Tag: capital

Capitalism and Creditism and Corporatism, Oh My!

submitted by jwithrow.The Fed

Journal of a Wayward Philosopher
Capitalism and Creditism and Corporatism, Oh My!

December 26, 2014
Hot Springs, VA

The S&P opened at $2,084 today. Gold is flat around $1,198 per ounce. Oil is still checking in at $56 per barrel. Bitcoin is at $326 per BTC, and the 10-year Treasury rate opened at 2.24% today.

All is quiet in the markets this holiday season. We may look back on this time period in a few years and say that we were presented with a tremendous opportunity to buy beaten down energy and commodity stocks during the tax-loss selling season of 2014. We probably will say that we had a great opportunity to accumulate some gold throughout 2014 as well. Just be sure to follow your asset allocation model if you decide to capitalize on these opportunities.

Yesterday we examined our current economic circumstances and realized that we were employing capitalism but we had no capital! Today we must ask the question: How can you have capitalism without any capital?

The obvious answer is you can’t. It’s like making potato soup without potatoes – try as you might it just won’t work.

So if we don’t have capitalism then what do we have? My answer is that we have some weird blend of creditism and corporatism. Governments have colluded with large corporate interests, especially in the commercial banking sector, to rig the economy in their favor.

Though we could go back further, let’s start our story (from the American perspective) at the end of World War II. Prior to the war governments didn’t think they could do everything they wanted due to financial constraints. That didn’t stop them from doing half of what they wanted to do but it forced them to make a choice. Did they want guns (warfare) or butter (welfare)?

The U.S. came out of WWII looking like gold… literally. The U.S. economy was the least damaged by the war which ravaged Europe and it came out holding the world’s largest stash of gold reserves. This relative economic strength gave U.S. politicians the wrong idea: they started to think they might not need to make any choices. Then President Lyndon Johnson came along and he wasn’t shy about it – guns and butter it will be!

So we got the Vietnam War and the Great Society together! And gold steadily flowed out of the U.S. Treasury until President Nixon pulled the switch-a-roo in 1971 and closed the gold window. All of a sudden the international monetary system became elastic. With no more gold restraint, dollars and yen and pounds started to pile up as central banks and commercial banks discovered they could conjure money into existence largely at will. But this was a different kind of money than the gold-backed variety – it was credit-based.

This credit-based money was extremely popular and the money supply grew 50-fold between World War II and 2008. Everyone got used to a constantly expanding money supply and now both the economy and asset prices are dependent upon it. It is the expansion of credit, not real capital, that supports all of the federal spending programs, all of the wars in the Middle East, the mass imports from China and Vietnam, the new housing developments and shopping malls in Middle America, the massive car lots across the country, most of the skyscrapers dotting the city skies, and current real estate and stock market valuations.

Here’s a fun example: do you know how much debt is still owed on the tax-funded Meadowlands Sports Complex in New Jersey? I’ll tell you: more than $100 million is still owed on the facility. Oh, and I am talking about the old Meadowlands Stadium that was closed and demolished in 2009 to make way for a new $1.6 billion facility now known as MetLife Stadium. New Jersey taxpayers are still on the hook for $100 million on a sports complex that no longer exists! New Jersey built the stadium, used the stadium, and demolished the stadium but never bothered to pay for it.

Such nonsense can only occur in a world of ever-expanding credit-based funny money.

This applies to the massive bank bailouts and banker bonuses that one side of the fictitious aisle rails against just as it applies to the massive welfare programs that the other side of the false political-divide takes issue with. None of it exists without perpetual credit expansion; none of it exists without creditism and corporatism.

Capitalism would have nothing to do with any of it.

It is important to understand that we have only seen one side of the credit cycle within the current monetary system. Credit has been expanding constantly for more than forty years now. But if we look around our world we can clearly see that nothing expands forever. Waves rise then fall. Trees grow then mature. Balloons inflate then pop.

One day credit will have to contract; it is inevitable. What happens when that day comes? Ludwig von Mises, the late Austrian School economist, offered some insight:

“There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved.”

Was he right? Time will tell.

More to come,
Signature

 

 

 

 

 

Joe Withrow
Wayward Philosopher

For more of Joe’s thoughts on the “Great Reset” and the fiat monetary system please read “The Individual is Rising” which is available at http://www.theindividualisrising.com/. The book is also available on Amazon in both paperback and Kindle editions.

