Wealthology

by Akinaw Bulcha

  However, when we come to the subject of economic booms and busts, we think it‘s harder to get. Despite what we may think, if Schiff and Paul were able to foresee these booms and busts, we should be able to do as well.

  But first, let‘s remember why this is important: In investing and in business, timing is everything. We know, for example, that recessions are times when there‘s an enormous transfer of wealth from sellers to buyers. We also know that in economic booms there‘s a huge transfer of wealth from buyers to sellers. When you buy in a bubble, you‘re drastically overpaying—losing wealth and hard earned money. When you sell in a bubble, you‘re reaping a huge profit.

  Many people have heard the motto that an investor should ―buy when there‘s blood on the street‖ (referring to Wall Street). But how do you know when the street is about to bleed? You obviously need to know in order to save up cash to take advantage of the situation when it arises. If you don‘t know, you may find yourself bleeding with the Street.

  So how come Paul, Schiff, Marc Faber and other Austrian economists never seem to be bleeding with the Street? Why do they usually end up unscathed? Alan Greenspan once said that we can‘t know if we‘re in a bubble, but those guys always seem to know.

  Paul was warning Greenspan about the formation of a real estate bubble way back in 2003! Does this mean Paul knows more about the nutconomy than our exalted Alan Squirrelspan? The thing that"s so strange about this scenario is that Paul knew more about the consequences of Greenspan"s actions—the very person in charge of managing the economy!

  Austrian economists know that one of the best ways to find out if you‘re in a bubble is to keep an eye on what our government is doing to the supply of money in the economy. When the central bank pumps too much money into the economy by lowering rates (as Alan Squirrelspan did for years after 2001), asset prices (real estate, bonds, stocks, etc) rise dramatically and a bubble is created; but when the Fed takes the money back out of the economy to avoid inflation, the bubble bursts.

  Austrian economists didn‘t take the bait when asset prices rose dramatically as a result of Greenspan‘s irresponsible credit expansion—they knew the boom was a hoax. Booms and busts are almost always a result of too much credit.

  The Great Depression of 1930s, for example, was a result of flooding the economy with too much credit during the 1920s. In his book, America"s Great Depression, economist Murray Rothbard, points out that bank credit expansion increased by over 68% from 1921 to 1929. In those same predepression years (1921 to 1929), bank lending to stock speculators rose 750%! Think about the incredible amount of risk people took without knowing they were doing so.

  Investors were (a) borrowing money to (b) buy inflated stocks which were soaring because of (c) the initial credit expansion created by the Fed. Some speculators may have known they were playing Russian roulette but they didn‘t know the gun was fully loaded.

  “Getting rid of a delusion makes us wiser than getting hold of a truth.” ~Ludwig Borne.

  Principle #4: Economic Growth These two economists also have a clear and precise idea of economic growth. Sustainable economic growth comes from saving and investment rather than borrowing and spending. You need to know this in order to make wise business decisions. When do you load up on inventory? Should you hold on to your assets? You would if you expect the economy to grow. Should you scale back your expenses because you expect the market to cool?

  If you listen to mainstream economists, their answer to combat recessions is to expand credit (debt). But Austrian economists argue that increasing the amount of debt in our economy just kicks the can down the road, creates a bigger bubble and leads to greater consumption of capital. It doesn‘t increase production and jobs.

  Providing the economy with too much credit (debt) increases the trade deficit because it encourages Squirrelmericans to buy more imported nuts. Debt isn‘t the solution, it‘s the problem. What the U.S. economy needs is less credit, less spending, more savings, more investment, more production and more exports.

  Understanding the causes of economic growth is one of the most important prerequisites to becoming a successful investor. With that understanding, we can choose the right economic environment to grow our investments.

  Beginning with the country first, allows us to make more money safely—regardless of the investment class you choose. It‘s the starting point. Economies comprised of savers and producers do better than borrowers and consumers. This is the reason why unemployment has been decreasing for 13 straight months in Germany. It‘s an export driven economy, Germans don‘t over consume.

