Our Money Narratives

As described in our review of Silver Spoon Kids, the following are the individual “Money Narratives” for the Wolf and I, as well as our thoughts on a new “Money Narrative” for our own immediate family. The book recommends constructing these stories based upon reflections from asking the following types of questions:

  • What is your earliest money memory (ie, the first important purchase you made)?
  • What did you learn from your father/mother about money?
  • What are some of your family stories about money (ie, the time grandpa was really cheap, or your aunt made a ridiculous purchase)?
  • What kind of financial education did you receive growing up?
  • What were the big emotional issues around money in your family?

The Lion’s Money Narrative

Looking back on my childhood, I find myself puzzled by my family’s simultaneous desires to acquire money and wealth while desiring that it not change them in any meaningful way. What good is striving after money if you’ll live your life essentially the same way with it as you would without it (maybe plus a bigger, nicer house, a fancier car and a more comfortable vacation experience)? We didn’t spend a lot of time openly talking about money in our family, and when others noticed our wealth, it was an uncomfortable and sore subject. I remember being bullied for being “rich” in grade school which confused me at the time because I wore the same clothes and ate the same lunch and rode the same kinds of bikes that other kids at school did. And it hurt because I didn’t think it was true (we never used that word to describe ourselves inside the family) and I didn’t think I had any control over it– why persecute me for something my parents did?

It’s all the more confusing to think of where those kids came up with it. They must have heard it from their parents. And their parents must’ve interacted with my parents and somehow, despite my parents trying not to let their success change them noticeably, it did. When I shared the fact that I was being bullied, I remember being told, “We’re not rich, we’re just well off. And it’s none of their business.” Not very helpful advice for a young child dealing with these social issues! I learned a few things from that experience: that money could be dangerous even if you weren’t “rich”, and that even if I or my family were “rich”, I didn’t deserve it and was a worse person for having it. As an adult, that lesson has lingered and I’ve struggled at times with a sense of being happy with what I have, whether that’s been a lot or a little or something in between!

A positive aspect of wealth that I learned from observing my parents is that it can be used to help others. We’ve helped out friends and family members when they’ve found themselves in a tight place. And while we’ve enjoyed many nice vacations, a good fraction of those included friends or relatives joining us at family expense. It has informed my own sense as an adult that if I have the capability to provide for others with less in some situation, I can do that without either party making “a thing” of it and instead just focusing on the opportunity for mutual enjoyment.

Sadly, I did not get much financial instruction growing up. I observed my parents being budget-conscious and balancing a checkbook back when that was something you had to do (they still do this although I’ve encouraged them to set up an electronic account management system many times) as well as reviewing utility and credit card bills to ensure there were no erroneous charges. But aside from having my own bank account to collect gift monies and being encouraged to operate lemonade-and-cookie stands or hold summer jobs as a youngster, I wasn’t taught much about how to make money or how to manage investments. Looking back on it, I don’t think my parents had anything to teach. My dad got swept up in the excitement of the Tech Boom in the late 90’s and I remember him coming home one day crowing about the wild price action in his AOL stock, and then coming home dejected the following week when it had just as unexpectedly crashed. I would watch Wall Street Week with Louis Rukeyser on PBS on Friday nights with my dad, but we never talked about it and I didn’t fully understand what they were discussing on the show or what the stock market was. I didn’t realize I could invest in stocks on my own until well into college when I discovered the works of Benjamin Graham, somehow without ever hearing about Warren Buffett! Certainly no one ever sat me down and taught me the wonders of compound interest and the importance of getting an early start for a lifetime of successful investing.

And the greatest single source of wealth in our family, our privately owned business, was considered a taboo subject for dinner table discussion because my mom didn’t want her children to feel pressured to be a part of it. Conflicted is definitely a polite way of putting our family’s relationship with money, although on the whole I seem to have picked up a few healthy attitudes and habits because I’m a big saver, abhor the use of debt and credit and have no misgivings about money growing on trees or magically replenishing itself with use.

The Wolf’s Money Narrative (as transcribed by the Lion)

Part of my family’s culture involves exchanging red envelopes full of money on special holidays or in recognition of significant life events. My earliest memories of money are receiving lots and lots of these envelopes, so much so that they filled up an old Swiss milk chocolate candy jug I used to contain them and overflowed the brim! I didn’t understand why I was getting this money or what it was for but I wasn’t going to complain. I mostly just saved the money because I received so much more than I had wants or needs despite growing up humbly.

