Gary North On Time Management, 80/20 Rule

I am posting this for future reference. Gary North’s point isn’t original (it isn’t even his alone), but he has managed to articulate it succinctly, yet again, in “Putter, Fritter and Guess“:

It turns out that the best way for a businessman to spend his time is the 20% of his hours in a day that produce 80% of his net income. It may not be easy to identify these activities, but for a successful career, a person must do this.

What we find is that even when people do this, they do not have the self-discipline to ruthlessly abandon the 80%. They keep doing these low-return tasks. This may be pure habit. It may be a commitment to the ideal of perfectionism: to be sure that everything gets done right. The person refuses to decentralize and delegate. He cannot bring himself to let go. The result is that the person does not attain his maximum output/income.

The person who steadfastly refuses to delegate and decentralize is violating the principle of the division of labor. This principle says: “You can’t do it all.” In some cases, it says; “You can’t do it at all.” A task may not be a one-person task.

The person who is a perfectionist and who insists on doing an entire project is asking to minimize his output. If, by hiring an assistant, he can double his output and reduce quality only (say) 4% (20% of 20%), this will not matter, if the 4% is related to the 80% of the product’s functions that people rarely use.

Notes – Gary North On Inflation, Deflation And Japan

The following notes cover Austrian economist Gary North’s views on the chances of inflation and deflation in the US and Japanese monetary systems, derived from a 5-part article series on the subject found at LewRockwell.com:

Why Deflation Is Not Inevitable (Sadly), Part 1: John Exeter’s Mistake

  • Fed will attempt to stabilize money supply before hyperinflation; “mass inflation, yes; hyperinflation, no. Then deflation.”
  • Deflation will not take place unless the CB stops making new money
  • When prices fall, you are richer, but you pay no income tax on your profits (deflation is good)
  • Not-money: if you pay a commission to exchange, the asset is not truly liquid
  • Gold is a mass inflation hedge, not a deflation hedge
  • According to Exter/deflationists, gold is supposedly both an inflation hedge and a deflation hedge– the only asset possessing this virtue
  • We have never been able to test Exter’s theory of gold as a hedge against price deflation because there has never been a single year in which CPI has fallen (Q: what did gold price of Yen do in 2009 Japanese CPI decrease?)
  • Consumer price indexes should be based upon goods and services that are rapidly consumed; not price of homes and other prices of “markets for dreams”
  • Central banks inflate, they do not deflate
  • “When housing is bought on the basis of ‘I’ll get rich,’ the market begins to resemble a stock market. When it is bought on the basis of ‘I can live here for what I can rent,’ it is more like the toilet paper market”
  • The skyrocketing price of housing under Greenspan was not reflected in the CPI; the collapsing price of housing under Bernanke was not reflected in the CPI
  • Consumer prices did not fall during the 2008-09 crisis because the money supply did not fall; if the money supply shrinks, there will be price deflation; watch the monetary statistics

Why Deflation Is Not Inevitable (Sadly), Part 2: The Deflationists’ Myth of Japan

  • The money supply shrank in the US 1930-33 (Q: Why did the Fed allow money supply to shrink? Does this weaken North’s argument that the Fed will always inflate rather than deflate going forward?)
  • The US and Japan had similar CB policies until late 2008, when the Fed “went berserk”
  • Japan’s M2 was mildly inflationary from 1992-2009; CPI was slightly deflationary over the same period of time but never worse than 1% in any 12mo period; prices rose 2% 1997 and 2008
  • There has been no systemic price deflation in Japan
  • Japan is more Chicago School than Austrian
  • Statistical conclusions about Japan:
    • CPI in Japan fell little 1992-2009, no more than 1% per annum
    • BoJ did not inflate the currency to overcome systemic price deflation, because it didn’t exist
    • Collapse of Japanese RE prices did not affect CPI
    • Collapse of Japanese stock market prices did not affect CPI

