people. To others it’s just some colored fabric.
Either way, I wonder– what did these people honestly think they were going to accomplish?
It’s not like throwing a childish temper tantrum and setting some cloth on fire will suddenly cause millions of people to change their views.
By definition, deliberately burning a flag (or anything else) is an act of destruction, which seems like a dubious way to make anything better.
The reality is that, as individuals, we have zero control over what happens next– trade policy, tax policy, monetary policy, national debts, federal budgets, etc.
We can only control what we do ourselves.
And that’s what brings me back to this idea of opportunity.
No matter what happens in the world… no matter how dire the long-term outlook or how strained the social tensions, there will always be a near infinite abundance of opportunities.
Some of them are literally growing on trees.
We don’t have the power to wave our magic wands and remake the entire world as we want it to be.
But we absolutely have the power to seize the opportunities in front of us and remake our own realities into exactly what we want them to be.
It’s 2017. You can live anywhere and make money anywhere.
You can start a business in a day and start generating income tomorrow.
You can reach prospective investors, customers, and employees who live on the other side of the planet.
You can raise money for new ventures on dozens of websites without ever having to set foot in a bank.
You can invest in countless asset classes in every corner of the world without having to get out of bed.
You can protect yourself from every major risk in the financial system with nothing more than an Internet connection.
We have so much power to affect our own lives, far more than any politician or government.
And THAT is the entire point of personal sovereignty.
It’s about being independent and self-reliant, not waiting around for some government to legislate the nation into prosperity.
All it takes is a little bit of education… and the will to act.
Education is a BIG part of a having a Plan B… especially when it comes to money.
In light of the obvious risks that we discuss on a regular basis, safeguarding (and growing) our savings is absolutely critical.
Finance can be a little bit scary and seem quite complicated at first.
No one comes out of the womb a financial expert. And they certainly don’t teach this stuff in a government-controlled public school system.
But just like speaking a foreign language or learning to drive, knowing how to properly manage money is a SKILL.
And it’s one that can be learned. By ANYONE.
The difference between knowing versus NOT knowing how to manage money can have an EXTRAORDINARY impact on your life.
Simply being able to generate an extra 1% to 2% annual return on your investments can add up to hundreds of thousands of dollars in extra wealth over 20-30 years.
As with any other skill, learning about finance takes some time and patience. But the reward is extraordinary.
I wanted to pass along an email today that highlights key characteristics of the world’s most successful long-term investment strategy.
It was written by my friend and colleague Tim Price, a UK-based wealth manager who is a disciplined master of “value investing”.
This strategy is absolutely worth understanding. Learning it can truly have an enormous impact on your life.
— From Tim: —
Successful investing involves having an edge.
And if you do not know what your edge is, you do not have one.
There are doubtless many investors who, in the absence of a general investment strategy, randomly buy stocks, many of which they hear about on CNBC.
Other individual investors have dutifully followed conventional financial wisdom and have bought large index funds, like the S&P 500.
In this way, investors are essentially owning a small share of the entire stock market.
But Snapchat’s looming IPO highlights a lurking problem with this approach.
Snapchat is a California-based photo-sharing social network. It loses money and lacks a credible plan for long-term growth.
The company itself acknowledges that they may never turn a profit.
Yet Snapchat will soon IPO at a share price that will value the company at $30 billion, more than the GDPs of Iceland, Cameroon, Latvia, and Cyprus.
Investors are of course welcome to pour their money down whichever drains they choose.
The interesting thing, though, is that after it goes public, Snapchat will eventually become part of the S&P 500.
(This is the stock “index” of the 500 largest companies in the US, like Apple, Exxon, etc.)
There are dozens of mutual funds and “exchange traded funds” which follow the S&P 500, i.e. they own shares of each one of the 500 companies that comprise the index.
So once Snapchat joins the S&P 500, every single fund that follows the index will be obliged to buy shares of Snapchat.
This means that buying into large index funds guarantees exposure to low quality, expensive, risky assets.
Active investment management requires doing something different from the herd.
It requires focusing on what actually works instead of following the crowd.
So which investment strategy actually works?
One fascinating 49-year study by Research Affiliates highlights the best and worst performing strategies over the longer term for equity investing.
The best performing strategies, by far, were all value investing strategies.
You may not be familiar with some of the terms, i.e. Price-to-Book, Price-to-Sales, etc.
But value investing essentially boils down to buying the highest quality assets at the cheapest possible price.
Here’s a simplistic example:
Let’s say that the share prices of XYZ, Inc. and ABC Ltd. value both companies at $1 billion.
XYZ is flush with cash, generates $950 million in annual profit, has no debt, and $5 billion worth of high quality assets.
ABC is in debt up to its eyeballs, loses money, and has very few assets.
Both companies are essentially selling for the same price. Which would you choose?
Clearly XYZ is the better deal; you’re buying high quality assets at a discount, and you’ll make your money back in just over a year.
This “discount investing” natural sense to our species. We’re always looking for a great deal, whether it’s on a new car or steak dinner.
Investing should be no different.
There are plenty of high quality, profitable, well-managed companies whose shares can be bought in major stock markets around the world.
Some of those shares are incredibly expensive relative to the company’s true worth. Others are selling for astonishing discounts.
The challenge is knowing which is which.
Value investors have the skills to tell the difference. And that’s precisely what value investing is– a skill… and one that can be learned.
It’s worth learning, too.
The findings from the 49-year Research Affiliates study are consistent with a similar study conducted by James O’Shaughnessy in his book ‘What works on Wall Street’, the results of which are shown below:
Again, you may not be familiar with the terms, but O’Shaughnessy’s study shows that the four value investing strategies vastly outperformed.
A value strategy would have turned $10,000 into $22 million over the period in O’Shaughnessy’s study.
Given such obvious data, why would investors favour any other approach ?
Value investing requires patience.
The share price of a company that’s trading for a steep discount can languish for months, even years.
Successful value investors must have the patience to buy great companies at a discount… and then do NOTHING.
Most investors do not have this much patience.
But the long term returns are worth it.
You can learn more about Value Investing in my recent video podcast on how to find the most compelling investments on the planet.
Here is what one of our subscribers said about it:
“Would you please pass along my thanks to everyone who contributed to the recent podcast about value investing?
I found the EVE to Leveraged Free Cash Flow explanation illuminating. I used it to evaluate which of my remaining US stocks to sell first if need be.
Even though I’m starting out, I also used it to evaluate (and to decide to pass on) a private business, and I’ll use it when I evaluate another private business in the near future.
I heard you got plenty of positive feedback about your two recent Black
Papers, and I want to make sure you get positive feedback about the podcast
too. You guys rock!”
– Ben, Subscriber of Notes from the Field
There are lots of famous investors and hedge fund managers who are legendary stock-pickers.
Warren Buffet is a great example.
Others are hard-core quantitative analysts who build complex trading algorithms.
Ray Dalio, the billionaire founder of Bridgewater Associates, is neither.
He’s a macro investor whose fortune was built on an uncanny ability to spot big macro trends.
He predicted in 2007, for example, that the US housing bubble would burst, and warned the Bush administration that major banks were on the verge of collapse.
The government ignored him.
After the 2008 collapse of Lehman Brothers, Dalio immediately recognized that the Federal Reserve would have to print trillions of dollars to bail out the system… so he positioned his firm for big profits, buying assets like gold and foreign currencies.
Dalio was right again.
Now Dalio has a new warning for anyone who’s willing to listen.
In October he admonished a room full of central bankers in New York that there was simply too much debt in the world.
At the time, total global debt was an astounding $152 trillion.
Total debt has now risen to $217 trillion, according to a report published last month by the Institute for International Finance.
And as Dalio points out, this has consequences.