  “By continually pushing the message that we have the right to gratification now, consumerism at its most expansive encouraged a demand for fulfillment that could not so easily be contained by products.” ~Ellen Willis.

  Principle #5: Interventionism and Unintended Consequences Austrian economists also base their predictions on the idea that government intervention anywhere—in the marketplace or in foreign affairs—always produces a bigger problem than what it seeks to address.

  We need to understand this concept in order to avoid being consequenced by government actions. Government actions have big, unintended consequences that directly affect our financial lives. For example, in order to ―stimulate the economy‖ after 9/11, Alan Greenspan began flooding the economy with credit by lowering interest rates to 1%. In December 2001, the rate was 1.82%. Two years later in December of 2004, the rate was finally lifted to 2%.

  In 2006, the rate was still a very low 5%. The economy was literally awash with money because Easy Al kept rates absurdly low for five years in the hope of stimulating the economy. As a result, we experienced one of the biggest bubbles in American history.

  “We shall not grow wiser before we learn that much that we have done was very foolish.” ~Friedrich Von Hayek.

  It’s the Stupid, Stupid Now let me explain how stupid we‘d have to be to think we can stimulate an economy by expanding credit. First of all, the public mistakenly thinks that government bureaucrats are smart when the truth is that they‘re shortsighted, unethical and arrogant. Here‘s Greenspan‘s reasoning…

  Step one: He thinks flooding the economy with money will stimulate growth. But there‘s just one problem with that plan: The Fed can"t control what people do with the money once they get it. Think about how logically absurd it is to expect to stimulate the economy by printing money without controlling how and where the extra money is spent! That means the Fed tries to stimulate the economy with the admission they can‘t control the outcome of their actions! Read this paragraph again slowly and you‘ll get why the Fed should not attempt to regulate the economy.

  Here‘s how Easy Al‘s plans went awry: Instead of taking the stimulus money to expand our economy by producing exportable goods, the public used the money to buy massive amounts of imported goods, thereby weakening our economy even further. We didn‘t build new factories, roads, or manufacturing plants—we just spent an enormous amount of money. As Peter Schiff has pointed out in his book, Crash Proof, Greenspan initiated the largest consumption binge in American history.

  Greenspan should‘ve realized this. After all, we‘ve dismantled our industrial base and shipped manufacturing jobs to Asia. Almost everything is made in China, Germany or Japan. We‘re a nation of consumers. Instead of stimulating our economy, the credit expansion stimulated the economies of Asian exporters. The graph below tells the story:

  Look at the sharp rise in imports from 2001 to 2007. In that time of easy credit, imports more than doubled from $1.3 trillion to $2.7 trillion. The one thing you don"t do when our industrial base has been dismantled is give people money!

  The effect of all this spending on imports meant only one thing: Jobs for exporters—not for us. Asian economies have been able to build up their industrial base with our money thanks to Easy Al. The huge transfer of wealth from the U.S. to Asian economies was just one of several ―unintended consequences‖ of too much credit. Government policies somet
imes create the very situation they seek to avoid. These bureacrats aren‘t gods. As I‘ve shown, Ron Paul was warning Alan Greenspan of the consequences of his actions. How scary is it to realize Squirrelspan was making decisions for our economy although he couldn‘t see the consequences of his own actions? It‘s as scary as realizing he doesn‘t understand why stimulating the economy is logically absurd.

  “All the perplexities, confusion and distress in America arise, not from defects in their Constitution or Confederation, not from want of honor or virtue, so much as from the downright ignorance of the nature of coin, credit and circulation.” ~John Adams.

  Recession and Credit Contraction are the Cure We must understand something else about the above graph. If you look at it again, you‘ll see that spending on imports only decreases during recessions (the shaded areas).

