December 18, 2014
On the morning of September 19, 1873, an excited crowd of people gathered outside the Fourth National Bank in lower Manhattan.
It was a wet morning, yet the line continued to grow, stretching across Pine Street down Nassau Street as rain-soaked customers jostled with one another for position.
Some people were clever enough to sell their spots in line to customers who held large deposits at the bank.
The reason? No one thought the Fourth National Bank had money anymore… and they were all cramming in line trying to withdraw their cash before the bank shuttered.
The great Panic of 1873 had just started, and a number of reputable financial firms in New York had already closed. Robinson & Suydam, Jay Cooke & Co. Kenyon, Cox & Co.
Rumors were circulating that even the Pennsylvania Railroad had failed, and that Drexel, Morgan, & Co had closed down its London office.
A full-blown crisis was brewing, and it had unfolded in matter of days.
It wasn’t the first time the country had seen a panic like this. And it certainly wouldn’t be the last.
Thousands of banks failed throughout the 1890s, and another 300 in the first years of the 20th century.
Naturally the government stepped in to ‘fix’ the banking problem with new regulations; their bright idea was to allow banks to hold as little as 15% of their deposits in reserve.
In 1907 an even greater panic kicked off, taking down some of the largest banks in the country.
The circumstances of these crises are always different. But one of the common elements among all of them was a loss of confidence in banks.
People would realize that their bank wasn’t actually holding on to their money after all; or that the bank had taken their money and made stupid loans to bankrupt railroad companies on the other side of the country.
As long as people felt confident that their money was safe, the system functioned just fine. But as soon as there was any doubt, an epic crisis invariably ensued.
Candidly, not much has changed.
In more than a century, there has been practically ZERO evolution in banking. It’s the same con game, the same trickery as it’s always been.
Few people actually realize this. The banking propaganda is so deep that no one ever questions the financial sanctity of his/her bank.
We walk into these ornate buildings with fancy cornerstones to show off how old the bank is.
They conjure images of conservative men in suits scrutinizing every transaction and safeguarding customers’ capital.
They try to make us feel safe by telling us that everything is ‘insured by the government’.
But it turns out that most of this is just myth.
According to its own financial statements, the government which ultimately guarantees the whole banking system is itself insolvent.
The central bank that presides over the banking system is borderline insolvent, again, according to its own financial statements.
And as for the banks themselves, many of them are still poorly capitalized and highly illiquid.
JP Morgan and Citi, for example, both maintain fledgling cash reserves that are as little as 3% of total customer deposits. This isn’t exactly conservative.
Just as it was more than a century ago, modern banking is a confidence game; and the stability of entire banking systems is based on promises that cannot possibly be kept by insolvent counterparties.
Just as happened with Lehman Brothers back in 2008, or the entire Cypriot banking system last year, we could go to bed one night presuming that everything is fine, then wake up the next morning to reality.
Bottom line—you should not assume that your bank is safe. Let the data tell the truth. The numbers speak volumes.
In today’s podcast I’ll show you how to evaluate the safety of your bank as your financial custodian. It’s an incredibly important topic that everyone should pay attention to:
December 17, 2014
Castries, St. Lucia
As he speculated on the ethics of society, Aristotle found himself naturally led to the study of politics.
Putting together his observations, he wrote a treatise on political philosophy (cleverly entitled Politics), in which he describes how a tyrant abuses power for personal benefit at the expense of his subjects.
And they can get away with this either with a reign of terror or by disguising their actions as virtuous.
In order to instill terror in the populace, Aristotle elaborates:
“A tyrant should also endeavor to know what each of his subjects says or does, and should employ spies . . . and . . . eavesdroppers . . . [T]he fear of informers prevents people from speaking their minds, and if they do, they are more easily found out.”
Yes, even 2,400 years later, Aristotle’s treatise seems to be the official playbook for those in power today, because this is precisely what’s taking place.
But it’s not only government spying that poses a threat to your privacy.
As we learned from the ongoing Sony hacking scandal, most of our digital communications are completely unsecure.
And it’s especially striking that a company as large as Sony would take digital security so lightly.
Truth is, there are basic steps that anyone can take to safeguard privacy and protect against theft of emails, identity, and financial information.
First thing’s first: don’t EVER put anything sensitive in an email.
Sending an unencrypted email is like shouting across a crowded room. There is no privacy whatsoever in email.
We put together a comprehensive free Black Paper on how to encrypt your email to help you understand how to secure your communications. I encourage you to check it out and share it with your friends.
And for chat software, here’s a great infographic from the Electronic Frontier Foundation that ranks a number of popular messaging platforms.
You can see that applications like Cryptocat and Adium’s OTR are far superior than, say, Skype or AOL Instant Messenger. No surprise there.
Bear in mind that even encrypted email or chat isn’t totally secure. Just because you encrypt your communications doesn’t mean that it can’t be used against you later on.
Suppose, for example, that you and your business partner use secure email to communicate with one another. Congratulations, you’ve taken the NSA and North Korean hackers out of the equation.
But if your partner decides to sue your ass down the road, suddenly all of those emails become evidence that s/he can use against you in court.
So, again, definitely think twice before hitting the send button. If you have something sensitive to say that you wouldn’t want a jury to see, don’t leave a written record of it… even if it’s encrypted.
Aside from saying bonehead stuff in cleartext email, Sony also royally screwed up by putting sensitive information in unencrypted files on their servers.
This is how tens of thousands of Social Security Numbers got hacked. It’s how we now know that Tom Hanks checks into hotels under the name of “Johnny Madrid”.
It was a really dumb thing to put all of this data in unencrypted files. And it’s an easy fix.
First, don’t just dump all of your data on services like Dropbox (that is guaranteed to lay down and share all of your information with the US government).
There are other services like Switzerland-based Wuala, which offer, secure, “zero knowledge” encrypted storage.
This means effectively that you are the only one who can decrypt the files that are stored.
Yet like Dropbox, Wuala’s software automatically synchronizes your computer to the file server.
(SpiderOak, recommended by Edward Snowden, is a Chicago-based company that provides a similar service.)
For highly sensitive data, it makes sense to encrypt files locally on your own computer FIRST before uploading them to a cloud server.
There are a number of great file encryption tools out there, including TrueCrypt (which has sadly been discontinued as of this year), and the open-source DiskCryptor [for Windows].
Again, there are plenty of great options out there. As I’m fond of saying, all the tools and all the technologies already exist to take back our privacy.
It’s comical, almost. Any measure they try to implement, any law they try to pass, can be undone with existing technology.
If they try to ban firearms, for example, we can start 3D printing them. That technology already exists.
If they implement capital controls tomorrow, we can move straight to crypto-currency.
And if they continue spying on us (which they will), all we have to do is take some basic precautions.
Their power is waning quickly. And all the tools are already available. It’s up to us to use them.
December 16, 2014
Castries, Saint Lucia
Last night, the Russian central bank announced a shock decision to hike up its key interest rate from 10.5% to 17%, effective immediately. Incredible.
On Monday alone the ruble declined more than 9% against the dollar, and almost 50% in 2014. It looks like a massacre.
If you listen to conventional financial news, they’ll all tell you that you’d have to be insane to own anything in Russia right now—stocks, bonds, currency, etc.