He told central bankers back in October that “there is only so much one can squeeze out of a debt cycle, and most countries are approaching those limits.”
Governments often go into debt in order to finance big spending projects which stimulate economic growth.
But eventually the amount of growth you can generate from debt reaches a point of diminishing returns.
We can already see plenty of data to support this assertion.
China has taken on hundreds of billions of debt over the last several years in order to maintain its economic growth.
But measures of China’s “debt efficiency” now show, according to the Wall Street Journal, that it takes “increasingly more debt to generate the same GDP growth.”
So China is rapidly reaching its limit in terms of how much economic growth it can squeeze from its debt.
Debt, i.e. government bonds, are supposed to be boring, low-risk investments.
Grandparents buy government savings bonds for their grandkids. Retirees and pension funds hold them as “risk free” assets.
But in a recent piece written for the Economist, Dalio suggests that “the bond market is risky now and will get more so. Rarely do investors encounter a market that is so clearly overvalued and so close to its clearly defined limits…”
He bleakly projects that “investment returns will be very low” and that investment risk will increase, i.e. the “reward-to-risk ratio will worsen.”
Dalio concludes his piece predicting that “savers will seek to escape financial assets and shift to gold and similar non-monetary preserves of wealth, especially as social and political tensions intensify.”
The funny thing about these big-picture, macro trend predictions, is that they seem so obvious in retrospect.
Just look at the 2008 financial crisis.
Banks had spent years accumulating $1.3 trillion worth of no-money-down mortgages made to unemployed borrowers with terrible credit.
Eventually the entire financial system blew up.
Duh. It makes so much sense looking back.
But in 2007 almost everyone thought the boom would last forever.
Nearly every major crisis begins with a false set of beliefs, like “housing prices always go up.”
And after the collapse everyone wonders how we could have believed such nonsense.
Today’s false belief is that these unsustainable debts don’t matter.
Looking back a few years from now it will seem painfully obvious.
$200+ trillion in global debt? $20+ trillion in US debt? Did we seriously believe this would turn out OK?
Dalio’s is a powerful warning, and he poses a logical solution: precious metals and real assets.
Maybe he’s wrong. Maybe $200+ trillion in debt really is consequence free.
Maybe the ultimate false belief of “This time is different” turns out to be true.
But it’s hard to imagine you’ll be worse off taking some very simple steps to reduce your exposure to such obvious risks.
Yesterday I told you that the US government had recently released its annual financial report to the public.
And the numbers are pretty gruesome.
For example, the government’s “net loss” in fiscal year 2016 more than doubled, from MINUS $467 billion to MINUS $1 trillion.
It’s astonishing that anyone could manage to lose so much money, let alone in a year where devoid of major wars, recessions, financial crises, or infrastructure projects.
But what else can we expect from an institution that spent billions of dollars to build a website?
Today I wanted to highlight a few other items from the government’s report that are worth repeating:
1) The federal government failed its own audit. Again. (page 37)
Auditors have a bad reputation. People typically conflate ‘auditor’ with the guys at the IRS who harass taxpayers.
This isn’t the case.
Auditors actually work for you.
Their job is to be an independent, objective set of eyes. They go into a company on your behalf and review all the records to make sure that there’s no fraud or deceit.
Every year, big companies submit their financial statements to auditors for inspection, and auditors spend weeks doing their own studies to determine if those statements accurately reflect the company’s true condition.
In fact, our agriculture company is undergoing an audit right now by a large, international accounting firm.
It’s important: audits provide an independent assessment to the shareholders indicating that everything we’ve said about the company is true.
Needless to say, when a company fails its audit report, it’s a BIG deal.
That’s what happened to the US government.
The government submits its own financial statements each year to the Government Accountability Office (GAO), its in-house auditor.
But the GAO gave the federal government a failing grade, yet again, and specifically singled out the Defense Department for “serious financial management problems.”
If this were a private company, the senior executives would be out on the street and probably facing criminal charges.
2) The government’s single biggest asset is $1 trillion in student debt (p.81)
This is pretty sad.
Like any large business or bank, the US federal government holds a number of financial investments.
Big banks, for example, have bonds, loans, and mortgages on their balance sheet.
For borrowers and homeowners, a mortgage is a liability. We owe the bank money.
But to a bank, a loan is an asset; they’ve loaned the money, and they’re the ones receiving interest payments each month from us.
The government also holds loans as financial assets– specifically student loans.
As of September 30, 2016, America’s youth owed the federal government $953.6 billion from student loans.
By the end of December, that number increased another $100 billion to $1.05 trillion.
This constitutes the US government’s single biggest asset, even more than the aggregate value of their aircraft carriers or national parks.
In other words, the government’s most lucrative asset is the continued indentured servitude of young people in the Land of the Free.
3) This is just the tip of the iceberg… there’s so much more to tell you.
Click here to listen in on today’s podcast– I’ll explain how, based on the government’s own numbers, their actual “net worth” is nearly MINUS $100 TRILLION.
We’ll debunk so many myths from the debt sheep who think it doesn’t matter.
And we’ll discuss a VERY plausible scenario about how this could play out over the next few years… as well as some simple strategies to limit your exposure.
Listen in here.
Every year around this time the US federal government releases an annual financial report to the public.
It would be hilarious if the numbers weren’t actually true.
Just like Apple or Exxon, the government’s annual report contains several important financial statements and detailed commentary about their finances and operations.
But unlike Apple, Exxon, the government can’t manage to turn a profit. Ever.
According to this year’s report, the government’s net loss “more than doubled, increasing $533.2 billion (103.7%) during [Fiscal Year] 2016 to $1.0 trillion.”
It’s extraordinary that they lost $533 billion in 2015, let alone a full trillion in 2016.
Bear in mind, there was no major wars, recessions, or crises to fight.
What did you really receive in exchange for that trillion-dollar loss?
Brand new highway system? Giant tax rebate?
Nope. None of the above.
The sad reality is that it now costs the government so much to run itself, along with paying massive interest on the debt and supporting all of its entitlement obligations, that they lose $1 trillion even in a “normal” year.
What will happen in a bad year?
Then there’s the issue of the government’s “net worth”.
After adding up all of its assets (like tanks, aircraft carriers, government buildings, etc.) and subtracting liabilities (the national debt), the government’s “net worth” was MINUS $19.3 trillion at the close of the 2016 fiscal year.
That’s worse than 2015’s NEGATIVE $18.2 trillion, which was worse than 2014’s NEGATIVE $17.7 trillion, which was worse than 2013’s NEGATIVE $16.9 trillion.
The US federal government is insolvent, plain and simple.
This isn’t some wild conspiracy theory. It is a statement of fact based on publicly available data published by the US government itself.
It’s concerning that the government of the largest economy in the world is bankrupt.
But it’s even more concerning that more people aren’t concerned.
Naturally most of us have been programmed to believe for decades that the US government is rich and always pays its obligations.
This is a dangerous fantasy.
Yes, the government has been able to continually destroy its finances for years without consequence.
And for that accomplishment they should be awarded some special Nobel Prize in Ponzi Schemes.
But history is packed with examples of once-dominant empires who eventually declined under the weight of their unsustainable finances, from the French monarchy to ancient Rome.
Are we really supposed to believe that this time is any different?
Are we really supposed to believe that the US government can continue to indefinitely lose $1 trillion dollars per year without consequence?
Sure, it’s great to hope for the best. And maybe, just maybe, they manage to fix everything.
But it would be dangerous to bet everything you’ve ever earned or plan to achieve on such an unreasonable expectation.
When nations go broke, there are consequences. Simple.
This isn’t some earth-shattering concept. It’s common sense.
And once again, history is generous with examples, from the nationwide bank account freeze in Cyprus in 2013, to Iceland’s capital controls following the 2008 crisis, to the wage and price controls of Emperor Diocletian in ancient Rome.
