real money Archives - Zenconomics

submitted by jwithrow.

Journal of a Wayward Philosopher
How to Insulate Your Portfolio from the Fed’s Financial Destruction

January 16, 2015
Hot Springs, VA

The S&P opened at $1,992 today. Gold is up to $1,267 per ounce. Oil is back down under $47 per barrel. Bitcoin is checking in at $210 per BTC, and the 10-year Treasury rate opened at 1.72% today. Famed Swiss economist Marc Faber went on record at a global strategy session this week saying he expected gold to go up significantly in 2015 – possibly even 30%.

Yesterday we examined the Fed’s activity since 2007 and we noticed $3.61 trillion dollars sloshing around in the financial system that didn’t exist previously. Then we put two and two together and realized the answer was four… not five as the mainstream media claims. We came to the conclusion that the entire financial system is now dependent upon exponential credit creation out of thin air and that financial destruction cometh once the credit expansion stops.

Today let’s discuss some ideas for insulating our balance sheet from the ongoing financial crisis and the inevitable crack-up on the horizon.

The first and most important thing to understand is the difference between real money and fiat money. The Fed (and other central banks) issue fiat money at will – created from nothing. Dollars, euros, yen… none of them are real money; they are all fiat. These currencies do not represent real work, savings, or wealth and they certainly are not backed by anything of substance.

Most of these currencies exist as digital units out in cyberspace but if you read one of the paper notes in circulation it is completely honest with you:

”This note is legal tender for all debts, public and private.”

That means central bank notes are really good for paying debts but that’s about the extent of it.

All of these currencies depreciate over time in terms of purchasing power because they have no intrinsic value and their supply is unlimited. Even when a currency is “strong” as the U.S. dollar is currently, it is only strong measured against other currencies. Measure the dollar against your cost of living and you will see the real picture.

The point is we can’t trust central bank money.

Which leads us to the first way to insulate your portfolio from the Fed’s carnage: convert fiat money into real money – gold and silver. Gold and silver were demonetized in the late 60’s and early 70’s and the establishment has been downplaying their significance ever since. But there is a reason every central bank in the world still stockpiles gold. Gold and silver have been money for centuries and that is not going to change in a brief fifty year time span. Maybe one day cryptocurrencies will take the torch from gold and silver but that day is not today.

It is wise to maintain an asset allocation of 10-30% in physical gold and silver bullion. Precious metals will skyrocket in price measured against fiat currency as the Fed’s financial destruction plays out but in reality they are just a store of value. Precious metals will skyrocket in price only in terms of the fiat currency that is depreciating so dramatically.

Energy and commodity stocks, especially well managed resource companies, stand to boom as the monetary madness plays out as well. This is not a long-term strategy, however, so any gains captured during the commodity boom should be converted into hard assets or blue-chip equities after they have finished falling in price. There is enormous risk in the stock market so equities should make up a smaller portion of your asset allocation: 10-15% perhaps.

Despite everything said about fiat currency above, cash should still make up a large percentage of your portfolio; probably 20-30%. Cash loses purchasing power over time but it is still the primary medium of exchange so it is necessary to remain liquid. Ideally you should keep 6-12 months worth of reserve funds in cash and any cash above that threshold can be used to acquire assets as they go on sale. And plenty of assets will go on sale when the credit expansion stops.

The remainder of your asset allocation should be in real estate, provisions, other hard assets, and anything else that improves your quality of life. With all of the unjust systems and institutions to contend with it is easy to forget most of us are far richer than the wealthiest individuals living at the beginning of the 20th century. We have central heating and air in our homes, reliable auto travel over long distances, affordable air travel to anywhere in the world, way too much entertainment, cheap access to the internet which opens the door to all manner of information/commerce/entertainment, pocket-sized computers that double as telephones, and many other modern comforts that would be considered futuristic luxuries by the wealthiest of the wealthy one hundred years ago.

After properly aligning your portfolio to weather the Fed’s financial storm, focus on aligning your life to maximize fulfillment, purpose, and peace of mind. After all, your most valuable asset is time and time cannot be measured in financial terms.

More to come,

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.

submitted by jwithrow.

Journal of a Wayward Philosopher
Real Money

December 4, 2014
Hot Springs, VA

The S&P is buzzing around $2,069, gold is back up over $1,210, oil is checking in just under $67 after OPEC announced that they would not cut production, bitcoin is hanging around $373, and the 10-year Treasury rate is checking in at 2.29% today.