They’ll tell you that the ruble is in freefall, and that the dollar is the place to be.
But if you have been a reader of this column for any length of time, you know that I am a very data-driven person.
So… just for kicks, I decided to dive into the numbers and make an objective comparison between the US dollar and the Russian ruble.
The results might surprise you.
First of all, I start off with the premise that ALL paper currencies are fundamentally flawed.
Our global monetary system is absurd—the idea of letting unelected central bankers conjure as much money as they want to out of thin air is simply insane.
But it is true that some fiat currencies have better fundamentals than others. And if you want to understand the health of a currency, it’s imperative to look at the ISSUER of that currency, i.e. the central bank.
As with any bank, one of the most important metrics in determining a central bank’s financial health is its level of solvency.
Specifically we look at the bank’s capital (i.e. net assets) as a percentage of its total balance sheet.
The US Federal Reserve only has a basic capital ratio of 1.26%. Talk about razor thin. (This is down from 4.5% just a few years ago)
That means if the value of the Fed’s assets declines by only 1.26%, the issuer of the world’s dominant reserve currency becomes insolvent.
Now, what happens to the liabilities of an insolvent entity? They decrease in value. Just like how Greek bonds (the liabilities of the Greek government) collapsed a few years ago.
What are the Fed’s liabilities? Open your wallet. Those green pieces of paper aren’t ‘dollars’. Just look. They have “Federal Reserve Note” (i.e. debt) printed on them.
So the Fed’s pitiful financial condition directly affects the value of the dollar over the long-term.
On the other hand, the Russian central bank’s ratio is 12.5%—literally almost TEN TIMES GREATER than the Fed.
Capital cushion is crucial because when the unsuspected happens, this is what can help keep you afloat.
Think about it: you might be able to keep going without savings, perhaps even accumulating debt, but only until something happens out of the blue.
Until your car breaks down, or you need to go to the hospital, for example. Then all of a sudden, your lack of capital can become a serious issue.
Another important metric is gold. As I mentioned, since all fiat currencies are fundamentally flawed, it’s important to see the amount of REAL ASSETS that a central bank holds in reserve.
To make an apples-to-apples comparison, we look at a central bank’s GOLD reserves as a percentage of the money supply, i.e. how much gold backs the money supply.
In Russia, it’s 6.2%. And rising. Last year it was 5.5%, and the central bank is continuing to heavily stockpile more.
How much gold backs the dollar?
Precisely zero point zero percent. Zilch. Nada.
The Fed doesn’t own gold. It loudly proclaims this on its own website: “The Federal Reserve does not own gold.”
It holds ‘certificates’ which are redeemable for US dollars. But there’s not a single ounce of gold backing the US dollar.
So… with no gold and pitifully razor thin solvency levels, it really wouldn’t take much of a shock to topple the dollar.
By comparison, the ruble is much better capitalized and actually has something backing it.
Now, I’m not necessarily advocating to buy the ruble, but hard, publicly available numbers clearly demonstrate the discrepancy between “sentiment” and objective data.
And at a time when the ruble and the whole Russian economy have been beaten down so much that Apple alone is now worth more than the whole Russian stock market, Russian assets certainly make for an interesting speculation.
The bottom line, however, is—if you wouldn’t own the ruble, then what are you doing holding 100% of your assets in the dollar?
December 16, 2014
[Editor’s note: This letter was penned by Sovereign Man’s Chief Investment Strategist, Tim Staermose]
As I was preparing to go and meet a friend who runs a nascent fund management business in Sydney yesterday, I noticed there was a lot of unusual activity going on a block or so from my downtown hotel.
Turns out an armed man had entered a busy café in the heart of Sydney’s central business district and was holding a bunch of people hostage.
The location was obviously chosen for maximum media exposure. It was right opposite the studios of Channel 7, one of Australia’s three big commercial television stations, and right in the center of the city, near offices, and the Pitt Street shopping district, which ordinarily would have been teeming with Christmas shoppers.
Before long, all sorts of rumors began flying. I began getting texts and emails from worried friends and family from all over the world.
I sauntered past the crowds gathering around the “exclusion zone” the police had set up and went to my meeting, avoiding police roadblocks on the way.
What was immediately apparent to me was that NOBODY really knew what was going on. And despite people leaping to all sorts of wild conclusions, all the reporting on the incident was mere speculation.
The police may have known more facts, but they were not letting any news filter out.
Everyone was in the dark, leading to speculation that it was a “terrorist attack” organized by militants affiliated with “Islamic State,” or IS.
That the gunman had made some of his hostages hold up a banner in the window with a verse from the Koran sent the whole world into a tizzy.
Though this banner has in recent times been misappropriated by certain jihadist and militant groups – from discussions with my Muslim friends – in reality it is nothing more than the Muslim equivalent of a Christian holding up a crucifix.
The Prime Minister of Australia came onto live TV and gave a press conference talking tough about national security, about not caving in to threats to our “way of life,” and so on, and urged people to “carry on with the lives as normal.”
No one seemed to be listening, though. All the offices around the area evacuated their staff and told them to go home for the day.
I tried to go to the bank to deposit a check. No luck. All the banks in the CBD had also shut for the day. They even shut the Apple Store, which on a normal day is usually packed.
Tragically, overnight two of the hostages were killed, along with the lone gunman, in what I would term a botched police operation. But the mainstream media are spinning it somewhat differently.
The hostage taker turns out to be a long-term Australian resident who came as a refugee from Iran in the 1980s, and has had numerous arrests and run-ins with the police.
Far from being a part of an organized Islamic terrorist group, the man seems to be a lone loony tune.
Tragically, lives were lost.
But contrary to the Australian Prime Minister’s call to “carry on as normal,” fear and paranoia won the day. The whole of downtown Sydney was shuttered.
And my larger concern is that this will become a rallying cry to implement all sorts of draconian security requirements in the future.
It’s a controversial topic. And we’d be interested to hear… what do you think?
December 15, 2014
Castries, Saint Lucia
On October 9, 1939, Friedrich Nottebohm applied to become a naturalized citizen of Liechtenstein.
Nottebohm had been living in Guatemala since 1905, and as World War II started heating up, he became concerned that his German nationality might cause problems for him down the road.
It turns out he was right.
After attempting to enter Guatemala in 1943, he was denied entry as an enemy alien and later sent to an internment camp in the US. The Guatemalan authorities did not recognize his Liechtenstein naturalization and still regarded him as German.
After he was detained, the government of Liechtenstein petitioned the International Court of Justice on Nottebohm’s behalf against unjust treatment by the government of Guatemala.
In court, the government of Guatemala argued that Nottebohm was not a citizen of Liechtenstein for the purposes of international law since his ties to the country were tenuous at best.
He had been living in Guatemala for 34 years and maintained strong ties to Germany, whereas he had spent only enough time in Liechtenstein to get his papers and showed no intention of building further ties to the country.
The court sided with Guatemala, assessing that there was not a genuine link between Nottebohm and Liechtenstein, and that he would be treated as German for the purposes of international law.
That’s one of the risks in obtaining a second citizenship through an expedited, usually investment related process. Things can change quickly.
For example, St. Kitts and Nevis, another Antilles island nation close by to where I am right now, probably has the most well-known and popular “citizenship by investment” program.
