Unfortunately, we don‘t have an economic instinct that helps us choose our financial actions carefully. It has to be learned. But there is a big promise for taking the time to accurately learn from Austrian economists. The biggest benefit, in my view, is being able to avoid making disastrous financial decisions.
But on the positive side, the cash value of their ideas is this: If you can predict where the market will be, you‘re on your way to building real, lasting wealth. You‘ve found the only ―money making system‖ that exists. If you know Google‘s stock will go up 100%, well then, you should buy it. If you know Google‘s stock will be going down, you can also make money by betting against it. The important thing is to know where the stock is going. If you can predict market ups and downs, you‘re set.
During the housing crisis, the people who saw the crisis coming and bet against sub-prime mortgage lenders or bank stocks, reaped huge, unheard of profits. I remember getting a call from someone in the real estate business as the crisis was underway who was telling me that his bosses were, ―Making a sick amount of money—getting rich—by betting against these mortgage banks.‖
How much money can be made from betting against stocks? Hedge fund manager John Paulson received the largest one year payout in Wall Street history of $4 billion by betting against subprime mortgage companies. It pays to be able to predict the future—it pays to be a good entrepreneur.
The examples above just show some of the many ways to make money with economic literacy. Now, obviously, the money John Paulson made may never be made again so quickly. But on a smaller scale, Paul and Schiff have done quite well by betting on the future of gold prices and other commodities.
“Nine-tenths of wisdom is being wise in time.” ~Theodore Roosevelt.
Why Prediction Matters: Professional Strategies Real estate used to be a glamorous business. There was a ton of money to be made in it for investors and workers alike. If you had a real estate job from 2001 to 2006, people would‘ve thought you had great timing although we were really in the middle of a fake boom. Loan brokers and agents were easily pulling down six figure incomes. But what if you stayed in the business for another two years?
You would‘ve realized you made a big mistake by getting into the business in the first place. From 2001 to 2006 the real estate industry created millions of jobs on credit. So not only would you have lost your job (which was inevitable as credit dried up) but you would‘ve also lost five years of experience in a field of work you should have been in the first place. When the thousands of workers that should never have been in the real estate industry look for other work, they find out that they‘re less competitive.
We don‘t always understand the full costs of the Fed‘s power to alter an economy‘s structure. But it can cost you dearly. One of the negative side effects is that it momentarily diverts human capital from where it can best serve society. This is why predictions matter to the wage worker just as much as it does to the investor. Economic education is not just for business owners.
“The only place opportunity cannot be found is in a closed-minded person.” ~Bo Bennett.
Zero Growth or 400% Return During his 2007 presidential campaign, Paul had to disclose some of the publicly traded stocks he owned. Turns out, he was heavily invested in gold, silver and other metal mining stocks. What do you think the cash-value of Paul‘s recipe was?
If you look at the graph below, you can see the price of gold has almost doubled since 2007, when Paul publicly released his holdings. Of course, since I now get his brand of economics, I‘m positive Paul owned gold, gold related or other precious metal mining stocks years before 2007. Look at the chart below again. If you knew what Paul knew in 2001, your return on gold would have been 400%! Again, the key word is if; a lot of people didn‘t know what he did.
As a side note, this upward rise in gold prices may just be the beginning. Gold miners are digging deeper and faster than ever before but are unable to keep up with global demand. Obviously, Paul made a very good bet— the return on gold has been better than almost every other asset class over the last 10 years.
“The general who wins the battle makes many calculations in his temple before the battle is fought. The general who loses makes but few calculations beforehand.” ~Sun Tzu.
The Lost Decade Other people who didn‘t understand economics weren‘t so lucky. Everyone else who invested in real estate or the stock market didn‘t see any gains from 2000 to 2010. Imagine 10 years of zero growth! We now refer to the last 10 years as the ―lost decade.‖
What makes the lost decade sad is that people had plans that they can‘t go through with now. Some wanted to retire, start a business, go to college, get married or travel. All these plans had to be set aside because of one thing: They didn‘t understand economics.
Most people can‘t afford to lose another decade. After all, we only get 8 of them to start with—maybe 9 if you‘re rich. By the way, referring to the last 10 years (2000-2010) as the ―lost decade‖ is quite optimistic because it wasn‘t just a decade of zero growth but of negative growth.
Although the net worth and incomes of Squirrelmericans have not gone up during the last 10 years, nut prices have. If you account for inflation, they‘ve lost more like 15 years. No baby boomer can afford another 15 years of zero growth.
People are ready to educate themselves about money after experiencing what Time magazine has called the ―decade from hell.‖ How long can people stand to take the abuse of Keynesian or political nutconomists? I predict there‘ll be a huge wave of squirrels looking to empower themselves in the areas of finance and nutconomics in the years to come.