Why Deflation Is Not Inevitable (Sadly), Part 3: Why Currency Withdrawals Don’t Matter

  • The Japanese economy is starting to become price competitive; this will have ramifications higher up the corporate command chain
  • Estimates of US currency held outside the United States range from 50-70%
  • Rise of credit transactions such as credit cards have minimized the role paper currency plays in everyday transactions
  • Currency withdrawals from the banking system which are not later redeposited are deflationary due to the reserve ratio mechanism
  • Monetary deflation can occur as a result of deliberate Fed policy:
    • increase legal reserve requirement
    • sell assets
    • allow bank collapse to occur by not funding FDIC with new money to offset withdrawals

Why Deflation Is Not Inevitable (Sadly), Part 4: High Bid Wins

  • All economics systems are governed by principles of:
    • supply and demand
    • high bid wins
  • The increase in the Fed’s balance sheet (monetary base) has been offset by increase in excess reserves held at banks; thus, no price increases
  • Deflationists’ claim: “Commercial banks will not start lending until the recovery is clear. The recovery is a myth. So, banks will not start lending, no matter what the FED does. The largest banks remain over-leveraged. They will not be able to find borrowers at any rate of interest, so the capital markets will collapse (except gold), and then consumer prices will fall.”
  • North’s response: “the largest banks are making money hand over fist. It is the local banks that are failing. The FED has done what it was set up to do in 1913: protect the largest banks.”
  • Inflationists’ claim: “Commercial banks will start lending when the recovery is clear. The FED will probably not contract the monetary base all the way back to August 2008, because this would bring on another crisis comparable to September 2008. The FED will not risk bankrupting the still highly leveraged megabanks. It will therefore not fully offset the decrease in excess reserves. It will not “wind down” all the way, if at all. Bernanke fears 1930—33 more than anything else. So, the money supply will rise. Prices will follow.”
  • “The increase in excess reserves has been voluntary. The bankers are afraid to lend, even to the U.S. Treasury.” (Q: Why are bankers afraid to lend, even to the Treasury?)
  • “The FED is in complete control over excess reserves. It pays banks a pittance to maintain these reserves. It is legally authorized to impose fees.”
  • Why the Fed maintains its current policy:
    • doesn’t have to sell assets
    • doesn’t have to face rising long-term interest rates due to expanding money supply
    • doesn’t have to worry about collapsing housing market as interest rates go to 25-40%
    • doesn’t face a corporate bond market collapse
  • Monitoring money supply changes is key to predicting consumer price increases

Why Deflation Is Not Inevitable (Sadly), Part 5: Conclusion

  • J Irving Weiss and his son Martin, recommended 100% T-Bills since 1967; it takes $6400 to buy what $1000 bought in 1967
  • Deflationists confuse asset prices with consumer prices
  • Deflationists believe low interest rates lead to debt build up but lower ones won’t stabilize; cost of capital can fall to zero and no one will borrow
  • This is John Maynard Keynes theory, who therefore recommended the government should borrow and spend to avoid this fate
  • There is not a shortage of borrowers today, corporate bond rates are around 6%, not 0%, implying there are people looking to borrow at positive rates of interest
  • Capital markets — markets for dreams, priced accordingly
  • Consumer prices rise comparably to increases in M1 in the US and M2 in Japan
  • Deflationists confuse money (in a bank account) with dreams (imputed asset prices in capital markets)
  • At the supermarket, prices are slowly rising in the US and slowly falling in Japan

Gary North: If You Wouldn’t Buy A Company With Multiple Bankruptcies In Its Past, Don’t Buy Government Bonds

Having a historical perspective can open your eyes to risks and trends. According to Gary North on government bonds:

Today, governments issue bonds. They have been doing this in the West for three centuries. They have been defaulting on these bonds ever since, just as they have been doing on all other forms of debt since at least the fourth century B.C. The rate of defaults has escalated over the last two centuries.