In each of those instances there were probably countless people who either chose to be willfully ignorant or simply hoped that their politicians would fix everything.
Rational people don’t choose to be ignorant, especially when the government itself puts this data in black and white.
Nor do rational people bet everything on hope.
They have a Plan B. And later this week we’ll discuss some key elements of yours.
I don’t understand Snapchat.
I hate sounding like a grumpy old curmudgeon (I’m only 38!), but it’s true.
If you have kids, you may have seen Snapchat… or if you’re one of our many younger readers, you probably use it yourself.
I understand the basic premise– people share photos with each other, and then add funny ‘filters’ that make them look like a dog with floppy ears.
Last summer at the annual retreat for our Total Access members in the Italian countryside, I asked a member’s 14-year old daughter to explain Snapchat to me.
Her answer summed it up– “Facebook is lame. My mom has a Facebook account.”
Now THAT makes sense.
Apparently 158 million people use Snapchat daily. Most of them are obviously young.
According to the company, its average user spends 25-30 minutes sending 16 “snaps” (photos I presume) per day.
This data has been made public now because Snapchat’s parent company, Snap Inc., is filing to go public in an IPO that will value the company at $30 billion.
That’s seems a hefty price tag given that Snapchat loses tons of money.
In 2015, Snapchat lost $372 million. In 2016, its results were even worse, losing $514 million.
Using the “Free Cash Flow” valuation that we discussed in our most recent podcast, Snapchat’s results are even more dim; Snap lost $677 million in 2016, more than double 2015’s negative free cash flow.
Sure, it’s possible that Snapchat’s fortunes turn and the company becomes the next Facebook.
But in fairness, Facebook was at least profitable when it went public, generating over $700 million in positive cash flow in the 3-years prior to their IPO.
Snapchat has lost over $1 billion in less time.
So despite whatever potential may exist, it seems insanely risky to pay such a steep price for a loss-making company.
Snap isn’t some startup, after all. This is a mature, 6-year old company with nearly 2,000 employees.
Twitter’s been around longer than that and still hasn’t figured out a way to be consistently profitable, so it’s not like being a social media giant is a sure thing.
It’s unclear if Snapchat even has a real plan to make money.
Their IPO filing document with the Securities and Exchange Commission plainly states, “We have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability.”
Plus the company’s website has a bloviating, self-aggrandizing mission statement typical of ‘technology’ companies these days:
“Our products empower people to express themselves, live in the moment, learn about the world, and have fun together.”
I love “tech” companies who think that they are empowering people to express themselves.
Right, because I never quite felt capable of expressing myself properly until I could insert floppy dog ears into a selfie-photo.
(On a side note, I find it revolting how the word ‘technology’ has been debased to the point that it applies to mobile apps to share narcissistic butt-selfies.)
The thing that’s probably most absurd, though, is that Snapchat plans on selling shares to the market that don’t carry any voting rights.
Usually when you’re a shareholder of a company, you are entitled to a share of the profits AND a share of the voting rights.
But there’s a new trend now among self-absorbed “tech” executives who feel that all of us little people need to keep our mouths shut.
So Snapchat is following the footsteps of Google and Facebook, and will issue shares that don’t have any voting rights.
So in summary, Snapchat is losing money. There’s tons of competition from other narcissistic, butt-selfie mobile apps. The company lacks a clear plan. And they’re not even offering any voting rights.
All this for the bargain price of just $30 BILLION. Sign me up!!
To contrast this madness, I want to tell you about an investment I recently made that you probably won’t see on the front page of the Wall Street Journal.
I bought a chicken. 10 of them, to be exact.
I already had plenty of my own, but a local neighbor down the road had extra hens, so I bought some for about $7.50 each.
The new hens started producing eggs immediately.
Bear in mind they’re totally free range. They wander around the farm like they own the place, sticking their beaks wherever they please.
They eat my strawberries, watermelons, and anything else that sparks their curiosity.
(Fortunately we grow an absurd amount of food that could easily feed 50 families… so there’s enough to go around.)
The egg yolks are a deep, almost orange color. It’s great.
In a single week the chickens produce, on average, 5 eggs each.
Organic, free-range eggs are valuable anywhere. Here in Chile they sell for 25 to 50 cents each.
I’ve even sold them myself to people in my building.
So that’s 25 cents x 5 = $1.25, or roughly a 16.6% return on my $7.50 investment. Per week.
Best of all, I still own the chickens, each worth $7.50.
(Plus three of the eggs actually hatched this morning, so now I have even more chickens.)
If I want my money back, I can easily sell the chickens and recoup my original capital.
In the meantime I own real assets that are actually worth what I paid, AND cashflow 16% per WEEK.
I’ll take that over Snapchat any day.
I’m not suggesting that you go buy a bunch of chickens. That might not even be legal depending on where you live.
But the larger point is that there are always a multitude of safe, lucrative opportunities out there.
They’re not as exciting as the high-flying phony tech companies that you see on the front page.
But they’re safe, steady, and dramatically cut your downside risk.
On April 12, 2009, the government of Zimbabwe officially abandoned its currency.
You probably remember the stories; starting in the early 2000s, the Zimbabwe central bank began printing massive quantities of money in order for the government to make ends meet.
This resulted in one of the worst episodes of hyperinflation in modern history.
Zimbabwe’s rate of inflation in 2001 was more than 100%. Prices basically doubled.
But that was nothing.
By 2003, inflation was nearly 600%. By 2006, more than 1,200%. The following year, more than 66,000%.
At its peak in 2009, Zimbabwe’s inflation was estimated at 89.7 sextillion percent, which looks like this:
Eventually the government finally capitulated and chose to abandon its currency altogether.
And for the next several years, Zimbabwe had no official currency.
People transacted in dollars, euros, South African rand, Chinese renminbi… any foreign currency they could get their hands on.
But a few months ago the government of Zimbabwe decided to give it another try.
They created a new type of currency they’re calling a “bond note”, which is basically
Zimbabwe dollar version 2.0.
It’s been barely two months since the bond notes debuted, but people are already losing confidence.
There was even a recent story in which a government agency refused to accept its own bond notes as a form of payment.
It seems Zimbabweans have adopted a ‘fool me twice, shame on me’ attitude. They’re skeptical.
The bond notes are supposed to trade at parity with the US dollar, i.e. a $5 Zimbabwe bond note is supposed to be the same as $5 USD.
The government has absolutely nothing to back up this assertion, other than the usual tactics of coercion and intimidation.
They’ve threatened to throw anyone in jail who’s caught trading bond notes at anything other than the official 1:1 exchange rate.
Naturally these threats have only spurred the creation of a black market where Zimbabwe’s bond notes are bought and sold at their real values.
Right now the bond notes are trading at 5% to 10% below the US dollar. But this is just the beginning.
As Zimbabwe continues to print more bond notes, the new currency’s value will plummet.
But here’s the important thing to remember: it’s not just Zimbabwe.
Just about EVERY country plays games with its currency.
The primary difference boils down to one thing: confidence.
When the US Federal Reserve or Bank of Japan conjures money out of thin air, people still confidence in those currencies.
And western central bankers have not been shy about abusing that confidence in extremis.
In the United States, the Federal Reserve has printed so much money that its capital reserves constitute a mere 0.88% of its balance sheet.
The Fed has essentially rendered itself nearly insolvent.
But hey, confidence.
Meanwhile the European Central Bank has actually made interest rates NEGATIVE.
And in Japan, not only are interest rates negative, but the central bank has resorted to mass-buying of shares on the Tokyo Stock Exchange, to the point that the central bank is now a top 5 shareholder in more than 80 of Japan’s largest companies.
And yet, investors somehow still remain confident that these central bankers know what they’re doing.