You can become citizen of St. Kitts in as little as six months by investing as little as $250,000 in the country’s Sugar Industry Diversification Fund.
The program is very popular with people from all over the world—US citizens who want to divorce themselves from Uncle Sam, Russians, Middle Easterners, and Chinese.
Why? Because a St. Kitts passport has traditionally been a solid travel document, offering visa-free access to Europe, Canada, and much of Asia.
I wrote earlier this year that the US government had put St. Kitts in crosshairs because of this citizenship program. They accused St. Kitts of “lax controls” and saying that “illicit actors” are using the program to obtain St. Kitts passports.
I warned that the program’s days may be numbered, and that many of the benefits may soon be curtailed.
Sure enough, it’s already happening.
A few weeks ago, Canada became the first major destination to revoke visa-free access for St. Kitts passport holders with immediate effect.
As you can imagine, they cited ‘security concerns’ for doing so.
In light of such absurd doublethink, having a second passport makes more sense than ever.
A second passport means that you’ll always have a place to go– to live, travel, do business, invest, bank etc.
If your home country ever becomes another historical statistic and engages in all the old favorites of bankrupt nations– war, capital controls, price controls, etc., you won’t be trapped.
It’s one of the best insurance policies you could ever have. And if planned properly, you can ensure that there’s absolutely zero downside.
But these “citizenship by investment” programs are under intense scrutiny right now. Aside from St. Kitts, the economic citizenship program in Malta has also taken a lot of fire.
In light of this trend, it may not be worth forking out hundreds of thousands of dollars on a second passport. Yet there are still a number of options to obtain one.
First, instead of trading money for a passport, you can much more easily trade time.
In countries like Panama or Belgium, for example you can apply to become a naturalized citizen after a few years of residency, and you don’t have to spend any meaningful time in the country to qualify.
Or you could do so in Chile where it’s still incredibly easy to establish residency for just about anyone, and the requirements for permanent residency and subsequent naturalization are very lenient.
Second, if you’re flexible, you could consider having baby in a place like Brazil where children born in the territory become immediate citizens, and parents are able to apply for naturalization after an abbreviated residency period.
The easiest option, though, is if you have ancestors from a country that issues citizenship based on bloodlines. That’s usually the easiest, fastest and cheapest way of obtaining a second citizenship and passport.
UK, Ireland, Hungary, Spain, Italy, etc. There are so many options in this case, it’s worth looking at the family tree to see if you quality.
Bottom line, there are plenty of options out there.
And as the clampdown on quick citizenship by investments schemes continues, pursuing one that gives you a much more substantial connection to the country of your chosen second citizenship is the way to go.
December 15, 2014
[Editor’s note: This letter was written by Tim Price, London-based wealth manager and editor of Price Value International.]
“[W]e want to use our reserves more constructively by investing in development projects around the world rather than just reflexively buying US Treasuries. In any case, we usually lose money on Treasuries, so we need to find ways to improve our return on investment.”
– Unnamed senior Chinese official, cited in an FT article, ‘Turning away from the dollar’, 10th December 2014.
“Mutually assured destruction” was a doctrine that rose to prominence during the Cold War, when the US and the USSR faced each other with nuclear arsenals so populous that they ensured that any nuclear exchange between the two great military powers would quickly lead to mutual overkill in the most literal sense.
Notwithstanding the newly dismal relations between the US and Russia, “mutually assured destruction” now best describes the uneasy stand-off between an increasingly indebted US government and an increasingly monetarily frustrated China, with several trillion dollars’ worth of foreign exchange reserves looking, it would now appear, for a more productive home than US Treasury bonds of questionable inherent value.
Until now, the Chinese have had little choice where to park their trillions, because only markets like the US Treasury market (and to a certain extent, gold) have been deep and liquid enough to accommodate their reserves.
The above FT article points to three related policy developments on the part of the Chinese authorities:
- China’s appetite for US Treasury bonds is on the wane;
- China is ramping up its overseas development programme for both financial and geopolitical reasons;
- The promotion of the renminbi as a global currency “is gradually liberating Beijing from the dollar zone”.
The US has long enjoyed what Giscard d’Estaing called the “exorbitant privilege” of issuing a currency that happens to be the global reserve currency.
The FT article would seem to suggest that the days of exorbitant privilege may be coming to an end – to be replaced, in time, with a bi-polar reserve currency world incorporating both the US dollar and the renminbi.
(The euro might be involved, if that demonstrably dysfunctional currency bloc lasts long enough.)
Here’s a quiz we often wheel out for prospective clients:
- Which country is the world’s largest sovereign miner of gold?
- Which country doesn’t allow an ounce of that gold to be exported?
- Which country has advised its citizenry to purchase gold?
Three questions. One answer. In each case: China.
Is it plausible that, at some point yet to be determined, a (largely gold-backed) renminbi will either dethrone the US dollar or co-exist alongside it in a new global currency regime?
We think the answer is yes, on both counts.
Meanwhile the US appears to be doing everything in its power to hasten the relative decline of its own currency.
There is a new ‘big figure’ to account for the size of the US national debt, which now stands at $18 trillion.
That only accounts for the on-balance sheet stuff. Factor in the off-balance sheet liabilities of the US administration and pretty soon you get to a figure (un)comfortably north of $100 trillion.
It will never be paid back, of course. It never can be. The only question is which poison extinguishes it: formal repudiation, or informal inflation.
So the direction of travel of two colossal ‘macro’ themes is clear (the insolvency of the US administration, and its replacement on the geopolitical / currency stage by that of the Chinese).
The one question neither we, nor anybody else, can answer precisely is: when?
There are other statements that beg the response: “when?”
Government bond yields have already entered a ‘twilight zone’ of practical irrelevance to rational and unconstrained investors.
But when do they go into reverse? When will the world’s most frustrating trade (‘the widow-maker’, i.e. shorting the Japanese government bond market) start finally to work?
When will investors be able to enter or re-enter stock markets without having to worry about the malign impact of central bank price support mechanisms?
Here’s another statement that begs the response: “when?”
The US stock market is already heavily overvalued by any objective historical measure.
When is Jack Bogle, the founder of the world’s largest index-tracking business, Vanguard, going to acknowledge that advocating 100% market exposure to one of the world’s most expensive markets, at its all-time high, might amount to something akin to “overly concentrated investment risk”?
Lots of questions, and not many definitive answers. Some suggestions, though:
- At the asset class level, diversification—by geography, and underlying asset type—makes more sense than ever. Unless you strongly believe you can anticipate the actions and intentions of central banking bureaucrats throughout the world.
Warren Buffett once said that wide diversification was only required when investors do not understand what they are doing.
We would revise that statement to take into account the unusual risks at play in the global macro-economic arena today: wide diversification is precisely required when central bankers do not understand what they are doing.
- Expanding on the diversification theme, explicit value (“cheapness”) today only exists meaningfully in the analytically less charted territories of the world. Stock markets in Russia and China, for example, are trading at book value or less, while North American markets 3x more.
- Some form of renminbi exposure makes total sense as part of a diversified currency portfolio.
- US equities should be selected, if at all, with extreme care; ditto the shares of global mega-cap consumer brands, where valuations point strongly to the triumph of the herd.