Have you ever stopped to think about that? That the formal issuance of government bonds in the “West” is a practice which is only 300 years old? And that over that entire period, the rate of default has been rising?

In the grand scheme of things, government bonds are equivalent to a recent IPO with a pro-forma operating history of consistent unprofitability.

Why do governments issue bonds?

The ability of the government to extract wealth from rich people through taxation has always been limited. Rich people know how to hide their money. They know how to get it out of the country, and they know how to get it into markets that are less easily taxed.

So, politicians learned half a millennium ago to get their hands on rich people’s money before rich people started hiding their money. They did this by promising to pay a rate of interest on the money. Government bonds are ways of extracting money in advance, especially from rich people, which politicians would have preferred to tax directly, but which they did not tax directly because they knew that rich people would hide the money.

The whole point of the bond market is to enable the government to expand its operations beyond what would be possible by collecting taxes today. Politicians are able to get more money to expand operations today, because they promise to repay lenders a specific rate of interest. But, of course, this does not promise that the government will not repay with debased money.

The specific risk of government defaulting on debt while you own it changes over time.

The risk of government defaulting on debt is constant throughout time and is always guaranteed.

It’s worth reading the whole thing.

Gary North Pulverizes IRA-based Retirement Investing

Austrian school economic commentator Gary North has written an outstanding take-down of some of the political and financial risks inherent in government-approved IRA retirement savings vehicles. It’s creatively written from the point of view of a CPA counseling his client on why he should use an IRA for tax-reduction retirement planning. But, it’s written sarcastically and shows the naivety of this advice, so it could be a little confusing to read as you have to realize the opposite of what the fictional CPA is saying is what Gary North believes.

I list the major points against investing via an IRA for tax-reduction purposes made by Gary North below:

  1. Free money from Congress
    1. Congress is not looking for ways to save US citizens from their tax burden; historically, they have worked to expand it
    2. There is no incentive for Congress to not change the rules and force you to pay taxes to withdraw your money from your IRA, eventually
    3. The record of Congress is one of repeated duplicitousness, lies and rules-changes, none of which have ever benefitted the average investor
  2. Emotionally locked in
    1. Most people are emotionally locked in to non-Roth IRA plans because they fear paying taxes now and would prefer to push that inevitability into the future
    2. It is unlikely their tax terms will improve with time; Congress raises taxes and fees over time
    3. People have emotionally committed themselves to higher future tax burdens to avoid confronting the reality of their tax burden right now
  3. Price inflation
    1. Investors must contend with constant price inflation caused by the Federal Reserve
    2. Even at 2% inflation per annum, prices double every 35 years
    3. If you begin investing at 30, prices will have doubled by the time you retire at 65; your IRA will have lost half its value
    4. Traditional IRA investment choices, such as major stock market index funds, have yielded negative net returns for the last 12 years
    5. It’s unlikely the average investor can shield himself from inflation within the investment choices available in an IRA
  4. Privacy
    1. Information on IRA holdings must be sent to the IRS every year
    2. Congress and the IRS know exactly what you hold in your IRA
    3. You have no privacy and no secrecy of your investments via an IRA
    4. Congress and the government do not set a good precedent in this regard, as they insist on transparency from investors but lie, cheat and distort the truth on their own behalf
  5. A freeze on IRA accounts
    1. The odds of another crisis, financial or otherwise, are relatively high
    2. The government could use this as a pretext for issuing an executive order to lay claim to IRA assets, or otherwise freeze individuals’ ability to manage them
  6. Gold in an IRA
    1. It is difficult and costly to buy gold in an IRA
    2. Placing gold in an IRA negates part of the benefit of owning gold (privacy)
    3. Typical IRA offerings are managed by graduates and defenders of the current financial and political system, who have proven themselves incompetent on numerous occasions (2007-2009 being the most recent) and who are ignorant of economics and have a vested interest in propping up the current system

I don’t get how anyone could doubt the Austrian school.