I learned from my mother that money is not for spending. You work really hard, you earn a lot of money, save it all, don’t spend it, don’t enjoy life. Money is hard to come by. I learned from my father you work really hard, you don’t earn a lot of money, you don’t spend it, and you don’t enjoy life. And that’s not what he told me, that’s what I gathered from observing him. And you let your wife or the smarter person of the couple manage it for you.

Everyone in my family worked really hard, but none of them made enough to feel satisfied. They never explained how much they’d have to make to feel satisfied. And they didn’t seem to have time to enjoy their money anyway because they were always working too hard trying to get more of it!

Money was not a numerical, quantitative thing, it was just some abstract concept.

I spent all of my red envelope money on totally inconsequential things once I realized I had the ability to spend money as a teenager. I didn’t think about what I needed, I just thought “I have money, I guess I’ll spend it”. I wasn’t a conscious spender. My parents never taught me anything, so I just followed my impulses. I didn’t know what we were hoarding money for so I figured I’d just spend it. I wish someone had told me what money could be used for so I could’ve been more thoughtful about the way I decided to spend it back then!

Some things I admired about my family’s attitude toward money is that they saved it. It takes a lot of discipline to save money and not to take vacations or be tempted by material things. The only unethical thing about money I remember is that my uncle gambled a lot of money and this was embarrassing for the family. It was considered wasteful. It was taking risks but not on a sure thing. Tempting fate. Casinos are not seen as having honor and integrity, so it’s frowned upon to be seen there.

I had an accounting class in middle school, but I didn’t learn budgeting until I got married and the Lion taught me. He was also the one who taught me about retirement savings, IRAs and investing.

One big emotional issue about money growing up was that I learned my extended family helped pay for my college education so I wouldn’t have debt. It was very touching and as a result I feel obligated to return the favor by treating elder family members to meals and travel.

When I think about my own affluence, I think “What affluence?” It’s hard to view our position as actually mine, that it doesn’t really belong to me because my husband is the breadwinner and I am the homemaker. That being said,  I feel good about it, I feel lucky. I feel like I’ve come a long way. It’s a privilege to not have to worry about money and feel taken care of. That is not the way I remember growing up in terms of money.

Our New Money Narrative

We want to demystify money in our family and treat it with transparency. We also don’t want to fool ourselves or others about what money means to us, how we acquire it, how much we have and what we plan to do with it. Our plan is to talk about money early and often with our children and as much as possible find age appropriate ways to include them in family money management.

Just as we find activities for our Little Lion to contribute to the household well being, often tasks he himself comes up with after observing us, such as sorting laundry piles, sweeping the floors, assisting with meal prep and clean up, etc., we will look for ways he can be part of our money economy in the family.

At the present stage, when we buy something we let him hand over the means of payment and sign any receipts as necessary, so he understands that to get goods and services from others we have to pay for them. As our children grow, we will include them in dinner conversations about how work is going and where we stand on our budgeting. When it’s appropriate to provide them with an allowance, we’ll introduce them to the concept of budgeting and help them to develop ideas about how they can generate their own income beyond their allowance. We’ll also talk about savings and delayed gratification and the power of compound interest over time to help them conceptualize the tradeoff between some now or more later.

As a family that plans to homeschool, we’re particularly interested in the ways we can integrate math and financial literacy into real life activities. Grandma Wolf has a seasonal baked good distribution business and we look forward to sending the Little Lion to be a (paid) apprentice on her route from time-to-time, learning about marketing and customer service, costing and profit calculation and the value of a hard day’s work. We’ve also thought ahead about stock investing and portfolio management for an enterprising youngster with savings. We see no reason why our children can’t learn about investment selection and management in their adolescence and be in a position by their teenage years to fully research and manage their own portfolio of business interests. This is also appealing because it’s a way for our children to “follow their parents” into an activity and one where we can model the behaviors because we’re doing them ourselves.

We don’t want to give our children the impression there is anything shameful about having money, getting money or talking about money (or even wanting it!) We also don’t want to give our children the impression that simply having money or being able to get it makes a person valuable by itself. Life is complex and money is just one means and one end to be sought in a productive, interdependent life. That being said, we intend to have honest and frank discussions with our children about why some people have a lot more than others and why some people have a lot less– and the answer is not just “luck.” This may seem controversial or a way to invite social problems with children struggling to understand the nuances of life, but we see no way around acknowledging these fundamental realities. Some people are poor for a reason and some people are massively wealthy for a reason.