  When the Fed increases credit, our economy suffers because money and therefore, jobs flow overseas. In other words, our economy only improves when easy credit is not available to finance imported goods. Economic depressions are the cure, not the problem. Politicians will never tell the public that what we need is a deeper recession to quickly fix all of our problems. Their only motive is to create the illusion of prosperity to get re-elected. Our economy needs to deleverage, we need to get rid of the excess credit.

  “If borrowing and spending all this money led to more jobs, then we would be at full employment already.” ~Paul Ryan.

  Unintended Consequence: The $500 Billion Tax No One Knows About

  There‘s another unintended consequence of the Fed‘s easy credit policies. The following graph shows oil prices for the last 5 years.

  The strange thing about this graph is that when oil prices started to rise dramatically in 2007, we had just entered into a worldwide recession. At its peak in 2008, prices reached $140. This jump in price is strange because no one pays more for a commodity they expect to be used less. Doing that would be like paying double for bread that‘s about to go stale.

  Why would oil prices skyrocket when the demand for oil was decreasing due to a worldwide recession? That doesn‘t make any sense. Well, it does make sense when you realize interest rates were dropped significantly late 2007 and into 2008 after the recession was underway. Take a look at what interest rates did as oil prices were rising dramatically.

  The shaded area in the graph below shows the large drops in rates occurred at the same time the price of oil went up (shown in the graph above). In the second half of 2007 and early 2008, investors had access to a lot more credit as rates dropped. All the extra credit created speculative buying and just like real estate, oil formed a bubble of its own.

  As the price of oil skyrocketed, so did the cost of gasoline. Squirrelmericans spent an extra $500 billion on oil during that period of credit induced speculative buying. That $500 billion cost was only incurred because the Fed flooded the market with credit. The speculation it produced resulted in a tax on the consumer—an unintended tax—but a tax nonetheless.

  Kidus, if you were here when gas prices rose to over $4/gallon virtually overnight, you would‘ve seen quite a spectacle. A lot of people were really angry, but they directed their anger at oil companies instead of looking at our Fed‘s monetary policy. Presidential candidates were priceless with all their posturing and idiotic solutions. They‘d stop to fill up gas for photo ops, called for a ―gas tax holiday‖ and oil windfall profits tax but not one candidate could diagnose the problem. We now know why prices rose so fast.

  “The government solution to a problem is usually as bad as the problem.” ~Milton Friedman.

  Foreign Policy This idea that government actions have unintended consequences applies to foreign policy as it does to the economy. And our foreign policy has a huge effect on our pocketbooks. It‘s not only America‘s biggest expense (bigger than Medicare or Social Security) but it affects our livelihoods in other ways.

  Paul‘s understanding of interventionism explains why his predictions are accurate even in matters unrelated to the economy. But neither his foreign policy predictions nor the logic behind them should surprise us.

  Something some Americans know in their hearts to be true but may not want to admit is that terrorism is, in fact, a response to our intervention in the affairs of foreign nations. I had a hard time admitting this fact myself. But all we must do to understand why Arabs hate American foreign policy is look at what we‘ve done to them throughout the 20th century. No one with an open mind can look at the history of the region and fail to understand they have a reason to be angry.

  Terrorist acts are predictable because terrorism is the only response Arabs have to American aggression. Arab states have been, until recently, run by brutal, puppet dictators that have (for the most part) been installed in power by the United States. Unified opposition to American aggression was impossible for Arab citizens. The response of terrorism is what the CIA calls ―blowback.‖ It means that our aggression/intervention in the affairs of other nations has unintended consequences.

  It‘s politically incorrect to say these things but as I mentioned, Americans already know this to be true in their hearts. Why else would the 500 plus page publication of the 9/11 Commission Report fail to mention the causes of terrorism just once? Not once?

  Why would the commission leave out the most important part of the investigation? Is there a more important question to ask than, ―What causes terrorism?‖ The cause of terrorism was never identified by the commission because they knew the answer. Any psychologist will tell you that truth isn‘t to be found in what is said but what‘s not said. The commission report‘s true findings can be seen not from what they‘ve included in their report but from what they‘ve systematically omitted. They must think we‘re stupid enough to believe the ‗official‘ findings.