Gary North Says “NO!” To Hyperinflation

In case you missed his previous missive on the subject, entitled “Which Flation Will Get Us?“, Gary North came out today firmly against the idea of a hyperinflationary experience in the US or any other industrialized country with a privately owned central bank. Instead, North is predicting “mass inflation”, which he defines as 15-30% money supply growth per annum.

North bases his conclusion on four premises:

  1. The central banks control inflation, the central banks are owned by the banks, hyperinflation destroys banks who are borrowed short and lent long
  2. There is too much public awareness of the role the Fed plays in promoting inflation nowadays (primarily thanks to Ron Paul), so they will get blamed if something goes wrong
  3. People have become accustomed to the boom-bust cycle and the pattern of recessions following inflations, so the public will be more tolerant and forgiving of a recession and the “return to normalcy” than the destruction and reset of a hyperinflation
  4. Members of the Federal Reserve System participate in a lucrative employee pension system which primarily holds US stocks (53% of plan assets) and bonds (34% of plan assets), which will be made worthless by a hyperinflation, giving the employees of the Federal Reserve System a vested interest in preserving the system and averting hyperinflation

North calls hyperinflation a “policy choice”. He believes the only thing that could change this outcome would be if the Congress nationalized the Fed. Then, all bets are off.

It’s an interesting prediction. It makes a lot of sense. I am not sure how mass inflation will avoid some of the problematic items mentioned above though (particularly #2 and #4).

If North is right, this should be good for gold and not so good for people invested in stocks as consumer price increases will likely outpace increases in stock prices. Stock prices may even get hurt short-term because of increased commodity prices for many businesses.

UPDATE

Robert Wenzel of EconomicPolicyJournal.com fires back:

So don’t put me in the more unemployment camp or the mild inflation camp,or in the non-hyperinflation camp. Long term there are too many unknowns to be in any camp, especially when you have a machine known as the Fed that can shoot out billions trillions of dollars whenever it chooses. I just watch what the Fed is doing and adjust accordingly on a roughly six month basis. The constant adjustments are no way to live, but are necessary because of the fact that we do have a central bank, the Federal Reserve, that manipulates up and down the money supply. Right now, because of the new money accelerated growth that is occurring,  I anticipate that the climb in price inflation is going to escalate dramatically, where this spike in price inflation will stop, I have no idea. I just take it six months at a time.

Keeping Your Eye On The Macro Ball

Gary North’s latest piece on the EU debt debacle succinctly highlights the two extremities of inevitability with regards to the final resolution of the EU’s fiscal and monetary problems– totalitarian government control, or default:

If the sovereign government debt situation in Europe is anywhere near a final economic solution, why do the heads of Germany and France keep meeting? These meetings are getting more frequent.

Why didn’t all the previous meetings solve the economic problem of PIIGS debt?

What public relations statement do they expect will bring financial stability to the PIIGS?

What new program will they suggest, only to be disavowed as impractical by the European Central Bank, and then adopted a week or two after the official denial?

What program will they ever submit to their respective parliaments, to be debated openly in front of voters? None, you say? I see. Just like before.

What opportunity will voters in France and especially Germany be given to express their view of the new program? None, you say? I see. Just like before.

What indication will investors see that there is any new program that is not merely another Band-Aid?

What program, other than more deficit spending by France and Germany to lend more money to the PIIGS, will ever come forth from one of these meetings?

What solution, other than more purchases of the IOUs of PIIGS bonds by the ECB, will ever be presented?

What will they ever suggest, other than more of the same?

What evidence will ever be presented that the latest round of more of the same will not be followed in a few weeks and months and years by even more of the same?

As always, investors dream of a final economic solution. They keep returning, like a dog to its vomit, to the capital markets, euros in hand, to get in on the boom that lies ahead – must lie ahead – because of the final infusion of capital, the final expansion of the monetary base, the final round of more of the same.

This is a good example of a macro-factor that a good value investor would want to always keep in the back of his mind while performing his bottoms-up analysis of a given company.