- And whatever their direction of travel in the short to medium term, US Treasuries at current levels make no sense whatsoever to the discerning investor. The same holds for Gilts, Bunds, JGBs, OATs.
- Arguments about Treasury yields reverting to a much lower longer term mean completely ignore a) the overwhelming current and future oversupply, and b) the utter lack of endorsement from one of their largest foreign holders.
Foreign holders of US Treasuries, you have been warned. The irony is that many of you are completely price-insensitive so you will not care.
There are other reasons to be fearful of stock market valuations, notably in pricey Western markets, over and above concerns over the debt burden.
As Russell Napier points out in his latest ‘The Solid Ground’ piece,
“In 1919-1921, 1929-1932, 2000-2003, 2007-2009 it was not a resurgence in wages, Fed-controlled interest rates or corporate taxes which produced a collapse in corporate profits and a bear market in equities.
“On those four occasions equity investors suffered losses of 32%, 85%, 41% and 51% respectively despite the continued dormancy of labour, creditors and the state. It was deflation, or the fear of deflation, which cost equity investors so much. There is a simple reason why deflation has always been so damaging to corporate profits and equity valuations: it brings a credit crisis.
“Investors forget at their peril what can happen to the credit system in a highly leveraged world when cash-flows, whether of the corporate, the household or the state variety, decline. In a deflationary world credit is much more difficult to access, economic activity slows and often one very large institution or country fails and creates a systemic risk to the whole system.
“The collapse in commodity prices and Emerging Market currencies in conjunction with the general rise of the US$ suggests another credit crisis cannot be far away. With nominal interest rates already so low, monetary remedies to a credit seizure today would be much less effective. Such a shock, after five and a half years of QE, might suggest that the patient does not respond to this type of medicine.”
And since Christmas fast approaches, we can’t speak to the merits of frankincense and myrrh, but gold, that famous “6,000 year old bubble”, has always been popular, but rarely more relevant to the investor seeking a true safe haven from forced currency depreciation and an ever vaster mountain of unrepayable debt.
December 12, 2014
Long ago I sold almost all my possessions and left the Land of the Free.
It was a decision of optimism and adventure—I realized that there were much richer and more rewarding opportunities to do business, invest, and spend time abroad.
The only asset I keep there is a condominium in Dallas. It’s the same place I purchased more than a decade ago to be close to my father when he was diagnosed with inoperable brain cancer.
I left after he passed away, but I kept the condo so that I could have a place nearby my mother and stepfather (who still live in the area) in case the need ever arose.
Over a decade ago when I bought the place, my Homeowners’ Association dues were just barely $200 per month. And I got a lot of value for that.
Back then the dues paid for water, cable, security, gym membership… all sorts of stuff.
Since then the HOA dues have been rising steadily. This year I’ve been paying $450.38 per month.
Yet now I just received a letter notifying me that the fees will be increasing once again starting January 1st to $495.42.
That’s 10%. And that’s on top of a similar increase that I received on my medical insurance premium (after which I promptly dumped the company and switched to a much better international plan——premium members, watch out for an alert on this.)
What’s more, property taxes have gone up every single year that I’ve owned this condo.
(And in case you’re wondering, the unit is worth $20,000 LESS than what I bought it for years before the property bubble formed.)
If we are to trust the official inflation numbers the government puts out, the long-term rate of inflation hovers at around 2% per year.
But you and I both know that prices have been going up much more than that.
And even if you use their own official monkey numbers, wages haven’t kept up.
Think about it: let’s say a loaf of bread costs $1, and you make $50,000 per year. When denominated in bread, your salary is 50,000 loaves.
Next year the price of bread rises to $1.10. Your salary goes up to $51,000. Your new salary in bread is 46,363 loaves.
Even though your salary has actually increased, your standard of living when denominated in loaves of bread has decreased by 7.2%.
Certainly this is a simplistic example. But it shows that inflation is really just a form of theft.
At best, it’s an invisible tax—a transfer of wealth from responsible savers in the middle class to heavily indebted governments.
Through inflation, governments are able to reduce the real value of their debts. And at $18 trillion, the United States government is in serious need of doing so.
That’s why they lie about inflation. And it’s a lie that matters.
At 2% inflation, the average person will see prices double two times in his/her life. In other words, if the price of a widget is $1 on the day you’re born, it will probably cost at least $4 by the time you depart this earth.
Yet if inflation is ratcheted up just by a single percentage point to 3%, then you’ll see prices rise nearly EIGHT fold over the same period. And at 4%, roughly SIXTEEN fold.
Inflation is an extremely destructive force over the long-term for individuals.
Bankrupt governments have every incentive to create it. And they have even more incentive to lie about it.
December 12, 2014
In the Grand Bazaar in Istanbul during the Ottoman Empire it was a familiar site to see a muhtesib or “market inspector” making his way through the stalls.
They were in charge of making sure that everything in the marketplace adhered to state regulations.
Accompanied by some members of the police force, every day they went around, carefully inspecting the activities of each seller to ensure that they were complying with the rules.
If they weren’t in compliance, the muhtesib would set his police thugs on them.
From regulation on the production and distribution of goods, to building codes, and price controls, these average people had their every action controlled by the government.
It didn’t take long for the Ottoman Empire to lose its competitive edge under the weight of these massive bureaucratic burdens.
This has happened to dozens of formerly dominant empires throughout history. And it’s happening in the Land of the Free today.
We may not have the same traditional market square with the imposing presence of the muhtesib. But don’t be fooled, he’s there.
The Competitive Enterprise Institute estimates that the total cost of complying with America’s federal regulations last year was $1.86 trillion.
That’s about $15,000 per household, more than what the average household pays on food, clothing, or shelter each year.
And the number of regulations is rapidly rising.
You might be rather surprised to know that there are a whopping 10,610 bills and resolutions currently before the 113th United States Congress.
But it’s more than that.
What a lot of people don’t realize is that executive agencies have their own ‘rule making’ authority.
Every single business day, in fact, dozens of new rules and regulations are proposed, almost none of which ever become public.
Just today alone, the current issue of the US government’s daily journal of rules (called the Federal Register) is 214 pages. And that’s actually pretty slim for Uncle Sam.
Over the last few days, we’ve seen new regulations about proper handling of Irish potatoes and toy magnet sets. It’s absurd.
For even the tiniest issue, bureaucrats and politicians jump to the rescue.
They “protect” us from bad haircuts, ugly interior designs, and slow-speaking auctioneers (just three examples of the over 1,000 occupations that require government licenses in the Land of the Free).
It’s as if they’re some kind of superhero here to save us from ourselves.
I can just picture it now—Bureaucrat Man! Swooping in to save the day with yet another regulation or piece of legislation!
Smashing anyone who tries to rent his/her apartment on Airbnb, Bureaucrat Man saves the citizens of New York from becoming victims of “greedy landlords”.
In San Francisco he makes sure that you’re qualified enough to—walk dogs, demanding that anyone walking more than four dogs have a valid ($375) permit.
In Florida, Bureaucrat Man ensures that giving food to the homeless is done according to rules and regulations; otherwise you get arrested for your act of indecency, just like a 90-year old man was recently.
Heck of a job, Bureaucrat Man. Noble in his intentions, incompetent in his actions, and ruthless in his enforcement.