  The 9/11 Commission Report committed one of the biggest Freudian slips in American history. It says in big, bold type: ―Our foreign policy is to blame. We messed up. We did something wrong.‖

  Terrorism isn‘t about religion. After all, the Pope lives in Italy. There are more Christians in Brazil and in Europe than in the United States. France, of all places, has gone much further than the U.S. ever will by actually outlawing Muslim women from wearing Burkas (face veils).

  And terrorists don‘t hate us for our freedom. Here‘s a short list of other free nations: Austria, Canada, Mexico, Britain, France, Germany, Australia, New Zealand, Costa Rica, Brazil, South Africa, India and the list goes on (you get the point). For some reason, none of these other nations are called the ―Great Satan‖ by terrorists.

  What"s important to note is how our foreign policy affects our pocketbooks. We‘ve paid dearly for our interventions across the world. I only mention all this because we don‘t learn about this in Business 101. But we live in a large interconnected world, it must be looked at.

  “Bad taste is simply saying the truth before it should be said.” ~Mel Brooks.

  Round and Round We Go

  Speaking of interconnectedness, here‘s a sequenced order of unfortunate events that illustrates this idea of the unintended consequences of government action: 1. Our government intervened in the internal affairs of Arab states (installing hated dictators like the Shah of Iran, Saddam Hussein, etc.).

  2. These events together caused the Sept 11th attacks.

  3. We then had to intervene in the economy. After Sept 11th 2001, Alan Squirrelspan attempted to stimulate it by increasing credit. 4. And because Easy Al kept rates too low for too long, a real estate

  bubble formed and burst.

  5. And because the real estate bubble burst, current Fed Chairman

  Ben Squirrelnanke dropped rates to the floor.

  6. And because he lowered rates, oil speculators bid up the price of

  oil which then created a $500 billion tax on our economy. And

  round and round we go.

  If the government had done nothing, we wouldn‘t have experienced the Sept 11th attacks or the current economic recession. Is there
a more powerful case for not allowing government to make important decisions? Its bad choices affect everyone else in the system because government collectivizes failure. We pay for its failures. Every American paid for Alan Greenspan"s failures because our economic actions are collectivized through the power of the Federal Reserve.

  In conclusion, this non-interventionist philosophy is a big reason (maybe the only reason) the Austrian theory of economics is unpopular, although it has a sterling reputation for making accurate market predictions, something that can make you rich.

  Interventionism is popular around the world because as human beings, we‘re fearful. We want to neutralize perceived threats. When we hold an image of a threat in our minds, we forget it‘s only imaginary. We try to neutralize imaginary threats and create real ones in the process.

  “Don"t be afraid to see what you see.” ~Ronald Reagan.

  The Blessing of Acceptance I used to wonder why it‘s so difficult for us Squirrelmericans to understand how things really worked. But I now know why: Pretending not to know is a powerful temptation.

  The misrepresentation of common sense in economics, politics and foreign policy is precisely what‘s wrong with the American system and why it‘ll destroy itself if it doesn‘t learn to accept reality.

  We can pretend not to know the truth but there‘s just one problem with that: Our lives don‘t matter—we die knowing we were just a cog in the machine. Fitting in has never brought anyone feelings of pride and accomplishment. I once heard someone say that ―If there‘s a hell, it must be a state of being consciously aware of having lived a conventional life of no consequence.‖

  Inconsequential people don‘t think—they do what they‘re told and believe what they‘re told to believe. I feel like I was saved from living a life of no consequence, because I would‘ve been just an unseen blip in human history if it wasn‘t for the hand of Providence. I was plucked out of the remotest part of the earth—I was given a chance. I wake up every day knowing that I could‘ve been a poor, uneducated, shoeless farmer in the outskirts of Ethiopia.