I see this trend in my students. One day, I explained how money, banking, government debt and the Fed work together. The lecture ended after identifying the various causes of our economic crisis and its significance for their careers. During a break one student asked me, ―Based on what you said in class, are you more of an independent or Libertarian now?‖
―Well, I think those are the only two choices we‘ve got—especially for younger people who will inherit the massive debt they‘ve created‖, I replied.
―Me too‖, she said, ―I‘m definitely more of an independent nowadays and I think a lot of people are leaning that way because they finally see how Washington works.‖
We can‘t blame people for seeing the government as the problem— especially with the enormous amount of debt it‘s created, not to mention playing a big role in the economic crisis. Most people‘s 401(k)s are now 201(k)s.
I wonder what their financial lives would look like if, like Paul, they knew enough to buy gold a decade ago or if they‘d known that our government was creating a housing bubble in 2003, five years before the resulting financial collapse. They‘d be 400% richer today.
That‘s the value of what you‘re learning. In our next letter, I‘ll show you why the Austrian economists are always right.
Your Loving Uncle, Akinaw.
How to Understand Your Financial Universe
Dear Kidus,
We can learn a lot from comedians. They just have a way of summing up our most complex life situations into simple statements. Tim Allen, for example, has a clear grasp of sociology: ―Women now have choices. They can be married, not married, have a job, not have a job, be married with children, unmarried with children. Men have the same choice we‘ve always had: work, or prison.‖ What more needs to be said?
As I now explain why Austrian economists are right about the future, keep in mind that it‘s all actually very simple.
How Did They Know it? So, what gave Ron Paul and Peter Schiff (and other Austrian economists) such clear economic foresight? How does one economic school predict every recession of the last hundred years?
It turns out, their powers of insight are based on common sense ideas that are available to the rest of us but only if we look just a little bit below the surface and get rid of some basic economic and political assumptions that we‘ve been trained to accept
as fact.
“All over the place, from the popular culture to the propaganda system, there is constant pressure to make people feel that they are helpless, that the only role they can have is to ratify decisions and to consume.” ~Noam Chomsky.
Principle #1: It All Starts with a Precise Definition of Money To understand the American economic system, you must get a clear, precise grasp of money, credit, and inflation. We should start with money anyway since our net worth is denominated in paper currency.
Two things determine the value of our money: 1) The supply of dollars (arbitrarily determined by the Fed), and 2) the strength of the economy.
Paul has a nagging suspicion that government will always do one thing to our money—it‘ll increase the supply of money to pay for its expenses. But that causes the dollar to be worth less.
Here‘s how it works: As the government keeps printing money, the additional dollars they add into the system dilutes the purchasing power of the ones already in circulation. And since Congress will keep printing money to handle its deficits, Paul predicts that the dollar will lose value over the long term.
We also have history as a guide. Whenever the Fed has increased the supply of money (we‘ll get into this later), it‘s never taken that extra liquidity back out of the system. In other words, the printing will never stop. And this continual expansion of the money supply has another effect.
The price of everything in the economy rises because it takes more dollars to buy the same amount of stuff. Government printing of money is the only reason all prices go up year after year. It"s the only thing that causes system-wide inflation. Because Paul understands this process, he knows that holding his wealth in paper dollars is a major liability.
He doesn‘t invest in U.S. Treasury notes or bonds or CDs because he knows inflation will eat up his wealth. Real inflation, according to trustworthy economists is anywhere between 6 and 9% even though our government says it‘s historically been between 3 and 5%.
The government, by the way, doesn‘t factor in all costs in measuring inflation. For example, it fails to accurately represent housing cost increases in its measurement. But why would they? The lower inflation looks, the more money they can justify printing.
Paul is aware of all these games, dishonest statistics and figures. Because he expects the government to continue to make each dollar worth less by printing trillions to pay for its expenses, Paul puts his money in gold and other things that the government can‘t print.
Investing in gold is a defensive move based on an understanding of what governments always do to the supply of money. What you know has consequences. If you want to avoid the pain of financial loss, you must understand how money works.
“Paper money has had the effect in your state that it will ever have, to ruin commerce, oppress the honest, and open the door to every species of fraud and injustice.” ~George Washington, (letter to J. Bowen of Rhode Island, 1787).
Connect the Dots From that initial fact that government printing of money will reduce the value of each dollar, you can draw other conclusions. You can answer a large number of investment questions based on a correct understanding of money.
“Paper money eventually returns to its intrinsic value—zero.” ~Voltaire
What About Domestic Stocks? Investing in American stocks that earn income in dollars runs into the same problem because the value of dollar denominated dividend payments will be reduced by the rate of inflation. Imagine that you invest in an American company paying a 6% dividend. If you‘re being paid in dollars that are losing 7% of their value every year, your real dividend payment is a negative 1%. Various financial advisors still preach that the U.S. is a good place to invest but we must recognize it for what it is: propaganda.
“Do not buy the hype from Wall St. and the press that stocks always go up.” ~Jim Rogers.