Now that is some serious snake-charming talent.
You really have to hand it to these central bankers.
They have managed to convince some of the most financially sophisticated people in the world that these desperate tactics, which are fundamentally no different than what Zimbabwe did, will somehow result in zero consequences.
That’s one serious Jedi mind trick.
Perhaps it will continue to be this way.
Perhaps the confidence in western central banks will last forever no matter how crazy their shenanigans become.
Perhaps there will never, ever be any consequences from their reckless behavior.
And perhaps the New England Patriots will decide to ditch Tom Brady this weekend and put me in the game as their starting Superbowl quarterback.
A boy can dream.
These central banks have managed to make it this far on smoke and mirrors. Kudos for that.
But the old adage of investing holds true in central banking as well: past performance is no guarantee of future results.
There is absolutely zero reason to presume that central banks can maintain course without consequence.
And last time I checked, there was a ton of uncertainty in the world which could potentially shatter that confidence.
It certainly behooves any rational person to look at the big picture and take some sensible steps to distance yourself from the risks.
You can’t control your central bank. But you can control your own decisions.
A decision to own gold and silver, for example, is a conscious choice to trade paper currency (i.e. a liability of a central bank) for something that’s real.
There are countless other options.
If you have the technological understanding, for example, cryptocurrency may be a viable option.
There’s no reason to panic or hastily dump your entire life’s savings into any alternative asset.
Be smart. Be rational. Take baby steps. But definitely take action.
I’ve always been a big believer in entrepreneurship.
But not in the sense that most people think of that word.
My dictionary defines “entrepreneur” as “a person who organizes and operates a business, taking on greater than normal financial risks in order to do so.”
I think this definition is totally wrong.
Entrepreneurship doesn’t have anything to do with owning or starting a business, let alone taking on great risk.
You can be an entrepreneur whether you’re an artist, charity volunteer, self-employed professional, entertainer, designer, teacher, or factory worker.
It’s all about your mindset.
An entrepreneur is fundamentally a value creator and problem solver: someone who creates something from nothing in order to solve a problem.
Essentially an entrepreneur is solution-oriented action taker– a person who works to fix problems rather than simply complain about them.
It sounds simple enough.
But when you think about it, this mindset goes against thousands of years of human development.
Since ancient times our species has been programmed to tolerate and accept problems… sometimes even ignore them.
Whether it’s barbarians at the gate, the astonishing decline of civil liberties, or even just the leaky faucet that won’t stop dripping, we have learned how to adapt and cope with obvious problems… and wait for –other people- to take action.
It’s the “Help! Someone do something!” mentality. This is for victims.
Entrepreneurship is about having the initiative to boldly step forward and take action– which is fundamentally what personal freedom is all about.
We spend a lot of time in this daily letter talking about solutions to big problems, problems like illiquid banks, insolvent governments, negative interest rates, etc.
You’ll probably recognize that the solutions we recommend are all about the individual.
We don’t ever talk about relying on the government to fix problems. They’re the ones who cause the problems.
Instead, we talk about taking matters into our own hands, distancing ourselves from the risks, and increasing our independence and self-reliance.
It’s an entrepreneurial approach to solving big problems at the individual level.
You don’t have to be a billionaire or start multiple companies like Elon Musk in order to adopt this mindset.
Musk is definitely a great example of an entrepreneur.
But that’s because, if you think about it, all of this ventures, from Tesla to SpaceX to his time at PayPal, spring from the same mindset: the initiative and willingness to create value, solve problems, and TAKE ACTION.
This same thinking can apply to a factory supervisor who takes the initiative to boost his production line’s efficiency…
… or to an office worker who takes the initiative to create a social media presence for her employer without being asked to do so.
Everyone comes across opportunities every day, big and small, to take action, create value, and solve problems.
Being an entrepreneur is about willfully flipping the switch in your mind, so that instead of merely noticing problems, you ask yourself, “How do I make this better?”
Certainly, sometimes the solutions themselves require special skills.
Even more, sometimes the solutions create an opportunity to start a business or create intellectual property, which in turn can lead to tremendous personal wealth.
These, too, are skills.
Starting a business is a skill. Managing a business is a skill. Designing products that solve problems and create value is a skill.
Sadly these are not skills that are generally taught in our government-controlled school systems.
But they are skills, nevertheless. Skills that can be learned. By ANYONE.
Like the entrepreneurial mindset itself, this requires the willingness and initiative to take action… in this case, to learn.
Books are a great start, and I can provide a comprehensive list in a subsequent post.
But I wanted to let you know about another option… one that we’ve found to be quite powerful.
By the way, it’s free. I pay for it myself.
I’m talking about our annual youth summer entrepreneurship camp.
(“Youth”, like entrepreneurship, is a state of mind… past attendees have ranged in age from 17 to 45.)
For five days each summer, my colleagues and I conduct an intensive workshop that focuses on teaching critical entrepreneur skills to select attendees who want to use what we teach them to make an impact.
It takes place at a beautiful lakeside resort in Lithuania and attracts incredibly talented, driven people from all over the world.
We only have about 50 slots available, and I’ve had the burden of selecting from countless applicants for the past eight years.
But if you’re truly interested in learning these skills, or improving on the skills that you’ve already learned, I invite you to learn more about what we’re doing.
In the year 440 BC, more than two decades into the reign of Pericles, an audit of treasury in Athens showed a massive surplus of more than 9700 “talents”.
A talent was a common unit of measurement in the ancient world, especially for gold and silver.
And, based on today’s precious metals prices and the traditional gold/silver ratio (14:1) used by the ancient Greeks, 9700 talents is equivalent to about $700 million today.
At the time, Athens boasted a population of around 43,000 citizens and 28,500 foreign residents… so on a “per capita” basis, the ancient Athenian surplus amounted to just under $10,000 per person in today’s money.
If you compare this figure to our modern world, it’s pretty extraordinary.
Modern China, despite all of its incredible wealth and savings, has a total surplus that amounts to less than $1,200 per person.
The United States doesn’t even have a surplus.
So ancient Athens was actually far wealthier than just about every country in our modern world.
Today things are obviously quite different for Greece.
With one of the highest debt levels on the planet, Greece is once again on pins and needles waiting for another bailout.
It’s almost comical how this cycle has repeated for nearly a decade. It goes something like this:
Greece’s government almost runs out of money and becomes very close to defaulting on its debt.
Markets panic. Newspapers pump the Greek default story for weeks. Greek citizens spill out into the streets to protest.
Then Germany, the IMF, or the European Central Bank swoops in at the last minute with a tiny bailout that’s just barely enough for Greece to limp along for a little while longer.
And then everyone forgets about it as if the problem is solved… until it resurfaces again in 9-18 months and the entire process repeats.
So we’re right back in familiar territory: Greece is running out of money and the government is desperate for another bailout.
It’s an absurd situation. And even the institutions who provide the bailout money are starting to realize it.
According to a number of internal IMF memos that have been leaked to the press, the Greek debt situation is “unsustainable” and a “disaster”, and they project that there is no chance for Greece to grow its way out of debt.
It’s pretty obvious– even the IMF knows that these bailouts only delay the inevitable.
Like all bankrupt governments, Greece has very few options.
Default is a given; they’ll either have to default on their creditors, i.e. people who were silly enough to loan money to a bankrupt government. . .
… or they’ll have to default on the promises they made to their citizens, like pension payments and even public services.
Once a country defaults, international financial markets adopt a “fool me twice, shame on me” mentality, so Greece will find it very difficult to borrow money.
This means that the government will have to resort to another common tactic in order to make ends meet: printing money.
Of course, Greece doesn’t have control over its printing press right now since it’s officially part of the eurozone.
So Greece will first have to exit the euro… after which they can print as much worthless paper as they want.