How about those prices at the pump, huh? Some resource analysts think that oil won’t remain this low for long. They point to the fact that several OPEC nations are dependent upon high oil prices to run their social welfare states and suggest that, coupled with increased demand over the coming winter, oil will be forced to climb back up the ladder. Other analysts suggest there are numerous oil companies still profitable at current price levels thus supply will remain strong and oil will hang around current prices for longer than expected.

We can’t know which analysts are right and which are wrong but we do know that numerous well-run resource companies have seen their stock price hammered as a result of oil’s decline while the S&P has continued to escalate up its stairway to heaven. Speculators may see this as the best opportunity to get into resource stocks since 2009. Natural resource prices are especially cyclical – low prices drive marginal producers out of business which reduces supply and leads to higher prices which attract marginal producers back to the industry. Booms lead to busts which lead back to booms. Those disciplined enough to buy the bust and sell the boom tend to do well in the resource sector.

Speaking of natural resources, it is the rejection of real money backed by precious metals that, more than anything, has led to the disturbing macroeconomic trends we have been analyzing recently.

In October we examined fiat money and realized that it has always been a major drain on society when implemented throughout history. We agreed fiat money is any currency that derives its value from government law and regulation and we noted that legal tender laws are what force the public to use the government’s money rather than the market’s money.

The academic economists would have you believe we have a complex and sophisticated monetary system. They would suggest that you cannot possibly understand it so you may as well leave it to the experts. The economists will use strange terminology when discussing the economy in newspapers and on television in order to confuse and bore you. Want to know their little secret?

Our economy operates mostly on fake money.

I know, it sounds ridiculous. How is it fake money if you can spend it? That’s exactly what makes the fake money so insidious – you can’t tell that it’s counterfeit.

I will attempt to explain myself by asking a simple question: where does our money come from?

Take your time, I will wait…

If you said “from thin air” then you are the winner! For the last forty years or so our money has been loaned into existence. The Federal Reserve loans new money to its member banks and to the U.S. Treasury and the new money then eventually finds its way into the general economy. Where did the Fed get this money to lend? It created it! From nothing. Ex nihilo nihil fit.

But wait, it gets better. This same process takes place every single time a bank originates a new loan. Say you go get a mortgage to purchase a new home. The bank supposedly lends its deposits to you at interest to finance your home. But this isn’t entirely true. First, the bank is only required to have a fraction of the loan in reserve – roughly 10%. So if your mortgage is $100,000 the bank is required to have at least $10,000 in deposits to support the loan. But does the bank actually take that $10,000 and give it to you? Of course not! That $10,000 in deposits stays right where it is. It could be spent tomorrow if the depositors took a trip to Vegas. So where does the money come from to finance your home?

Hint: it’s the same answer as above.

So you get $100,000 in fresh new money and give it to the seller in exchange for the house. The seller uses your new money to pay off his mortgage and often there is a little bit leftover. The seller calls this profit and puts it in his account and the economy’s money pool gets a little bit bigger: there is now more money in the system then there was before you financed your house.

The economists use terms like ‘M1’, ‘M2’, and ‘money multiplier’ to make this seem like a complicated system but as you can see it’s pretty simple. It’s just a journal entry and a few clicks of the mouse and… PRESTO!

No one noticed a little extra money sneaking into the system here and there at first. But the rate at which new money entered the system increased dramatically as the money supply grew. Forty years later we are starting to see the ill-effects of exponentially expanding credit-based money. This credit expansion has distorted all aspects of the economy because money is half of every transaction. Financial planning and analysis is extremely difficult if no one knows what one unit of money will be worth from one year to the next. It’s always apples to oranges.

So where did our money come from before the fiat money explosion? Money has taken on many different shapes and sizes throughout history but if you go back just a little bit in modern history, say to the mid-19th century, you will probably find yourself using the market’s choice for real money – gold and silver. A little bit later – the late 19th century or so – governments muscled their way into the money business and, instead of just minting gold and silver coins, they created national currencies but they fully backed these currencies with gold or silver. While fully convertible, the currencies operated much like real money but it didn’t take long for governments to reduce the real money backing. They found this so pleasant, they eventually got rid of all currency ties to real money altogether!

One of the big advantages to using real money is that it tends to maintain purchasing power over long periods of time. You can expect real money today to be roughly as valuable as real money ten years from today. You could actually save this real money if you wanted to! Saving leads to capital formation which can drive steady economic activity without the need for massive credit expansion which always results in booms and busts.

There are numerous other advantages to using real money but wife Rachel will fuss at me for making this post long and boring as it is so we will have to come back to them in a later entry.

More to come,

Joe Withrow
Wayward Philosopher

For more of Joe’s thoughts on monetary history and real money 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.