We are also giving great consideration to the concept of “philanthropy” versus “charity” in our family values surrounding money and wealth. We’re skeptics of “charity” generally and our children will not see us shipping checks to everyone who comes begging or has an emotional story to tell while we pat ourselves on the backs and feel good regardless of impact and outcomes. They also won’t get the impression that we feel guilty or a need to “give back”, or that giving away or gifting money is the only way to make contributions to their community or humanity. If “philanthropy” really does entail any act or service that makes the world a better place to live for everyone, then we will help our children to understand that being the best people they can be, putting their talents to their best use and living lives of principled striving for their conception of the good are all philanthropic endeavors that make the world better off, as also are donating to public and private causes they feel passionate about, serving in leadership roles in public and private life, giving their time and physical presence to various organizations and efforts and so on.

In summary, we want to raise our children with an awareness of money and wealth, a desire to make their own contribution to the family’s stores of value in their various forms, and with confidence that they can make their own contribution through their thinking and efforts. And with this stable foundation and sense of themselves, we want to see them go out boldly into the world around them, wherever that might be, and help others to build wealth and security of their own.

The Open, Free Intellectual Environment Of The American University

A fellow investor friend of mine sent me an e-mail and suggested I read “What’s the point?” by UK fund manager Terry Smith. We were originally talking about Michael Burry’s commencement speech at UCLA [PDF] and the idea that one of the things that was so extraordinary about it is the way he unmasked the villains and the corruption and spoke the truth unapologetically in such a public forum. I had also, in an earlier e-mail, complained about my lack of interest in blogging, feeling frustrated lately at the nearly overwhelming volume of fallacious bullshit floating around the net that seems to deserve a response yet leaves me tired and bored out of my mind every time I attempt another mud wrestling fiasco.

I don’t know if my frustration inspired the link to Terry Smith or if it was simply the next step in the theme of telling it like it is or what, but that blog post got me thinking. I’ve long thought about giving it one last hurrah and then hanging up my hat. Because, seriously, what is the point? You can tell the truth a million times but if your opponent is bent on lies and deceit, nothing can be done. (Of course, Mises adopted the slogan, from Virgil, of “Tu ne cede malis”, but he’s a smarter man than I, with more energy, apparently.)

In light of this, I wanted to share three critical experiences I had in college during my sophomore, junior and senior years, respectively, which have stuck with me to this day and serve, subtlety and fundamentally, to color my view of the intellectual Opposition. I believe my experiences are not unique, although few people besides me may have had the required awareness to realize it, and as such where I went to school back then is not important to the story. This is not about an institution but rather the institution of the American academic system and its culture as it exists today, and likely has existed for awhile before now and probably longer still in the future.

I want to give some insight into why I find it hard not to be dismissive of many people who claim to think differently than me on various philosophical subjects.

I first became suspicious of my academic curriculum when I learned that microeconomics was not a prerequisite for macroeconomics. Rather than being treated as fundamental knowledge built upon and reexamined from a more global standpoint in macroeconomics, microeconomics was treated as a separate discipline entirely, which could be studied before, during, or after macroeconomics or even not at all (at least, if you weren’t concerned about getting an economics degree). Of course, numerous macroeconomic theories contradicted accepted wisdom taught in the microeconomics course, but no explanation was given as to the nature and source of these apparent contradictions, nor where it was in the economic causal chain that things stopped making micro-sense and started making macro-sense. There was simply a dichotomy in place and you were expected to accept it and move on.

In my second year I was excited to take a class with a professor teaching “international trade” (you know, the separate set of economic principles and rules that apply when two people exchange goods across imaginary political boundaries). Everyone I knew who had taken the class spoke highly of this professor as a competent and entertaining lecturer and said the material itself was quite fun. We spent a lot of time in that class studying the roles of quotas, tariffs and other government interference in the economy. It was really about political economy, not economics, because economics doesn’t change when you move stuff over imaginary lines.

But what rubbed me kind of raw in the class was when this beloved professor spoke quite approvingly of the idea, built into his theoretical examples in class, of providing “transfer payments” (read: violent redistributive extortion for special interest groups carried out by the government) to currently privileged groups who would be “hurt” by “free trade”. This professor advocated that paying these highwaymen off and reaping the benefits of freer trade was a good idea in the long run.