December 11, 2014
Exactly 199 years ago, in 1815, a “temporary” committee was established in the US Senate called the Committee on Finance and Uniform National Currency.
It was set up to address economic issues and the debt accrued by the US government after the War of 1812.
Of course, because there’s nothing more permanent than a temporary government measure, the committee became a permanent one after just one year.
It soon expanded its role from raising tariffs to having influence over taxation, banking, currency, and appropriations.
In subsequent wars, notably the American Civil War, the Committee was quick to use its powers and introduced the union’s first income tax. They also detached the dollar from gold to help fund the war.
This was all an indication of things to come.
Over the subsequent decades there was a sustained push to finally establish the country’s central bank that will control money and credit, as well as institute a permanent income tax to feed the expanding aspirations of government.
They succeeded in 1913 when the Federal Reserve Act was passed and the 16th Amendment ratified, binding the country in the shackles of central banking and taxation of income.
Over the century that followed, the US has gone from being the biggest creditor in the world to its biggest debtor.
Decades of expanding government programs, waste, endless and costly wars, etc. have racked up such an enormous pile of debt that it has become almost impossible to pay it down.
A lot of folks don’t realize that, since the end of World War II, the US government’s total tax revenue has been almost constant at roughly 17% of GDP.
In other words, even though the actual tax rates themselves rise and fall, the government’s ‘slice’ of the economic pie is almost always the same—17%.
I’ve worked out a mathematical model which shows that, even with absurd assumptions (7%+ GDP growth for years at a time, low interest rates, etc.), it is simply not feasible for the US government to ‘grow’ its way out.
Default has become the only option. And that could mean a number of things.
They could default on their creditors (other governments like China who loaned money to the US government). But this would spark a global financial and banking crisis.
They could default on the Federal Reserve, which owns trillions of dollars of US debt. But this would create an epic currency crisis for the US dollar.
They could also default on their obligations to their citizens—primarily to future beneficiaries of Social Security (who collectively own trillions of dollars of US debt).
Or they could choose to default on their obligations to every human being alive who holds US dollars… and engineer rampant inflation.
None of these is a good option. And simply put, the US government has reached a point of no return.
I aim to demonstrate this to you in today’s video podcast episode. It’s a very sobering realization. Join me to see it for yourself: http://www.sovereignman.com/podcast/can-the-us-ever-pay-off-its-debt-video-15730/
December 10, 2014
As the holiday season approaches you might have mistletoe on your mind for cheery, romantic reasons.
What you might not have known however is that the festive flora and its relatives are all actually parasites.
Unable to photosynthesize to feed itself, mistletoe latches on to a host plant and steals away its nutrients and water.
From the mistletoe’s point of view this may seem like a great idea… for a while.
Depleted of nutrients, the host’s growth is stunted. Branches fall off. And eventually if the mistletoe grows large enough, the entire host plant just dies.
Thus, mistletoe can quite literally eat its own self out of house and home. This isn’t exactly a solid long-term strategy.
Given their behavior it seems that most governments belong to the same genus.
The public sector has no ability to support itself. In theory, they’re supposed to survive by taking a modest portion of people’s earnings through taxation, and then providing valuable services in exchange.
Nature calls this ‘symbiosis’. But life rarely follows theory.
In reality, bureaucrats and politicians who produce nothing of value parasitically choke off the productive class through onerous taxation and regulation.
This cannot last forever, because at some point they will have no hosts left to feed off of.
Ukraine is the perfect example of this right now.
In a leaked version of a new budget proposal (in Ukrainian), we are seeing the drastic extent to which bankrupt governments feed on their hosts.
The proposal includes measures to cut public education in Ukraine from 11 to 9 years. And more importantly, education will no longer be funded by the state.
There will be no more free food for children in school or for patients in hospitals, and healthcare will no longer be completely state-funded.
The government is also proposing to drastically reduce pension benefits.
Women will have to work 10 more years in order to qualify for a pension, and men an additional 5.
They’re also proposing to FREEZE pension benefits, i.e. no longer adjusting them to the rampant inflation that’s unfolding in Ukraine.
They’d also like to do away with a number of other public services; they’ve proposed slashing the number of judges, prosecutors, and police.
They’ve even proposed reducing the number of members of parliament from 450 to 150.
Now, I happen to quite like the idea that a government is pulling itself out of the business of education, healthcare, security, etc.
But it begs the question—if the government is no longer going to provide these services… then why the hell should anyone have to pay tax?
Of course, taxes are still obligatory.
So on one hand the government is defaulting on all the obligations it has made to its citizens… essentially breaking the social contract.
Yet on the other hand they’re still going to throw people in jail for not paying taxes.
Just like mistletoe, this is a highly parasitic relationship. And it’s precisely what happens when a country goes bankrupt.
Ukraine is in this position for a number of reasons; certainly the war has been very costly and has wrecked havoc on the economy.
But Ukraine’s government has had a long history of pitifully bad decisions, corruption, and fiscal mismanagement. [stop me when this sounds familiar]
At this point they’ve managed to blow the vast majority of their foreign reserves (i.e. the country’s US dollar cash savings).
In fact, as of this morning, Ukraine’s total foreign reserves amount to just 0.34% of its enormous debt level.
This is barely enough to pay interest on the debt for the next six weeks! Astounding.
Oh… wait a minute. Hang on. I got my data wrong. I’m actually talking about the United States.
Fact is, Ukraine has $10 billion in foreign reserves on $70 billion in debt. That’s 14.2%.
The United States, on the other hand, has $61 billion in cash in its operating account [less than Apple], which equals 0.34% of its $18 TRILLION debt.
Nothing to worry about, though.
I’m sure that the rest of the world will continue to give the Land of the Free a pass.
It makes total sense that Ukraine is in the midst of an epic financial crisis, even though the US government is in far worse financial condition.
Because there are absolutely zero problems whatsoever with the US government being admittedly insolvent, highly illiquid, warmongering, and deceitful to even its own allies.
This is a consequence-free environment. Nothing to see here, people; you should have zero concerns about having 100% of your savings and assets tied to a bankrupt government that’s in worse shape than Ukraine’s. What could go wrong?
Hey look over there! It’s Kim Kardashian’s buttocks!
December 10, 2014
When Karl Marx wrote about the bourgeoisie as the “unproductive class” he was writing from personal experience.
The foremost champion of the proletariat, Marx never actually belonged to the working class himself.
Born into a well-off middle-class family, Marx ascended up the social hierarchy by marrying into Prussian aristocracy.
Seven kids later, a lavish lifestyle, and an unwillingness to hold down a job, he found himself deeply in debt, only to be saved by the generosity of his friend Friederich Engels.
Engels found Marx’s ideology so amusing he offered to pay off his friend’s debts AND give him an annual stipend of £350.
That may sound like a paltry figure in today’s terms, but at the time, this was a sizeable sum.
Back then Britain was on the gold standard, meaning that those paper notes were attached to something with weightier value.
The price of an ounce of gold at the time was fixed at £4.24.
So in gold terms, Marx was offered a lush 82.55 ounces of gold per year. And back then, you could actually redeem paper currency for gold.
So while £350 doesn’t even register a week’s wages anymore, the 82.55 ounces of gold that Marx’s stipend was worth is valued at nearly $100,000 per year in today’s money.