Capitalism Without the Capital

submitted by jwithrow.Adam Smith Plaque

Journal of a Wayward Philosopher
Capitalism Without the Capital

December 25, 2014
Hot Springs, VA

Merry Christmas!

The markets are closed today in honor of this wonderful holiday so we have no updates for you in this entry. Check back in with us tomorrow for market updates. We do have an important entry for you today, however. It’s not nearly as important as spending time with your family on Christmas Day but, since you are here nonetheless, we will carry on.

Earlier this month we watched as the U.S. national debt came up behind $18 trillion, whipped into the passing lane without signaling, and sped off into the distance. Where is the national debt going in such a rush? I’m not sure, but I’d wager it’s someplace not worth going to.

As the national debt raced past we noted that total credit market debt has ballooned up to 330% of GDP with considerable help from the Fed’s efforts to pump in $4.3 trillion worth of hot air.

The television analysts accept it all as normal but we must ask the question: How in the world did we get to this point?

Much of the apparent prosperity we have enjoyed over the last several years has been borrowed from the future. The world’s three major central banks – The Federal Reserve, the European Central Bank, and the Bank of Japan – have each been engaged in an outrageous financial experiment; they have been creating massive amounts of currency out of thin air to purchase government debt by the boat-load.

Remember, debt is nothing more than a promise to pay for present spending with future earnings. These central banks, in collusion with their respective government, are really engaged in a scheme to transfer massive amounts of wealth from the public in the future to themselves in the present. There will be serious consequences to this madness.

It is important to realize that none of this chicanery has anything to do with capitalism… there’s no capital even in sight! The money created by the central banks of the world may act much like real capital, but it is just a clever impersonator.

Capital, according to the Ludwig von Mises Institute, is defined as the goods that were produced by previous stages of production but do not directly satisfy consumer’s needs. In short, capital is real savings and real resources.

Capital formation is actually quite simple – just save more than you consume and you will have capital.

We are currently doing the opposite – we are consuming way more than we produce. That’s how you end up with debt piled to the ceiling. This is true on the macro level (governments, multi-national corporations, etc.) and it is true on the micro level (individuals, local communities). The credit-based money and the massive debt have driven capital into hiding… we suspect for fear of being called a greedy capitalist.

And that, in a nutshell, is the answer to our question: we got to this point by embracing central banking and fiat money thus abandoning capitalism and its sound monetary system.

Sound Money once kept debt and the central planners at bay.

What was the secret?

Sound Money was like your grumpy friend that just won’t ever agree to do anything. You ask him to go to the movies and he says nope. You ask him to go to the ball game and he says he’ll watch it on T.V. You ask him to go to the bar and he says he has beer in the fridge at home already. Eventually you learn there’s nothing you can talk him into doing so you stop trying. That’s why governments and central banks hated Sound Money; it would never agree to any of their best laid plans.

You see, Sound Money could not be infinitely printed by governments or central banks. Originally, before governments got into the money business, money could not be printed at all; it had to be dug out of the ground and then minted into a coin. Later, governments took it upon themselves to stockpile gold in a vault and create paper currencies 100% backed by the gold. Always one to offer something it doesn’t have at a price it cannot sustain, Government reduced the gold backing of its currency over time and then, in 1971, it cut ties to gold altogether. That was the requiem for Sound Money and ever since then there has been absolutely no limits on the amount of currency central banks can create. Which means there has also been absolutely no limit on how much debt governments can rack up.

So here we are.

But just because there have been no limits to all of this economic madness in the short run does not mean there will never again be any limits. History shows that market forces cannot be perpetually suppressed and distorted – eventually the market will win out. The Day of Reckoning will come.

Until the morrow,
Signature

 

 

 

 

 

Joe Withrow
Wayward Philosopher

For more of Joe’s thoughts on the “Great Reset” and the fiat monetary system please read “The Individual is Rising” which is available at http://www.theindividualisrising.com/. The book is also available on Amazon in both paperback and Kindle editions.

Preventative Care

submitted by jwithrow.Spa

Journal of a Wayward Philosopher
Preventative Care

November 12, 2014
Hot Springs, VA

The S&P opened at $2,028. Gold, starting to recover from its recent mugging, is up to $1,165. Oil is down to $77.25 and contemplating testing its support level. Bitcoin is up to $396 per BTC, and the 10-year Treasury rate opened at 2.34%.