Needless to say this currency debasement has the disastrous effect of causing nasty inflation that steals people’s purchasing power.
The final tactic common to bankrupt governments is plundering the wealth of citizens through capital controls.
Given that Greece already took steps to lock down people’s bank accounts in 2015, this is already happening.
Sure, it’s possible that the IMF provides yet another short-term bailout soon, and that this comical cycle repeats itself in a few months.
But whether the inevitable happens this time around or next is irrelevant. Greece’s long-term trajectory is pretty clear.
Naturally this raises an important question: when a country’s future most likely involves default, inflation, capital controls, and financial crises, does it make any sense to keep the majority of your wealth and savings there?
What’s the point of keeping funds in the Greek banking system if they’re just going to freeze you out of your account in the name of economic security?
By the way, this rationale is the same for ANY bankrupt country, not just Greece.
Italy. Portugal. Even the United States. These countries ALL have “net debt” levels in excess of 100% of GDP, and it gets worse every year.
Consider this: last year the US economy grew a tepid 1.6%. Yet at the same time the national debt grew 5.5%– and that was a “good” year.
How sustainable is it that the debt levels keep growing faster than the economy itself?
It’s not unpatriotic to look at objective, publicly available data and question whether that trend is really risk free.
After all, it seems ludicrous to assume that these governments can continue to accumulate debt forever without consequence.
And it’s hard to imagine that you’ll be worse off keeping a small rainy-day fund somewhere with better fundamentals.
Despite most of the world being saddled with excessive debt, there are still a handful of creditor nations like Singapore or Hong Kong with enviable surpluses that surpass even ancient Athens.
If moving funds abroad seems too complex (trust me, it’s not), an even easier option is keeping physical cash in a safe at your home, along with some internationally recognized precious metals like Canadian Maple Leaf gold and silver coins.
There’s very little downside in having a Plan B and ensuring that you have a small emergency fund that’s outside the control of a bankrupt government.
Even if nothing bad happens, you won’t be worse off.
But should more dangerous scenarios inevitably unfold, these simple steps can make a world of difference.
The numbers are pretty startling.
Nearly 7 in 10 Americans have less than $1,000 in savings.
1 out of every 3 Americans has nothing set aside for retirement.
And, according to Federal Reserve data, the median working-age couple has saved just $5,000 for retirement.
How is this even possible?
How could it be that the citizens of the wealthiest country to have ever existed in the history of the world barely have any savings?
Simple. The cost of living has skyrocketed over time. It’s become terribly difficult for tens of millions of people to keep up. Just look at the data—
This is especially difficult for the Millennial generation, which finds itself spending over of 40% of disposable income on housing costs.
If you add in student debt (which continues to plague millennials), that takes even more money out of their pockets each month.
And God help you if you decide to have children, the cost of which is now at a record level.
According to a study published last year by the US Department of Agriculture (not sure why they’re the ones looking into this…), the overall cost of raising a child from birth to age 21 is now a whopping $233,610.
Private studies have pegged that amount even higher, in excess of $300,000.
And, not that there’s any inflation, but childcare costs have risen so rapidly that it has become impossible for many families to keep both spouses in their careers.
Then there’s the costs of insurance and medical care, which continue to soar to record levels.
Healthcare costs in the United States are now at the highest levels EVER.
But even more importantly, the RATE at which costs are rising reached their highest level in 32 years.
It’s no wonder that people aren’t able to put any money away… or that, despite a brief dip after the Great Recession, consumer credit is once again exploding.
Just like their federal government, Americans are once again heavily indebting themselves.
And it’s easy to understand why: they just can’t make ends meet.
The tiny silver lining is that wages have finally started to grow, albeit slightly.
But wage growth has been vastly outpaced by the rising costs of major expenses– like housing, childcare, insurance, and healthcare.
If you find yourself in this situation… struggling without any real sense of security… I’d encourage you to at least consider one out-of-the-box solution:
Think about going overseas.
It’s 2017. Your ability to generate income no longer depends on geography.
I have friends who run a small CPA practice preparing tax forms from their beach home in Bali.
Others who do construction work here in Chile.
Software developers, agriculture consultants, insurance salesmen, paralegals, real estate brokers… they’ve all moved abroad and are thriving.
The biggest thing you’ll notice in terms of your personal finances, though, is that living costs are often remarkably cheaper.
Sure, if you move to Tokyo, Geneva, or Oslo you’re going to be forking over even more money to live.
But the vast majority of the planet is likely MUCH cheaper than where you’re currently living.
I purchased my apartment here in Chile, in one of the nicest neighborhoods in the entire country, for less than what a down payment would be in most metropolitan areas in the US.
And I wouldn’t even regard Chile’s housing market as being particularly cheap compared to other places around the world.
Your medical costs will also drop. Seriously, it’s a joke.
Medical treatment overseas can be incredibly high quality and just a tiny fraction of the cost.
Insurance will cost a tenth of what you’re currently paying, if you decide to have insurance at all.
You might just choose to pay cash whenever you need treatment, and it won’t cost more than a nice lunch.
Childcare? Forget about it. In a lot of places overseas (especially in Latin America or Asia), labor costs are so cheap that you won’t even think about daycare.
Instead, you’ll easily be able to afford your own round-the-clock, live-in help… for far less than what you’re probably currently paying for daycare.
Oh yeah. And your tax bill will likely go to ZERO.
This goes for just about all nationalities, including US citizens.
American expats have some special guidelines that they need to follow, but as long as you have what’s known as “bona fide” residency, i.e. you are really truly living abroad, and not just on paper, you can exclude more than $100,000 each year in “earned” income.
(Note, this does not apply to investment income… but there are ways to eliminate that as well. More on that another time.)
Most households spend tens of thousands of dollars each year on taxes, most of which has gone to fund more wars and more debt.
Just imagine what you could do for your family’s future with all that extra savings.
There are all sorts of other benefits as well.
You may have the opportunity to learn another language, and for your children to learn another language.
You and your family may be able to obtain another citizenship.
You’ll have unique international experience that certainly looks good on a resume and differentiates you from your peers back home.
And you’ll have the chance to develop a deep, close network of friends… fellow expats who share your beliefs and values.
I understand that as human beings, we are naturally afraid of the unknown.
And moving abroad is a big, big unknown.
Our ancestors braved that uncertainty once as well. They too were searching for a better life. It’s in our DNA.
So if you find yourself in a similar situation– barely able to stay afloat financially, and insecure about the future– it may at least be worth considering the possibility.
Most of the world is in an uproar right now over the travel ban that Donald Trump hastily imposed late last week on citizens of seven predominantly Muslim countries.
But there was another ban that was quietly proposed last week, and this one has far wider implications: a ban on cash.
The European Union’s primary executive authority, known as the European Commission, issued a “Road Map” last week to initiate continent-wide legislation against cash.
There are already a number of anti-cash legislative measures that have been passed in individual European member states.
In France, for example, it’s illegal to make purchases of more than 1,000 euros in cash.
And any cash deposit or withdrawal to/from a French bank account exceeding 10,000 euros within a single month must be reported to the authorities.
Italy banned cash payments above 1,000 euros back in 2011; Spain has banned cash payments in excess of 2,500 euros.
And the European Central Bank announced last year that it would stop production of 500-euro notes, which will eventually phase them out altogether.
But apparently these disparate rules don’t go far enough.
According to the Commission, the presence of cash controls in some EU countries, coupled with the lack of cash controls in other EU countries, creates loopholes for criminals and terrorists.
So that’s why the European Commission is now working to standardize a ban on cash, or at least implement severe restrictions and reporting, across the entire EU.
The Commission’s roadmap indicates that forthcoming legislation, likely to be enacted next year.
This is happening. And it may serve as the perfect case study for the rest of the world.