(I wonder if the Occupy movement would have included him amongst their ranks, given that this salary nearly puts him in the top 1% at the time)
As Marx ironically shows, paper does not stand the test of time. Gold does.
This of course defies mainstream thinking. We should all feel excited and privileged to hold paper. We’re told that gold is a barbarous relic.
Ben Bernanke once told Congress that he doesn’t “pretend to understand gold prices.”
There’s not really much to understand. Are your pieces of paper really going to be worth anything 150 years from now? Probably not.
If you want your savings and wealth to actually hold value over the long-term, follow the example from the father of communism and enemy of private property: own some gold.
And then to really be sure it gets to your grandkids, check out where are the safest places in the world to store your gold offshore.
December 9, 2014
In the moment after the musicians finished their last song, the silence was broken by the faint tune of someone singing “Mu isamaa on minu arm”.
The singers on stage quickly looked at each other nervously, but seeing strength in each other’s eyes they began to join in.
The year was 1969, and the Soviet leadership that held control over Estonia had banned this patriotic song. Singing it was a crime.
Yet an entire crowd of people defied the secret police and sang it anyway, sparking a peaceful rebellion against an oppressive system.
This seems to be the Estonian way. And today the country is making another unique stand against the existing system.
This time rather than fighting against Soviet domination, they are rebelling against the anti-business, anti-freedom policies of governments across the world.
Doing what has never been done before, the Estonian government has recently introduced an “e-residency” program for foreigners.
The idea is to enable people from around the world to very simply establish a unique digital presence in the country, and then carry the benefits of that with them wherever they go in the world.
E-residency is not the same as traditional residency. We’re not talking about actually moving to Estonia.
But the government there understands that in today’s world, geography is not particularly relevant.
We all have digital personas with which we transact business and engage with one another. So what if your ‘digital self’ could actually ‘live’ somewhere and have rights, privileges, and benefits?
That’s precisely what Estonia’s government is trying to do.
E-residents are issued a digital card that allows the holders to do things like:
- Register an Estonian business online in minutes
- Operate your Estonian company overseas via the Internet (e.g filing taxes, doing accounting, signing papers)
- Open an Estonian bank account and use it online (banking is great in Estonia, with a number of banks offering “Startup Packages”, immediate payment processing, and with worldwide wires costing only 6 euros)
- Sign contracts online by using a digital signature.
Given that corporate income taxes for undistributed profits in Estonia are zero, this is a massive perk to any entrepreneur or anyone interested in diversifying where they bank and source their income.
Estonia wants to make it easy for you to start your business and make money.
At the moment, to apply for the e-residency you need to go to Estonia in person. The whole process takes less than two weeks and costs just 50 euros.
But starting in 2015, you’ll be able to submit your application for e-residency at any Estonian embassy or consulate around the world.
This is a trend we’re seeing play out with increasing regularity.
The current system is based on racking up massive amounts of debt, conjuring money out of thin air, and coercing people with big militaries to use it.
Today the antique nations of the Western hierarchy (primarily the US and Western Europe) do everything they can to drive away talent, productive businesses, and innovation.
They create Byzantine regulations, excessive bureaucracy, and punitive taxes.
But that system is on the way out.
The new system breaks down borders. Geography becomes less relevant.
And governments are actually forced to compete with one another to attract talented residents and businesses.
That’s the future. And it’s already happening.
Panama, for example, has a fantastic program called the “Friendly Nations Visa” whereby people from dozens of countries can obtain residency quickly and easily.
Here in Chile, almost any foreigner can obtain instant permission to work.
And even in bankrupt Europe, governments have created special tax incentives for foreign investors to mop up all of the excess housing liquidity in places like Spain, Greece, and Portugal.
Despite the accelerated onslaught on freedom and opportunity across the Western world, there are places that recognize they have to compete for the best and are following up with action.
Estonia is really taking things to the next level with e-residency, and it’s an encouraging sign of where this trend is headed over the long-term.
December 9, 2014
When Gregor MacGregor returned to London he was a real celebrity.
He had just come back from the New World, where he had a number of successful exploits fighting in the South American struggle for independence and was made the Major-General of the Venezuelan republican army by Simon Bolivar—the leader of Latin America’s independence movement.
From within the dinge of Britain, the New World seemed like the land of both sunshine and wealth.
A number of Latin American countries were gaining independence at the time, and investors were frantically trying to get in early to capitalize on the opportunities overseas. The was the first emerging markets frenzy among investors.
When MacGregor, from his first-hand experiences there, told people of the new country of Poyais—where the climate was mild, the natives were friendly, the water pure, and the land fertile and abundant with high-quality timber—it seemed like there could be no better investment.
So in 1822, when he offered a £200,000 Poyais bond at 6%—twice the rate that British government bonds were going for at the time—who could resist?
It didn’t matter that the government of Poyais had no record of collecting taxes nor did it have any systems in place to raise revenue. The bonds would be easily paid back through export-taxes on the resources being shipped back to Europe.
It didn’t matter that the country had not been developed. There were hundreds of people signing up to build up the settlement there.
It didn’t even matter that the country didn’t actually exist.
The bonds were quickly sold and seven ships of people set out for this land of false promises.
The swindle inevitably came to light a few months later, though initially from a decline in confidence over Latin America as a whole rather than the discovery of Poyais’ non-existence.
And as the value of the fraudulent bonds plummeted, MacGregor simply skipped town to Paris, where he implemented the same scheme yet again.
In total, selling bonds for this fake country he made up he was able to raise £1.3 million, which in terms of the size of the British economy, is comparable to about £3.6 billion today.
Thousands of people lost all of their money believing in his well-orchestrated scheme, and some even lost their lives trying to find this land of opportunity to settle.
Though the country is very real, the US government’s ability to repay its bonds is just as fictional as that of Poyais.
The amount of debt it has accumulated has just surpassed the $18 trillion mark, which no level of taxation or economic growth could ever pay off.
And given that Treasury yields are below even the government’s own official rate of inflation, investing in US debt means not only will you not make money in the future, but you’re also losing money by the day.
This is hands down the worst investment out there, yet so many still pile their money into it.
Just as the Poyais’ scheme was unraveled by skepticism of Latin American bonds overall, the spark that turns the trust of US government finances into dust can come from a decline in confidence anywhere in the system.
You could easily brand the hopeful investors and settlers of Poyais as gullible. And there was a clear information mismatch and a lot of unknowns that fraudulent peddlers like MacGregor could take advantage of.
But loaning money on losing terms to the biggest debtor in history that has practically no mathematical chance of ever repaying it today – when all the facts are out there for everyone to see – is a much bigger insult to reason.
December 8, 2014
[Editor’s note: This letter was written by Tim Price, London-based wealth manager and editor of Price Value International.]
You can be for gold, or you can be for paper, but you cannot possibly be for both. It may soon be time to take a stand.
The arguments in favour of gold are well known. Yet they are widely ignored by the paperbugs, who have a curious belief system given that its end product (paper currency) is destined to fail. We just do not know precisely when.
The price of gold is weakly correlated to other prices in financial markets, as the last three years have clearly demonstrated.