Precious metals are still the asset class that most warrants your attention in the financial markets today. The U.S. mint sold 5.8 million ounces of silver in October which was a 40% increase from September sales. The Mint then started the month of November off by selling another 1.3 million ounces.

Then it ran out of silver to sell.

But guess what happened to the price of silver? It dropped from $19.50 per ounce on September 1 to $15.72 per ounce as the closing bell rang yesterday. Concurrently, the gold forward rate has just gone negative for the sixth time in fourteen years which suggests the market is pricing for a physical gold shortage. Despite this, the price of gold has been systematically beaten down in 2014 as well. What was that old saying about supply and demand?

Both gold and silver will probably flop around a bit for a while longer but ten years from now you will look quite wise if you allocate some of your capital to precious metals at the current prices.

Shifting gears to continue with our recent health care theme…

Last week we pondered a new model for health care based on cash payments for personalized service in order to opt out of the big-government/big-insurance/big-pharma cartel. We reckoned such a model would be similar to the free market model of a bygone era where family doctors had the freedom to offer personalized service to patients without having to worry about an avalanche of insurance paperwork needing to be complied with or a legion of attorneys hiding in the bushes outside looking for a malpractice lawsuit. We also reckoned there will be a small but growing number of health care professionals willing to offer personalized service for cash as the health insurance industry in the U.S. continues to spiral down into a sinkhole of bureaucracy.

What we didn’t ponder last week was how to afford a cash-based model and keep the insurance company in the waiting room unless an emergency occurs. The answer is simple: preventative care.

No, not the preventative care where you run to the specialist and sign up for the latest and greatest test or screening every time you think you might have sniffled in your sleep the night before. We mean the preventative care where you actually take responsibility for your own health and wellness.

The general guidelines are really pretty intuitive: get a good night’s sleep, stay active during the day even if you work behind a desk, walk as much as possible, eat real food and avoid the fake food that comes packaged in boxes and bags, drink plenty of water and not much soda, consider natural supplements and stay away from pharmaceutical drugs, reject stress and negativity, and maintain a positive state of mind.

Do these things consistently and you probably won’t ever get sick. And if you don’t get sick you won’t feel the need to go to the doctor – not even for checkups if you trust yourself implicitly. Then you could take the money you would have spent on doctor visits and prescription drugs and work on your asset allocation model.

Of course it is still advisable to maintain a wellness network. There are plenty of people and groups out there in cyberspace discussing natural health topics and answering each other’s questions at any given time of day. Though I gave it up years ago, I understand there are plenty of active Facebook groups in this space also.

Wife Rachel and I are big fans of routine chiropractic care as well. Instead of pushing a pill for every ill, chiropractors embrace a more holistic approach to wellness by focusing on musculoskeltal health to ensure optimal functionality of the nervous system. We found chiropractic care to be an especially important part of Rachel’s prenatal and postpartum wellness and it is an excellent tool to monitor the development of little Madison’s nervous system. You know how the pediatrician taps infants on the knee with the little hammer tool? Chiropractors do that too along with numerous other more advanced bio-mechanical and reactionary measurements.

Fortunately for the sake of this journal entry, many chiropractors operate on a cash-only basis. That is, they do not deal with insurance companies (they will accept credit cards). This eliminates the extra costs associated with insurance paperwork and compliance which means lower prices for clients. Some insurance policies may cover chiropractic care but it would be up to the client to file for reimbursement in that case. Ask the chiropractor whether or not his services are covered by insurance and he will probably say “I don’t know” and explain that your insurance policy is a private contract between you and the insurance company and has nothing to do with him (or her). How refreshing to know there is still a sliver of honesty and respectability left in the health care field!

With the proper mindset, preventative care is really quite easy so why do most people ignore it? One cannot know for certain but I suspect propagated fear has a lot to do with it. We’ll save that for a later entry…

More to come,
Signature

 

 

 

 

 

Joe Withrow
Wayward Philosopher

For more of Joe’s thoughts on the “Great Reset” and regaining individual sovereignty please read “The Individual is Rising” which is available at http://www.theindividualisrising.com/. The book is also available on Amazon in both paperback and Kindle editions.

Asset Allocation

submitted by jwithrow.asset-allocation

Asset allocation is a necessary tool for saving money and building capital within a fiat monetary system. Within a fiat system, the purchasing power of your currency is gradually inflated away and the value of various asset classes can fluctuate rapidly based on central bank monetary policy. Thus, it is important to have a principled yet flexible asset allocation model in place.