A growing bandwagon of academics and policy makers in other countries, including the United States, UK, Australia, etc. has been calling for prohibitions against cash.
It’s always the same song: cash is a tool for criminals and terrorists.
Harvard economist Ken Rogoff is a leading voice in the War on Cash; his new book The Curse of Cash claims that physical currency makes the world less safe.
Rogoff further states “all that cash” is being used for “tax evasion, corruption, terrorism, the drug trade, human trafficking. . .”
Wow. Sounds pretty grim.
Apparently pulling out a $5 bill to tip your valet makes you a member of ISIS now.
Of course, this is total nonsense.
A recent Gallup poll from last year shows that a healthy 24% of Americans still use cash to make all or most of their purchases, compared to the other options like debit cards, credit cards, checks, bank transfers, PayPal, etc.
And the Federal Reserve Bank of San Francisco released a ton of data late last year showing that:
– 52% of grocery purchases, along with personal care products, are made in cash
– 62% of purchases up to $10 are made in cash
– But even at much higher amounts over $100, nearly 1 in 5 purchases are still made using physical cash
This doesn’t sound life nefarious criminal activity to me.
It seems that perfectly normal, law-abiding citizens still use cash on a regular basis.
But that doesn’t seem to matter.
A bunch of university professors who have probably never been within 1,000 miles of ISIS think that a ban on cash would make us all safer from terrorists.
You probably recall the horrible Christmas attack in Berlin last month in which a Tunisian man drove a truck through a crowded pedestrian mall, killing 12 people.
Well, the attacker was found with 1,000 euros in cash.
The logic, therefore, is to ban cash.
I’m sure he was also found wearing pants. Perhaps we should ban those too.
This idea that criminals and terrorists only deal in bricks of cash is a pathetic fantasy regurgitated by the serially uninformed.
I learned this first hand, years ago, when I was an intelligence officer in the Middle East: criminals and terrorists don’t need to rely on cash.
The 9/11 attackers spent months living in the United States, and they routinely used bank accounts, credit cards, and traveler’s checks to finance themselves.
And both criminal organizations and terrorist networks have access to a multitude of funding options from legitimate businesses and charities, along with access to a highly developed internal system of credit.
A cash ban wouldn’t have prevented 9/11, nor would it have prevented the Berlin Christmas attack.
What cash controls do affect, however, are the financial options of law-abiding people.
These policymakers and academics acknowledge that banning cash would reduce consumers’ financial privacy. And that’s true.
But they’re totally missing the point. Cash isn’t about privacy.
It’s one of the only remaining options in a financial system that has gone totally crazy.
Especially in Europe, where interest rates are negative and many banks are on the verge of collapse, cash is a protective shelter in a storm of chaos.
Think about it: every time you make a deposit at your bank, that savings no longer belongs to you. It’s now the bank’s money. It’s their asset, not yours.
You become an unsecured creditor of the bank with nothing more than a claim on their balance sheet, beholden to all the stupidity and shenanigans that they have a history of perpetrating.
Banks never miss an opportunity to prove to the rest of the world that they do not deserve the trust that we place in them.
And for now, anyone who wishes to divorce themselves from these consequences can simply withdraw a portion of their savings and hold cash.
Cash means there is no middleman standing between you and your savings.
Banning it, for any reason, destroys this option and subjects every consumer to the whims of a financial system that is stacked against us.
On March 30, 1999, the Wall Street Journal’s front page headline blasted the good news across the world:
“Dow Industrials Top 10,000”
The day before, the all-important US stock index, the Dow Jones Industrial Average, closed above 10,000 for the first time in history.
It was a major milestone, and investors cheered.
A few investors, however, were concerned.
They felt that US stocks were too expensive, and the entire market was in a dangerous bubble.
But the Wall Street Journal answered those naysayers, as the headline of the second article on the front page ominously read:
“If this is a bubble, it sure is hard to pop.”
They were right. Sort of. The Dow Jones Industrial Average continued to climb for the next 8 1/2 months.
But on January 14, 2000, it peaked… and then started a horrible 2-year decline that wiped $5 trillion of wealth from investors.
Yesterday the Dow Jones Industrial Average hit another major milestone: 20,000.
You might even have heard the sound of champagne bottles being simultaneously uncorked by jubilant traders at 4pm Eastern Time.
But Dow 20,000 should give any rational individual pause to reflect on the possible consequences.
After all, the single most important characteristic of any investment is the price when you buy it.
It doesn’t matter how spectacular your investment is. If you overpay for it, you have no margin of safety.
And as the market affirmed yesterday, US stock prices can be expressed in a single word: expensive.
It’s not the fact that the Dow hit 20,000 that makes US stocks so expensive. The price of a stock alone doesn’t tell you much.
It’s important to look at the price of the stock relative to other important metrics, like cash flow, book value, sales, earnings, etc.
US stocks right now are selling at the HIGHEST price-to-sales ratio in at least 15 years, and far higher than it was before the 2008 crash.
Similarly, the cyclically-adjusted Price/Earnings ratio of the US stock market is now at its highest level since the 2000 crash, and higher than it was before the 2008 crash.
Looking at other metrics like Enterprise Value to EBITDA (a measure of a company’s core business operating cashflow), US stocks are also at their most expensive levels since the 2000 crash.
Certainly, US stocks could continue to become more expensive. Perhaps they go up forever.
Or perhaps an astute investor should start looking for a margin of safety.
Once significant measure of safety is a company’s Price/Book ratio. This is essentially a reflection of how much an investor is paying relative to the value of a company’s “net worth”.
In his book What Works on Wall Street, author James O’Shaughnessy conducted an analysis of the investment strategies that were the most (and least) successful in the US stock market for a period of over 50 years.
One of the most successful strategies? Buying companies with LOW Price to Book ratios.
One of the least successful strategies? Buy companies with HIGH Price to Book ratios.
Over the long run, value investing beats just about everything. And these extremely high multiples in the US market clearly do not qualify as good value.
This is not to say that the entire US market is overvalued; there are still pockets of value in North America. But they are becoming much more difficult to find.
Looking abroad, however, there are a number of other markets overseas where valuations are MUCH more attractive.
If North America stands out by way of high valuations, for example, Japan stands out by way of low and attractive ones.
One third of the entire Japanese stock market has a cash flow yield (Enterprise Value / Cash From Operations) of over 15%.
No other developed market comes close to that.
And as analysts from European bank SocGen point out, Japanese companies also have more net cash than listed businesses in any other country:
More importantly, Japanese companies are being actively encouraged to pay higher dividends and buy back their shares.
Whereas the balance sheets of US companies are groaning with years of accumulated debt, Japanese balance sheets are the healthiest in the world, and they are awash with cash to give back to their shareholders.
Japan is very enticing to value investors, and it’s a great example of how looking abroad and expanding your thinking to the entire world can yield very compelling results.
Our analysts at the 4th Pillar Investment Alert service have found a profitable Japanese company whose stock price is so cheap it’s selling for less than the amount of cash the company has in the bank.
Plus, the company is already paying a strong dividend.
This strategy is a no brainer. Don’t miss out on the next edition of the 4th Pillar, or the chance to subscribe at an incredible 45% discount.
This special offer ends tomorrow.
[Editor’s note: We have made this content available as an audio and video podcast, but I encourage you to watch the video with the slides.]
In the video I mention a preview issue of our 4th Pillar Investment Service.
Click here to download it.
For most of the past week, we’ve been spending a lot of time talking about trading overvalued paper currency for high quality, undervalued businesses.
Right now, this is an absolute no-brainer to consider.
If you’re holding US dollars, it’s critical to understand that the President of the United States, as well as key members of the Federal Reserve, ALL want the US dollar to get weaker.