Indeed gold may be the only asset whose price is being suppressed by the monetary authorities, as opposed to those sundry instruments whose prices are being just as artificially inflated to offer the illusion of health in the financial system (stocks and bonds being the primary financial victims).
Beware appearances in an unhinged financial system, because they can be dangerously deceptive.
It is quite easy to manipulate the paper price of gold on a financial futures exchange if you never have to make delivery of the physical asset and are content to play games with paper.
At some point that will change.
Contrary to popular belief, gold is supremely liquid, though its supply is not inexhaustible.
It is no-one’s liability – this aspect may be one of the most crucial in the months to come, as and when investors learn to start fearing counterparty risk all over again.
Gold offers a degree of protection against uncertainty. And unlike paper money, there are fundamental and finite limits to its creation and supply.
What protection? There is, of course, one argument against gold that seems to trump all others and blares loudly to skeptical ears.
Its price in US dollars has recently fallen. Not in rubles, and not perhaps in yen, of course, but certainly in US dollars.
Perhaps gold is really a currency, then, as opposed to a tiresome commodity? But the belief system of the paperbug dies hard.
The curious might ask why so many central banks are busily repatriating their gold? Or why so any Asian central banks are busily accumulating it?
It is surely not just, in Ben Bernanke’s weasel words, tradition?
If you plot the assets of central banks against the gold price, you see a more or less perfect fit going back at least to 2002.
It is almost as if gold were linked in some way to money. That correlative trend for some reason broke down in 2012 and has yet to re-emerge.
We think it will return, because 6,000 years of human history weigh heavily in its favour.
Or you can put your faith in paper. History, however, would not recommend it. Fiat money has a 100% failure rate.
Please note that we are not advocating gold to the exclusion of all else within the context of a balanced investment portfolio.
There is a role for objectively creditworthy debt, especially if deflation really does take hold – it’s just that the provision of objectively creditworthy bonds in a global debt bubble is now vanishingly small.
There is a role for listed businesses run by principled, decent management, where the market’s assessment of value for those businesses sits comfortably below those businesses’ intrinsic worth.
But you need to look far and wide for such opportunities, because six years of central and commercial banks playing games with paper have made many stock markets thoroughly unattractive to the discerning value investor.
We suggest looking in Asia.
As investors we are all trapped within a horrifying bubble. We must play the hand we’ve been dealt, however bad it is.
But there are now growing signs of end-of-bubble instability. The system does not appear remotely sound.
Since political vision in Europe, in particular, is clearly absent, the field has been left to central bankers to run amok.
The only question we cannot answer is: precisely when does the centre fail?
The correct response is to recall the words of the famed value investor Peter Cundill, when he confided in his diary:
“The most important attribute for success in value investing is patience, patience, and more patience. THE MAJORITY OF INVESTORS DO NOT POSSESS THIS CHARACTERISTIC.”
But the absence of patience by the majority of investors is fine, because it leaves more money on the table for the rest of us.
The only question remaining is: in what exact form should we hold that money?
Be patient. And consider the words of James Grant from his quietly passionate and wonderfully articulate Cato Institute speech:
“What will futurity make of the Ph.D. standard? Likely, it will be even more baffled than we are. Imagine trying to explain the present-day arrangements to your 20-something grandchild a couple of decades hence – after the Crash of, say, 2016, that wiped out the youngster’s inheritance and provoked a central bank response so heavy-handed as to shatter the confidence even of Wall Street in the Federal Reserve’s methods.
“I expect you’ll wind up saying something like this: “My generation gave former tenured economics professors discretionary authority to fabricate money and to fix interest rates. We put the cart of asset prices before the horse of enterprise. We entertained the fantasy that high asset prices made for prosperity, rather than the other way around. We actually worked to foster inflation, which we called ‘price stability’ (this was on the eve of the hyperinflation of 2017). We seem to have miscalculated.”
December 5, 2014
It seems rather appropriate that just seven days after the US government hit a whopping $18 trillion in debt, mainstream financial media has picked up the IMF’s recent World Economic Outlook report, which puts the US economy as #2 in the world.
There’s no shortage of ostriches out there who come up with every reason in the world why this doesn’t matter.
They say, ‘oh the IMF is just reporting purchasing power parity.’ Or, ‘oh it’s the per capita GDP that it counts.’
But the obvious truth is that the US is in decline. And it’s being overtaken.
1,000 years ago when Europe was just a tribal backwater with local warlords duking it out over salt mines, Asia was the center of wealth, power and civilization.
China continued to be the largest economy in the world up through 1870.
That changed. The West overtook the East in terms of power and influence and it remained that way for centuries.
Now things are changing once again. The West, and the US in particular, is plagued by:
Insane debt levels, which the government has been accumulating at faster and faster rates, hitting an unprecedented $18 trillion in debt this past week.
Short-sighted monetary policy, from quantitative easing that has debased the currency to negative interest rates that have wiped out any reason to be smart with money.
A crippled economy, as Western nations’ oppressive taxation frightens away the productive, and handouts have created a society of dependency.
Global bullying, as the US spies on its own citizens and allies, compelling businesses and governments to terminate their relationships with the Land of the Free.
Waging endless wars, whether against nouns (‘terrorism’), plants (‘drugs’), and brown people on the other side of the planet who supposedly hate us for our freedom. If they only knew…
A population that lives in fear, as you are more likely to get shot by your own police in the United States today than to ever even see a terrorist.
It’s pretty hard to maintain the top spot when that’s what you stand for.
China obviously has its own substantial problems, but over the last several decades one thing is for certain—China (and Asia in general) is a place where production and savings are valued.
The universal law of wealth is to produce more than you consume. The West has completely broken that.
They’re trying to replace it with debt, war and intimidation. And we’re now only just starting to scratch the surface of the consequences that this brings.
History shows that every time this happens, governments in power will do anything they can to maintain the status quo and keep the party going just a little bit longer.
Do you have an obligation, simply by an accident of birth, to go down with the sinking ship?
Do you owe desperate politicians a greater share of your livelihood so they can blow it on even more war, police and spying?
Or is your primary obligation to your family and your loved ones?
The truth is that all the tools and all the resources exist to disconnect from this economic Hindenburg.
You can choose to either be an unwilling participant in its continued unraveling. Or, to be a curious spectator, having take steps to protect what you’ve worked your entire life to build. The choice is yours.
December 5, 2014
Making up the highest stratosphere in Japanese society, the samurai had quite a reputation to uphold.
Beyond honor and loyalty, they had to keep up appearances by wearing only the highest quality clothing and by being seen in only the best establishments.
The samurai image did not come cheap, often requiring more than their simple stipends could afford.
Thus it became quite common for samurai during the Tokugawa period to rack up large debts from merchant lenders in order to fund the lifestyles that were expected of them.
If a samurai didn’t feel like paying off those debts, however, he could simply have them slashed, with the merchants taking the hit.
The courts didn’t care about the merchants. They were at the bottom of the social hierarchy, and their profit-making activities were not nearly as noble as those of the samurai.
While merchants suffered due to a lack of respect for their activities, peasants suffered in spite of great respect for theirs. Held in high regard as the true producers in society, they were honored by bearing almost the entire population’s tax burden.
This system, where the productive were continually punished, simply couldn’t last. And it didn’t, with the Tokugawa shogunate brought to an end with the Meiji Restoration in 1868.