The concept of asset allocation is to allot a percentage of your capital to various asset classes and to maintain each allocation ratio until you deem it necessary to adjust your model. For example, a basic asset allocation model could consist of 25% cash, 25% precious metals, 25% real estate, and 25% stocks. You would then allocate your income to each asset class accordingly.

The beauty of this strategy is that you cannot be wiped out by any wild swings in the market and you will always have cash on hand with which to purchase assets when they go on sale (when the market tanks). Of course you can always add additional asset classes into your model such as bonds or bitcoin or cattle depending upon your outlook and you may need to adjust your percentages based on new analysis from time to time as well.

The Infinite Banking insurance strategy that we talk so much about here at Zenconomics and in our book works perfectly to house much of your cash allocation. An IBC policy serves to compound returns on your cash while it sits idle waiting to be put to use without sacrificing any liquidity whatsoever.

As for your precious metals allocation, you can purchase gold and silver bullion from any local coin shop or from reputable dealers online or you can purchase through companies like Hard Assets Alliance which will facilitate fully allocated domestic or international storage for you.

Of course to follow an asset allocation model you will need to save a large percentage of your income. I think 50% is a good benchmark. 75% savings is preferred. Very few people have the discipline to pull this off but those who do never have to worry about financial problems again.

If maintaining such an asset allocation model for your household sounds extremely tedious and time-consuming that’s because it is. This is the price we must pay for living under a fiat monetary regime. In a sound monetary system we would be able to build capital simply by saving money in a bank account because our money would maintain its purchasing power over time. Instead, saving money in a bank account is a losing strategy so we are all forced to become financial analysts or have our wealth systematically transferred away from us.

Debt Impedes Economic Recovery

submitted by jwithrow.Great Seal

Debt is nothing more than an obligation to pay for present spending with future earnings.

A little bit of debt used to increase future earnings is a good thing. A little bit of debt used to increase present spending at the expense of future earnings is not a very good thing. A lot of debt used to increase present spending at the expense of future earnings is a good way to make it very difficult for there to be any earnings in the future at all.

At the macroeconomic level, the U.S. has chosen option three. Japan and Europe have done the same.

The great thing about economics is that there is a ‘response’ system built in that maintains a sort of chaotic order in the general market.

When there is significant capital formation within the system, interest rates go down. Decreasing interest rates send a signal that it is a good time to borrow so homes are purchased and businesses expand.

Interest rates then rise as more debt is taken on and thus capital available diminishes. This sends a signal that it is not a good time to borrow so mortgages are paid down and business debt is reduced. This leads to gradual capital formation within the system that will trigger a decrease in interest rates and the cycle perpetuates.

But guess what happens when you have an Ivy League graduate that thinks it is his job to force interest rates lower and keep them suppressed?

That’s right! The market does not receive the proper signal and it looks like it is still a good time to borrow. So even more homes are purchased and businesses keep on expanding.

Then we get the idea that home prices should always go up, stock prices should always go up, businesses should always expand, and GDP should always grow.

And we end up with more debt.

U.S. debt has grown by more than 60% since the financial crisis began in 2008. Global debt has grown by more than 40% in the same time period.

It turns out that a problem of too much debt cannot be solved by taking on more debt.

The events of 2008 sent a signal that it was time to stop borrowing and to liquidate debt but we didn’t listen. The economy will undoubtedly blow up again and the next crisis will be even bigger because the debt is now even bigger.

The only way for the economy to truly recover is for a mass-liquidation of debt to occur. Until then we can expect the Fed to keep fudging the numbers and blaming economic stagnancy on the snow.

We happen to like snow and find it to be much more desirable than the Fed, both economically and ascetically.

Forget the Interest Rate – It’s the Quantity of Interest That Matters

submitted by jwithrow.Mastering Interest

Financial success is all about understanding and mastering interest. You see, there are only three choices when it comes to financial matters:

  • Pay interest
  • Receive interest
  • Forego interest

That’s it.

All you must do to get ahead financially is to arrange your financial affairs such that more interest is coming in than going out.

It is the quantity of interest that’s important. This concept is not often discussed so most folks focus exclusively on the rate of interest instead.

3.5% for a mortgage? This is a great rate!

2.87% for a vehicle loan? We’ll take two!

.05% on a savings account? Well, we suppose something is better than nothing.

