FINANCIAL SURVIVAL 101
Most people are oblivious to what’s going on in America. They don’t "get it." You may not either. If so, I’m going to give it to you straight. It’s time for a wake-up call. It’s time for you to "get it." If you don’t "get it", your financial future is dim.
Last week I was talking with my 72-year old corporate counsel, who is planning to retire. I told him he couldn’t afford to retire. "You only have a million dollars," I said. "Subtract a $100,000 a year for inflation. In nine years you have the purchasing power of $100,000. You’ll be greeting people at Wal-Mart." I was only guessing about his net worth. Perhaps he’s got $2 million or more. I continued, "You’ve got guys managing your money who don’t "get it.". You’ve got these establishment guys with conventional investments in stocks and bonds, and they don’t see the big pictures. They could wipe you out." "I suppose," he mumbled.
My lawyer doesn’t "get it," doesn’t want to "get it." I understand that because almost nobody "gets it." It’s over for the America we’ve known. We’re on the down escalator. The assets we’ve relied on to keep us secure are now riskier than ever.
In the fall of 1999 I wrote a newsletter that warned about a pending crash in the stock market. The NASDAQ collapsed a month later. Subsequently, I wrote a newsletter about a coming crash in residential real estate. In 1999 I wrote a novel about gold rising to $1,000, people losing their homes, high inflation and a bad economy. It was right on the money. I’m not bragging, I’m making a point. How did I write such accurate forecasts? I learned the economics of sound money and free markets. There are incontrovertible truths in economics and when they are violated, the outcome is easy to predict. It’s no particular brilliance on my part, only common sense conclusions that any unbiased reader would arrive at.
Eighty years ago, in 1928, Babe Ruth, the greatest baseball player of all time, made $50,000 a year. Alex Rodriguez, a Yankee star of today, makes $28 million. The Babe made 1/5 of 1% of Rodriguez’s salary. That’s .002. In a way, you could say the money of 1928 has become virtually worthless.
Let’s go back 40 years – half way to 1928. In 1968 Willie Mays was voted the most valuable player in the All-Star game. He made $120,000 that year. Do you "get it"? $50,000 - $120,000 - $28,000,000. The rate of depreciation of the dollar is increasing exponentially (the bigger it gets, the faster it grows). Somewhere in America today (or in South America), a two year old kid tosses around a rubber ball. In less than 30 years he will earn one-billion dollars a year to play baseball.
In 1934 the politicians gained control of the money. The free market had determined that gold and silver were money. (Remember, the free market is the clearinghouse for the buying choices of the citizens. In the free market the consumer is king, not the government. The consumers decide who succeeds and who fails through their buying choices. The free market is the essential component of liberty.) I’m not stumping for a return to the gold standard. There isn’t enough silver available to be money on Wake Island and gold would have to be $40,000 to $50,000 an ounce. However, the one thing to remember about the gold standard is that politicians couldn’t create it out of thin air. That’s why it was good, and that’s why they got rid of it.
When government gained the monopoly on money, abolished the gold standard and allowed politicians to gain control over spending and money creation, the die was cast. It opened the door to ever-expanding social programs, wars and deficits. Before long, money and credit creation were used to stimulate the economy. Artificially low interest rates (not free market rates) spawned booms that invariably turned into recessions when the money growth slowed or interest rates rose. Today’s bubbles are created by excessive money and credit. We currently have bubbles in farmland, commercial real estate, art, antiques and collectors items. It’s the consequence of inflationary money and credit. In 1928, the national debt was $17 billion, in 1968 $347 billion, in 2008 $9 trillion. You see it’s running away.
Wall Street doesn’t "get it," the public doesn’t "get it," the politicians and bureaucrats most certainly don’t "get it" and, it seems that even the Federal Reserve doesn’t "get it." They just keep spending, borrowing and printing more money. Government liabilities may now exceed $60 trillion and the astronomical expenses from government social programs are going ballistic. Furthermore, the current crisis is calling for billions to finance bailouts and other guarantees. There’s no possibility of paying for all this without debasing the currency. Washington claims the inflation rate is under 4% and Wall Street, Main Street and the media buy it hook, line and sinker. Truly they don’t "get it."
The high inflation of today ruins the plans of retirees and throws many of them into poverty. Our inflation rate of 15% (my estimate) also acts as a hidden tax. It impacts the poor, low income workers and those on fixed incomes at exactly the same rate as the rich who can better afford it. This cruel tax, brought to us exclusively by the government, makes poorer those who can least afford it. No person, rich or poor, escapes this terrible depreciation of their money and the subtraction of their purchasing power.
That’s not all. Historically, inflation stokes hatred towards business persons and free enterprise. It elevates left-wing demagogues who promise redistribution. It encourages a bigger nanny state, more lobbying, political corruption and loud demonstrations by subsidized activist group. Ultimately, runaway inflation leads to enormous social unrest, civil disobedience, riots, strikes, radical politics and other destabilizing upheavals.
In the history of severe inflations (including the Weimar Republic and two fiat money episodes in 18th century France) only a few nimble investors and speculators survived and prospered. The vast majority of people lost their shirt. Most of them didn’t know or understand what was happening. They didn’t "get it." There was much speculation gambling, debt and leverage, but in the end, all was lost.
Figure it out for yourself. Stocks are down 20% and inflation is 15% (Shadowstats.com says inflation is 12%). That means many investors are out 1/3, and if inflation stays at this level, in twelve months they will be down 50%. Virtually everyone will argue with this viewpoint. That’s because they don’t "get it." Eventually they face ruin.
Savers and bondholders are also taking a shellacking. Back in 1980 there was an elderly currency analyst by the name of Franz Pick who spoke at monetary conferences. He was fond of saying, "Bonds are certificates of guaranteed confiscation." He may have been premature in 1980, but no longer. In 2000 I bought an old Superman comic book. This high-grade 1941 copy has more than doubled. So far in this century comic books have been better than government bonds.
The secret to financial survival now and in your retirement is to own tangible assets that will appreciate at a level that exceeds the rate of inflation. Convert depreciating paper assets into tangible assets. Make sure they are not in a bubble, and still promise appreciation. Don’t use leverage. Never try to make a killing. Be patient. Do not wind up on the financial scrap heap with the vast army of inflation-ravaged investors who didn’t "get it." Most investors are going to get killed. Be one of the select few who "gets it." Remember that in every big inflation those who listened to government spokesmen were ruined.
I don’t want to terrify you, but there is one more thing I see happening. It could happen soon or it could be a long way off. Pray it’s the latter. Foreigners who hold trillions of U.S. dollars are losing billions as the dollar sinks. The Asians could have losses approaching $2 trillion. Chinese exports to the U.S. amounted to only 2.1% of their rapidly growing economy last year. The world doesn’t need our business as they once did. The stronger the world economy outside of the U.S., the less they’re going to be willing to hold depreciating dollars. Plus, many countries would like to stick it to us.
If too many countries abandon the dollar as the world’s reserve currency, and if a few large Asian countries are unwilling to buy our bonds, our government would soon be insolvent. The dollar would be next to worthless and a paralyzing hyperinflationary depression would lay the U.S. low. Don’t think it’s impossible. We can’t live beyond our means for decades, bury ourselves in debt, and consume more than we produce without a day of reckoning. That sad day is coming, I promise you.