Inflation Adjusted Nation The Fed‘s misrepresentation of inflation numbers is the biggest problem with inflation adjusted investments like annuities or treasuries. You may still see a negative return despite the supposed adjustment. If inflation is 7% but your adjustment is 3%, you‘re losing 4% on your investment.
But a negative return isn‘t all you‘ve got to worry about. For the first time in our history, there‘s a real chance the dollar might collapse.
I used to think that was an alarmist position. How could the dollar collapse? But once you understand the history of paper money, you see it‘s possible because every nation that‘s had paper money has experienced a currency crisis or runaway inflation (Germany, Argentina and most recently, Zimbabwe are a few, famous examples).
“A prudent question is one-half of wisdom.” ~Francis Bacon.
No Money, No Problem Ron Paul decided to run for office because he understood money. He got the political bug when President Nixon decided to completely get rid of something called the ―gold standard‖ in 1971. America had been under some form of a gold standard since its founding.
Under the gold standard, every dollar the government printed had to be backed by a certain amount of gold. That meant paper money was kind of valuable—it wasn‘t monopoly money yet and since there was a limited amount of gold to back each dollar, there was a limit on spending. This was a major inconvenience for our government. They wanted to spend more but their credit card had a limit.
Before Nixon got rid of the gold standard, when other countries wanted to redeem their dollars, we would pay them in gold. But the U.S. was running out of money (real money—gold). In order to continue the Vietnam War and around the world, as well as pay for the War on Poverty, the War on Drugs, and other major expenses, Congress needed money.
So Nixon decided to increase the government‘s credit line by refusing to pay for expenses with real money (gold). After his decision, our money was backed by paper and ink. If we had debts, we paid with paper and ink.
When Paul saw what we had done, he saw it for what it was—the U.S. was declaring bankruptcy. We had no more gold (real money) to pay for our debts. But we had plenty of debt to pay for debt. Debt had become money. But Paul also saw something else: He must‘ve known we‘d take on so much debt that the value of the dollar could one day collapse.
“Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair.” ~Sam Ewing
Principle #2: Money, Government and Human Nature George Carlin once summed up a man‘s fear of commitment: ―‗I am‘ is reportedly the shortest sentence in the English language. Could it be that ‗I do‘ is the longest sentence?‖
Like most fears, it‘s really an irrational one. Married men are actually very happy as long as they do what they‘re told. But there is a commitment that every Squirrelmerican should fear—marriage to endless debt. This marriage is an unholy union of government and paper money.
The wealth of the nation through the abandonment of the gold standard has been placed in the hands of a few secretive and unethical bureaucrats. Credit is the most addictive drug humanity has ever experienced. If government is allowed to print as much money as it wants, it‘ll always want to print just a little bit more.
Year after year, one administration after another, politicians are always increasing something called the debt ceiling. It was originally intended to keep the national debt from rising above a certain maximum limit.
Calling it a debt ceiling is amusing. We should just call it a debt floor because the ceiling of a previous administration becomes the floor of the next.
Why does debt keep increasing? Both political parties under Nixon, Carter, Reagan, Clinton, Bush and now Obama, have raised the debt ceiling.
Why can‘t they stop the compulsive spending? They do it because they can. They do it because voters don‘t know enough about economics to end the Federal Reserve System. The Fed is the entity through which the government secretly steals nuts from future generations of squirrels.
Politicians use the printing press to make promises to the people who vote for them—to
pay for votes without seeming to raise taxes. And in this way, they institutionalize debt. It‘s an illusion of course; all spending is paid for somehow. That somehow is called the inflation tax. Americans don‘t like taxes but they like to spend the wealth of future generations on either social services or war.
Based on what we know of the American political and economic system, we should expect that the value of the dollar will eventually collapse.
Rating agencies have been threatening to downgrade our government‘s credit rating but no politician has been paying attention (except Paul of course).
When the U.S. does lose its undeserved top credit rating, there‘ll be a big price to pay as the cost of borrowing increases dramatically. In the next five years, according to current estimates (without factoring in a lower credit rating) the annual cost of interest payment on government debt could reach $1 trillion! American taxpayers currently pay $400 to $500 billion per year of interest on debt.
These are just some of the reasons I‘m advising my closest friends and family members not to own any stocks or bonds of U.S. based companies or hold onto cash. After all, history has shown that societies don‘t change unless they go through some kind of a major crisis, and even if they do go through such a crisis, they end up making worse choices in response to it. Nazi Germany and the Soviet Union, for example, were irrational responses to economic crisis.
If you remember in my letter on entrepreneurship, I told you that a good entrepreneur needs to have a sense of the ―flow of history.‖ Paul has a good grasp of the rise and fall of empires. All empires crumble when their currencies do. We have no reason to believe that our dollar‘s value will not crumble.
“We learn from experience that men never learn anything from experience.” ~George Bernard Shaw.
Principle #3: Bubbles and Busts Predicting the decline of the dollar‘s value may seem simple enough. After all, if you dilute anything, that thing becomes less valuable. We only value scarce things. That‘s simple to understand.
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