So the average person pays interest for their house and their cars and they forego interest when they buy their groceries and pursue entertainment. The interest that they do receive is negligible in comparison because they offer whatever capital they have leftover after expenses for a pittance.

So what’s the common man to do?

CNBC will say that the stock market is the only way to go.

What they will not tell you is that the stock market is ripe with risk. Getting into the stock market requires you to give up control of your capital and place it 100% at risk. All the while you have the hedge fund high frequency trading machines and the Wall Street insiders chomping at the bit to take your capital from you.

These forces are focused on the stock market every minute of every day, not just during business hours.
If you have the same amount of time and energy as well as access to the same amount of information as the insiders then you may be able to play the stock market and come out ahead in real terms.

We think that it is much more likely that you will only come out ahead in nominal terms at best if you come out ahead at all.

We think it a far better strategy to capitalize an IBC policy and then focus on employing that capital to develop sustainable sources of income.

The IBC policy ensures that your capital is generating a little bit of interest no matter what happens and your employment of that capital can be used to significantly increase the amount of interest coming in.

After all, what good is a 3.5% mortgage if you are not generating at least 3.6% in interest income consistently?

You see, interest rates are not terribly important – it is mastering the control of interest in vs. interest out that is truly the name of the game.

MyRA-QE Taper Connection

submitted by jwithrow.Government Help

We have a question for you:

Is it a coincidence that the government has introduced the “myRA” plans just as the Federal Reserve has begun to taper its quantitative easing programs?

Let’s think this thing through for a minute.

We know:

  • China is now a net-seller of U.S. Treasuries so the Federal Reserve has had to step in and purchase U.S. Treasury Bonds in increasing quantities to support government spending.
  • The average American saves for retirement in a qualified retirement plan focusing primarily on mutual funds, exchange traded funds, and stocks with bonds comprising a small portion of the allocation.
  • The proposed myRA plans are designed to focus on U.S. Treasury Bonds.
  • The Federal Reserve’s quantitative easing programs have pumped massive amounts of liquidity into the system which has resulted in a broad increase of stock prices across the board.
  • Tapering QE will withdraw liquidity from the system which will almost certainly result in a broad decrease of stock prices across the board and quite possibly a severe stock market crash.
  • A falling stock market would likely cause many Americans to seek investment options that they deem “safer”.
  • The government is already hard-selling their myRA plans stating that there is “no risk to lose what you put in”.

Hmm.

Maybe our benevolent bureaucrats really do think that myRA plans will help the common man.

But we hold dearly to a personal mantra:

Maximize Capital,
Minimize Crap,
Never Trust the Government.

With that mantra echoing in our mind, we can’t help but be a little suspicious – something funny seems to be afoot.

What do you think?

Real Estate for the Long Haul

submitted by jwithrow.Real Estate2

Did you know that the average real estate mortgage is in existence for less than seven years?

Wall Street does and that is why they are willing to purchase and package thirty year fixed rate mortgages into securities for retail. Which is why banks are willing to originate thirty year fixed rate mortgages to sell to Fannie Mae and Freddie Mac to then sell to Wall Street to package into securities to then sell to their “muppet” clients (ask Goldman Sachs).

This is also why mortgage contracts are front-loaded with interest. You see, fixing an interest rate for thirty years (or fifteen) would be a losing position for the bank if it had to keep the mortgage on its books for the contractual length of time. Fortunately, most people are not terribly disciplined so they either refinance or sell their home within seven years of purchase.

Let’s examine this process from a financial point of view. The bank collects a myriad of origination fees when real estate is purchased and it collects an un-proportional amount of interest in the early years of the mortgage contract. Then, within seven years, the homeowner either refinances or sells the home. When the homeowner re-finances, the bank collects a myriad of origination fees once again. When the homeowner sells the home, the bank also collects a myriad of origination fees again.

Now we don’t mean to vilify bank fees, We are simply pointing out that this revolving process results in a constant drain of private capital. Each time origination fees are paid that is a little bit of capital being drawn into the banking system that could have been used by the individual to build wealth instead. Once in the banking system, exponential debt will be pyramided on top of that small amount of capital.

The point is this:

We have been buying the same real estate over and over again for decades and we have been giving up small chunks of capital each and every time the same houses have been purchased.

Wouldn’t it make a lot more sense if we just bought our homes, paid off the mortgage, and then kept them within our control? Imagine the possibilities! Of course this wouldn’t make sense in every case, but the idea is worth considering…