Yet these lessons have quickly been forgotten, as nearly 150 years later, the same unsustainable practices continue to plague Japan.
The disdain for the productive class is apparent in the heavy taxation of businesses and individuals, while public sector debt has ballooned to well more than double the size of the entire economy.
And just as the samurai escaped paying their bills before, the tradition of screwing over creditors continues today.
The stated amount of the debt might not be slashed, but as the government prints money to repay their creditors, the value of what they repay is worth increasingly less.
Shirking on debt is now an institutionalized part of the system. Today the Japanese government doesn’t just admit to having inflation, it’s one of its key objectives in order to stay afloat.
The Japanese government is walking on a sword’s edge, though. On one hand they need inflation to be able to keep the debt repayments going, but on the other, by pushing for higher inflation they’re inevitably pushing for higher interest rates as well—meaning higher debt payments.
They’ve backed themselves into a corner.
This system clearly has an expiration date, one that’s long past due.
As it is, over 25% of Japan’s tax revenue goes towards just the INTEREST on the debt.
Remember, the late Ottoman Empire’s fiscal situation spiraled out of control just in a matter of years, to the point when they were paying 52% of their tax revenue just to pay interest on the debt in 1877. And at that point they were finished. They defaulted that year.
In April, the Japanese government raised the sales tax rate from 5% to 8%, which while doing nothing for the government’s ability to cover debt payments, did significant damage on the country’s growth in terms of GDP.
Clearly that didn’t work out very well, so they’re postponing the planned second increase in the sales tax.
But by doing that, the country’s credit rating was promptly downgraded by Moody’s.
While it’s astonishing that Japan’s rating is still as high as it is, the shift downwards is critical.
This is the beginning of the end. The Japanese government is running out of moves. If they raise taxes, they lose growth; if they don’t, they lose the last remaining shred of confidence from investors that they’ll ever make good on their debt.
Game over, Japan. Hara-kiri seems to be the only option at this point.
December 4, 2014
One of the great myths about investing that we’re told by the mainstream investment education is that we should “buy and hold” for the long term.
I remember being taught in a personal finance class long ago that I should just buy the S&P 500 index, walk away, and that years later I will have achieved huge gains.
The premise is that over a long period of time, it doesn’t really matter at what point you get in and out. The long-term trend of the stock market portends that you will make money.
It’s those kinds of investing myths that become axiomatic through repetition. You keep hearing the same thing over and over again and pretty soon people believe it.
Let’s look at the data.
It’s true that stock markets have plenty of peaks and troughs. Going back to the last relative peak, the Dow Jones Industrial Average (DJIA) hit just over 14,000 in October 2007; back then this was an all-time high.
If you had bought the DJIA back then, your return on the increase in share prices through today would work out to be a measly 3.5% on an annualized basis.
If you adjust that for taxes and inflation (even using the government’s own monkey numbers for inflation), you’re looking at a real rate of just 1.2%.
Now just think about everything that you saw in the last 7 years. The volatility. The risk. The turmoil.
Was it worth it? Probably not.
But if we go back further and hold an even longer-term view, the picture must brighten, right?
Let’s go to the peak before that. In early 2000, stocks once again reached what back then was an all-time high.
If you had bought the S&P 500 index back then (which is exactly what I was told at precisely the time that I was told), your annualized rate of return through today would be just 2.17%.
If you adjust that number for taxes and inflation, your real rate of return would be a big fat 0.14%… as in less than 1%. It’s practically ZERO.
Think about what you saw over the last 15 years in the markets—the collapse after 9/11, interest rates cut to zero, interest rates ratchet up again, huge swoons in markets, the credit crunch, Lehman’s collapse, the debt ceiling debacle, etc.
Is all that really worth a return of 0.14% per year? (i.e. 14 cents on every $100 invested)
It makes absolutely zero sense to do this with our money. But that’s what we’re forced into right now with most conventional investments at their all-time highs.
Bottom line—you don’t HAVE to be invested in the market. Sometimes the best investment you make is the investment you don’t make.
The challenge is, of course, that if you’re not invested in the market, your money is just sitting at the bank, earning less than the rate of inflation.
Welcome to the world of mainstream financial options. You’re damned if you do and damned if you don’t.
The conclusion here is very simple. It’s time to move on from the mainstream. There’s too much technology and too many global options now to be lulled into conventional investments that are born to lose.
December 4, 2014
On May 15, 1855 one of the greatest gold robberies in history occurred.
Three British firms had arranged for some of their gold to be sent from London to Paris by ferry and train. The gold was stored in solidly built boxes secured within iron safes with two locks.
When the boxes were opened in Paris most of the gold was missing, having been replaced by lead shot.
A grand total of 200 pounds of gold were stolen, worth £12,000 or about $3.7 million in today’s money.
In the investigations that followed, police in Britain and France made extensive searches and arrested hundreds of suspects for questioning but ultimately were unable to find any clues to lead them to the perpetrators.
The case was eventually solved a year later when one of the thieves turned in his co-conspirators after an inner dispute.
Arrests were made and in the end police were only able to recover £2,000 of the stolen gold.
The days of armed bandits robbing banks and riding off on horses has long passed but there are still threats to your savings that exist today.
Of course the biggest criminal gang you have to worry about is your own government.
When governments go bankrupt they often look for creative ways to raise revenue, and they’re getting more desperate by the minute.
At the height of the depression in 1933 Franklin Roosevelt banned private ownership of gold, forcing Americans to sell their gold at $20 an ounce and revaluing it at $35 a few weeks later, creating a nice profit for the government.
There’s little stopping the government from performing a similar act, as much of the public considers gold to be an archaic money instrument.
If you want to keep your gold safe it’s worth looking into other jurisdictions where the risk of gold confiscation is much lower.
Hands down the best country in the world to store your gold is Singapore.
Singapore is rapidly becoming THE place to invest and do business in Asia. Everything is just so much easier there. Regulation is minimal, corruption is among the lowest in the world, and the tax structure is very friendly to businesses and investors.
Prices for gold storage are incredibly competitive, and with recent legislation that eliminated import duties and taxes on investment-grade gold, premiums are dropping.
Gold throughout Asia is still highly valued at a cultural level and not seen as some archaic monetary instrument like it is by many in the West.
It’s quite common for people all across the region to store some of their savings in precious metals. Many people from countries like Vietnam, China, India, Malaysia, and Indonesia use storage facilities in Singapore.
Singapore is well connected, with cheap flights to other countries in the region and direct flights to many places in the world.
Singapore is also home to The Safe House (www.thesafehouse.sg), hands down one of the most advanced precious metals storage facilities in the world.
(Note: I am a director of The Safe House’s parent company, though I have no share ownership.)
Getting your gold in and out of the country is easy to do as well. Gold and silver are viewed as commodities by the authorities, which means there are no reporting requirements.
While the idea of storing your gold thousands of miles away may seem strange, all the evidence shows that it’s a bad idea to store gold in your home country.
If your bankrupt Western government slides into insolvency and begins seizing assets or imposing capital controls, you’ll be the smartest guy the room for having physical gold and silver in Singapore.
Yet if nothing happens for now, you won’t be worse off for holding precious metals abroad.