This means you have an opportunity right now to trade overvalued US dollars, which will likely get weaker, for high quality, undervalued businesses, which will likely get stronger.
This is easier said than done, of course.
Problem #1 is finding a great business.
Problem #2 is making sure that you don’t pay out the nose for it.
Netflix, for example, may be a very nice business with a lot of growth potential… and even more investor hype.
But if you’re going to buy shares, be prepared to pay dearly for them.
It will take several decades for Netflix to generate enough cashflow to recoup your investment.
Successful investors never overpay.
Instead, they patiently seek out great businesses whose shares they can acquire for bargain, discount prices.
This is not rocket science. Successful, rational investing is a skill, and one that can be learned.
Last week I promised to explain how my team finds and analyzes these types of deals to ensure that we can generate strong returns while taking minimal risk.
I ended up recording a full presentation about it.
Even if you’re already an experienced investor, I’d encourage you to watch this presentation, or listen to the accompanying audio.
The presentation explains, for example, why conventional valuation metrics are deeply flawed.
Most people are probably familiar with the famous “P/E” ratio.
I’ll show you why P/E ratios are worthless… and teach you about a FAR better metric to look at… one that few people have ever heard about.
Once you understand it, you’ll never look at investments the same way ever again.
In the video I mention a preview issue of our 4th Pillar Investment Service.
Click here to download it.
In September 1986, The Economist weekly newspaper published its first-ever “Big Mac Index”.
It was a light-hearted way for the paper to gauge whether foreign currencies are over- or under-valued by comparing the prices of Big Macs around the world.
In theory, the price of a Big Mac in Rio de Janeiro should be the same as a Big Mac in Cairo or Toronto.
After all, no matter where in the world you buy one, a Big Mac generally consists of the same ingredients– two all beef patties, special sauce, etc.
A Big Mac currently sells for 49 pesos in Mexico, for example; at the current exchange rate, that’s about $2.23 US dollars.
Meanwhile in Switzerland, a Big Mac sells for 6.50 francs, or roughly USD $6.35.
This means that a Big Mac in Switzerland costs 2.8x as much as the exact same burger in Mexico.
Obviously there are a LOT of differences between Switzerland and Mexico that would ordinarily lead to some difference in price.
But 2.8x is clearly excessive, suggesting that the Mexican peso is undervalued relative to the Swiss franc.
The most recent Big Mac Index was just released last week.
It shows that the US dollar is currently OVERVALUED against almost every currency in the world.
Canada. Russia. UK. South Africa. Turkey. Poland. Colombia. Philippines. Euro Area. Australia.
The average price of a Big Mac in each of these countries is dramatically cheaper than in the United States.
The Economist’s data show, for example, that the average Big Mac price in the US is $5.06.
(By the way, that’s 17% higher than the average US price of $4.37 that the newspaper reported in January 2013… not that there’s been any inflation.)
In Canada, however, the paper reports an average price of $6 Canadian dollars, or USD $4.51 at current exchange rates.
This suggests that the Canadian dollar is about 11% undervalued relative to the US dollar.
In the Euro area, the average price of a Big Mac is 3.88 euros, about $4.06 based on current exchange rates.
That implies the euro is 20% undervalued against the US dollar.
In places like Malaysia, South Africa, and Russia, it’s even more extreme, with local currencies 60%+ undervalued against the US dollar.
It’s important to understand what this means.
The fact that the dollar is overvalued isn’t some big prize. It’s not an indication that America is #1, the dollar is King, or that the US economy is strong.
This is a bubble.
Currencies, just like stocks and bonds, are assets traded in global financial markets.
And just like stocks and bonds, currencies can be in a bubble.
You may remember the dot-com bubble of the 1990s, when the stock prices of laughable websites (like Pets.com) soared to unimaginable heights.
As with all bubbles, that one eventually burst, and stock prices crashed.
The US dollar has been in a bubble for more than two years.
Yes, there are clearly a number of fundamental differences between the United States and other countries that would lead to natural exchange rate imbalances.
But again, we’re not talking about the US dollar being overvalued by 5% or 10%. We’re talking about EXTREME differences that are completely irrational.
And it’s not just Big Macs either.
Nearly every shred of objective data suggests that the US dollar is overvalued.
The “US Dollar Index,” for example, which measures the US dollar’s value against an entire group of currencies like the euro, Japanese yen Canadian dollar, etc., is currently at its highest level in 14 years.
Politicians and policymakers hate this.
They ignore all the benefits of a strong currency, and instead claim that a strong dollar makes US goods and services too expensive for foreigners to buy, which hurts exports.
Donald Trump told the Wall Street Journal last week that the US dollar is “too strong. And it’s killing us.”
On that single statement alone, the dollar index fell 1%.
Fed Chair Janet Yellen has also weighed in on the overvalued US dollar, calling it “a drag on U.S. growth”.
No one has a crystal ball, and it’s impossible to predict precisely WHEN this bubble starts to deflate.
In fact, it’s possible that the dollar becomes even stronger than it is today.
But when the two most powerful policymakers in the country both want the US dollar to get weaker, it’s pretty clear what’s going to happen.
This means that, right now, if you’re holding US dollars, you have an opportunity.
The evidence shows that the dollar is irrationally overvalued, and both the Federal Reserve and the US government want it to be weaker.
The evidence also shows that there are plenty of foreign currencies which are heavily UNDER-valued against the US dollar.
The old saying in investing is “Buy Low, Sell High.”
It also works the other way: “Sell High, Buy Low.”
And that is precisely the opportunity right now: to SELL overvalued US dollars at their 14-year high, and BUY top quality, undervalued foreign assets at their record lows.
January 20, 2017
Sovereign Valley Farm, Chile
It’s hard to argue with Barack Obama’s jump shot. I can’t imagine Rutherford B. Hayes having that kind of game.
Or his swagger. Comedic timing. Even charisma.
And there have been plenty of times over the last eight years when, in all seriousness, those qualities have truly mattered.
I can’t imagine anyone not getting goose bumps when President Obama sang Amazing Grace during the eulogy of Reverend Clementa Pinckney in 2015 after the horrific church shooting in Charleston.
During his presidency he had thrust upon him the impossible task of consoling an entire nation over and over again. Personality truly mattered.
But tangible, productive results are an entirely different story, and that’s what I want to examine today.
I’ve read a number of articles this week which glowingly praise President Obama’s accomplishments. Others offer scathing critiques.
Most tend to focus on the Affordable Care Act (ACA), i.e. Obamacare, suggesting that reforming healthcare is one of his most important legacies.
There are undoubtedly millions of people who now have medical insurance that never had insurance before.
And that is certainly a noble accomplishment.
The problem is that focusing on this single metric is a terrible premise.
Millions of people are no longer uninsured. Check. But that’s where their thinking stops.
What’s the overall quality in the system? What’s the cost?
Those metrics are conveniently overlooked.
Not even two months ago, the Obama administration was forced to publicly acknowledge that healthcare premiums will rise by an average of 25% in just a single year under Obamacare.
Plus, many consumers will only have a single option to choose from as a number of major insurance companies scale back insurance policies they offer.
The administration also admitted last year that overall healthcare spending continues to rise, surpassing $10,000 per person for the first time ever.
Then there’s a question of quality and efficiency.
In 2016, a Johns Hopkins study concluded that the number of preventable medical errors has soared in recent years and is now the third leading cause of death in the United States.
Obviously no one can blame Barack Obama for this trend.
But that’s precisely the point: it’s impossible for any program to be successful when the way you define success is so fundamentally flawed.
Obamacare focuses on one thing: coverage. Are more people insured? Yes. And in their mind, that makes it successful.
But anyone who looks at the big picture will reach an entirely different conclusion.
Premiums rose. Overall spending increased. Quality didn’t improve. Americans aren’t getting healthier.
