sound monetary system Archives

Capitalism Without the Capital

submitted by jwithrow.

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,

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.

Asset Allocation

submitted by jwithrow.

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.

Sound Money

submitted by jwithrow.

The most important facet of free market capitalism is sound money. If you don’t have sound money then you don’t have free market capitalism – you have something else.

Sound money is simply money that serves as a reliable store of value. Put another way, sound money is money that does not constantly lose its purchasing power. Sound money affords one a reasonable expectation that one unit of money today will buy the same amount of goods and services as one unit of money tomorrow. And next month. And ten years from now.

What a novel concept!

Anyone who has taken a finance course is familiar with the time value of money principle. In finance class, we learn to discount our money over time based on the inflation rate. We are taught, correctly, that present dollars are worth more than future dollars.

What we are not taught is that this is a deformation of free market capitalism!

The general market has chosen gold and silver to serve as money throughout most of history because the precious metals are particularly well suited for this purpose: they are limited in supply, they have functional utility outside of the monetary system, and, unlike our money today, they cannot be created from nothing.

Make no mistake about it, that’s where our money comes from today: nothing. It is created from nothing and then loaned into existence at interest. See the Hidden Secrets of Money video series for a more thorough examination of our money.

You see, money should not be a function of government nor should it be a function of a central bank behind closed doors. And it certainly shouldn’t be created from nothing. This is why the U.S. Constitution only authorizes gold and silver as legal tender; the Founders knew well the virtues of sound money and the dangers of fiat currency.

Did you know that the U.S. dollar was defined by the Coinage Act of 1792 to be 371.25 grains of fine silver? This act set the standard weight and measure of the dollar in terms of silver and individuals in the market were still free to accept or reject coins of differing weights and measures as they saw fit.

But we digress.

Here is why sound money is important to you:

Every dollar to your name is constantly losing value and there is no way for you to predict how much value your savings will lose over time.

This is a direct result of the monetary system that is in place whereby central banks create money from nothing and then lend that money to governments and to commercial banks at interest. That money then enters the economy when governments spend it and when commercial banks lend it out to customers. This is done constantly and it is why your money constantly loses value. Such a system has a profound impact on people from every walk of life.

How can we accurately plan for anything long-term if our money is constantly losing value? We can only guess.

What we do know from history is that sound money leads to a stable economy while fiat money leads to booms and busts.

The general market prefers the former while big government prefers the latter.

For more information on the sound money principle see the article links below. For a lot more information on sound money and monetary history see the book links below.

The Principle of Sound Money

The Simplicity of Sound Money

An Introduction to Sound Money