(Not to mention the matter of that $2 billion website…)
However noble the intentions, it’s hard to consider these results a major success worthy of an enduring legacy.
Then there’s the issue of jobs. President Obama has been credited with ‘creating’ more than 11.3 million jobs.
This entire premise, of course, is total nonsense.
It’s not like the President starts businesses and hires people. The only jobs the President creates are in government.
It’s the private sector that create jobs.
And for a guy who once told entrepreneurs, “you didn’t build that,” (referring to their businesses), he sure is quick to take credit for 11.3 million jobs created.
But OK, let’s play along and give him credit: creating 11.3 million jobs is a very noble accomplishment.
Once again, however, this metric for success is flawed.
What’s the quality of those jobs? At what cost?
Total “goods-producing” jobs, i.e. workers who make stuff, actually declined under the Obama presidency.
Manufacturing jobs, construction jobs… even utilities and media jobs… all fell over the last eight years.
Bear in mind that the US was already at the peak of recession when President Obama took office, with unemployment surging.
Yet today, goods-producing jobs are even below those dismal figures from 2009.
So what jobs were created?
A good chunk of them are in healthcare, which sort of highlights the earlier point that Americans aren’t getting healthier since they need even more workers to care for them.
Additionally there were a lot of jobs created in the federal government.
Plus a full 2 million of those new jobs have been waiters and bartenders.
At the beginning of the Obama presidency in 2009, there were 9.5 million waiters and bartenders in the United States.
Today there’s 11.5 million waiters and bartenders.
So it’s not like all these millions of workers who supposedly owe their jobs to President Obama are out there discovering the cure for cancer.
Then you have to look at cost.
Despite these 11.3 million new jobs, the number of food stamp recipients in the Land of the Free Lunch increased by 13.9 million during the Obama administration.
Plus, during his 8-years in office, the Obama administration spent a record $28.7 TRILLION and registered a $10 trillion increase in the national debt.
This means that every job President Obama supposedly created cost the American taxpayer $885,000 in debt. Per job.
This is a pretty pitiful return on investment.
And that’s really the bottom line. Debt lasts.
One day his Supreme Court justices will retire. Obamacare may be repealed. History will forget about his charisma and charm.
Edward Snowden may eventually return home. The 500,000+ pages of regulations his administration issued will be replaced.
And even the families of all the innocent victims who were accidentally killed in his drone strikes may move on with their lives.
But the debt will still be there.
Consider this: in the last two weeks alone, the Treasury Department has auctioned off tens of billions of dollars worth of debt in the form of 30-year bonds.
This means that a child who won’t even be born until 2030 will have some high school summer job in late 2046, and an increasing chunk of his income will be taxed to pay off the debt that Treasury Department borrowed a few days ago.
That’s a legacy which outlasts everything else.
In the mid-1800s at a time when the United Kingdom was still the dominant superpower in the world, an English scientist named Francis Galton wrote a series of papers arguing for the selective breeding of human beings.
Galton’s ideas became known as eugenics.
The concept was that genius and talent were hereditary traits passed from generation to generation, and that, to ensure the growth of our species, the best and brightest should be bred like cattle.
Scientists soon began taking measurements of nose angles and forehead slopes in order to establish a correlation between a physical features and talent.
The scientific community concluded that a person with certain physical features was predisposed for great success and achievement.
But it worked both ways.
If your forehead was too wide, or your nose to jaw ratio too slight, you were viewed as morally and intellectually inferior.
Given that many races share similar physical features, this phony science became the moral justification for segregation, slavery, and even genocide.
Today our species is clearly more enlightened, and we can stand amazed that such ridiculous ideas used to be taken seriously.
There will come a time, however, when our descendents say the same thing about us.
Case in point: half a world away at the World Economic Forum in Davos, Switzerland, Nobel Laureate economist Joseph Stiglitz made remarks earlier this week that the US should “get rid of currency.”
He means paper currency, as in the US should not only get rid of $100 bills… but ALL paper currency– 50s, 20s, 10s, 5s, and even 1s.
You guessed it. Stiglitz suggests that regular people don’t need paper money, and that it’s only useful for drug dealers, terrorists, tax evaders, and money launders.
This thinking is so 20th century, and it’s simply wrong.
ISIS is a great example.
The US military has literally blown up more than a billion dollars worth of ISIS’s stockpiles of physical cash during airstrikes.
But this hasn’t affected their terrorist activities one bit.
That’s because the most notorious terrorist group on the planet famously uses both the world’s oldest currency (gold) and the world’s newest currency (Bitcoin).
Professor Stiglitz has likely never been anywhere near a terrorist, so he likely doesn’t have a clue how they conduct financial transactions.
Stiglitz also relies on the old claim that cash facilitates illicit activity.
Again, this thinking only highlights a Dark Ages mentality.
In the today’s world, drug dealers and prostitutes accept credit cards.
No matter what you’re selling on a street corner, whether it’s hot dogs or marijuana, there are plenty of solutions (like Stripe, Square, or PayPal) to easily allow anyone to accept credit card payments.
But these intellectuals seem stuck in a Pablo Escobar fantasy that drug dealers have entire rooms filled with cash.
What Stiglitz, and perhaps many law enforcement agencies, fail to realize is that one of the biggest tools in masking illegal activity is actually Amazon.com.
Specifically, Amazon gift cards.
If you’re looking to quietly and easily pay large sums of money, even tens of thousands of dollars, you can do so with Amazon gift cards.
Amazon gift cards are essentially a “cash equivalent”.
Amazon sells just about everything on the planet, so its gift cards can either be spent or quickly resold for cash.
(You can obscure a financial transaction even more by using an Amazon gift card to buy another gift card…)
Curiously there are no loud, universal calls to ban Amazon gift cards. That’s because these policymakers and academics are stuck in the 1980s.
Instead, they’ve nearly all jumped on board the “cash ban” bandwagon.
These guys just don’t get it.
Cash isn’t about tax evasion or illegal activity.
It’s about having a choice.
Any rational person who actually looks at the numbers in the banking system has to be concerned.
In many parts of the world, banks are pitifully capitalized and EXTREMELY illiquid.
This is especially the case in Europe right now where entire nations’ banking systems are teetering on insolvency.
In the United States, liquidity is also quite low, and banks play all sorts of accounting games to hide their true financial condition.
Plus, never forget that the moment you deposit funds at a bank, it’s no longer YOUR money. It’s the bank’s money.
As a depositor, you’re nothing more than an unsecured creditor of the bank, and they have the power to freeze you out of your life’s savings without even giving you a courtesy call.
Physical cash provides consumers another option.
If you don’t want to keep 100% of your savings tied up in a system that’s rigged against you and has a long history of screwing its customers, you can instead choose to hold physical cash.
There’s very little downside in doing this, especially since most people are barely making any interest in their checking accounts anyhow.
Physical cash means there is no one else standing between you and your savings.
But Professor Stiglitz and his colleagues don’t want that.
They want a massive, centralized bureaucracy to have control over your savings.
This, coming from a man wrote in his 2012 book The Price of Inequality,
“[T]he success of [Apple and Google], and indeed the viability of our entire economy, depends heavily on a well-performing public sector. There are creative entrepreneurs all over the world. What makes a difference. . . is the government.”
Sam Walton, Richard Branson, Steve Jobs, and millions of other entrepreneurs are apparently worthless. To paraphrase Barack Obama, “They didn’t build that.”
All that matters is the government.
Just like his call to eliminate cash, Stiglitz’s entire book is an impassioned argument for MORE centralization and government control.
150 years ago, Francis Galton’s appalling ideas were considered science.
Stiglitz’s ideas are what pass as science today.
They’re equally ludicrous.
And one day our future descendants will look back on our own time and wonder how so many people could have allowed themselves to be fooled.