“Uh, question, professor– wouldn’t it be best to just have free trade, without a complicated system of quotas, tariffs and transfer payments to interest groups? Isn’t that most economically efficient? Why don’t we learn about that?” This question got a knowing smirk and a request to meet the good professor privately during office hours to discuss, as there simply wasn’t enough time in lecture to discuss such twaddle.

Dutifully, I scheduled some office hours time to meet with the beloved professor and discuss. Again, I posed the question to him, why are we paying these people off? Isn’t it better to let them figure out their own way to survive a competitive market place without getting welfare from everyone else? After all, they have no right to a certain income or position within the market place. Again, a knowing smirk as the professor launched into a short anecdote about how he once was full of piss and vinegar like I about these subjects. But the truth of the matter, he told me, was more complicated.

And then he, in so many words, spilled the beans– if “we” don’t bribe these special interest groups with redistributive social justice, they’ll get their pitchforks and their torches and elect another Hitler. That was it. That was why he doesn’t teach actual free trade economics in his course. That’s why he thinks transfer payments are good. That’s why he was for FDR’s New Deal and the Social Security scam. He saw it as the only thing standing between us, and Hitler.

I tried to make the point that if you fear totalitarianism, transfer payments are actually a step toward totalitarianism, not a step away. He responded by suggesting that granting these dictator-electors-in-the-wings a little welfare would create some kind of social anchor where we’d go no further toward socialism past that point, having bought the evildoers off. Never mind people tried to buy Hitler off and he just asked for more until he went to war. And never mind that the US government has had to move far, far beyond the New Deal since then to keep neo-Hitler at bay, according to his logic.

At this point, having no response to my observation of yet another contradiction, I was informed that office hours had suddenly come to an end (I’d only been there for thirty minutes and had scheduled an hour and I didn’t see anyone waiting in the hall for an audience) and that although he really enjoyed our conversation, he was going to have to ask me to come visit with him during the summer to continue the conversation. Of course he knew I was an out of state student who would be returning home during the summer so he was actually dodging his responsibility to make sense of his intellectual positions.

I left his office reeling in confusion and frustration. Here is a guy that my peers think is one of the best instructors the university has to offer, he is considered to be a thoughtful and intellectual person, etc. Yet, I come to find out he is teaching disingenuously. He is guilty of the “smuggled premise”, that is, his economic values taught in his class have nothing to do with sound economic reasoning but rather a personal, political belief that is never named nor mentioned which is thereby “smuggled” into the lessons. Instead of being honest and telling his students “I am teaching you a bunch of stuff that doesn’t make economic sense, because I think it makes political sense”, he carries out his pedagogical mission in such a way that he exploits his students ignorance and credulity.

Why can’t this professor just tell everyone what he really believes? Are we not old enough for the truth? Did we not pay for the truth? Do we not expect the truth?

To say I was disappointed by this experience would be an understatement. But I tried to put it behind me as I continued my economic studies.

During my third year, I had another run in with an economics professor, this time one teaching a “money and banking” course who had done some consulting for the Fed and who used as a textbook in his class the work of the notorious intellectual bungler, Frederic Mishkin. I raised a lot of challenges to the material which were poorly handled by the professor, but there is one in particular that will always stand out to me because of its zaniness. We were discussing the “money multiplier” of fractional reserve banking and how with a tiny base of reserves banks could pyramid large amounts of credit on top and lever up their balance sheets. I raised my hand and asked, “Doesn’t levering the balance sheet increase the risk of crisis for the bank and for the banking system?”

The professor acknowledged that, well, yes, it does, but it’s all done within the proscription of the FDIC guaranteeing everyone’s deposits and the Fed serving as lender of last resort to prevent a total collapse. Then I asked, “Well isn’t that crisis kind of inevitable when you create duration mismatch between funds that are borrowed short and lent long like this?” And the professor acknowledged, well, yes, it does, but again it’s all done under the keen watch of the overseer regulatory bodies, this time a little bit more apprehensive. And then I went for the F-word. I raised my hand, “But professor, isn’t it fraud to lend out people’s money that they think is being held for safe-keeping at the bank? Why not have the bank separate the two activities, safe-keeping and loan-brokering?”

There was a pause and he looked kind of startled. His skin color rose and his face contorted into a mixture of anger and glee, because now he had “figured me out” and knew my true motive. He exploded: “So I guess if it were up to you the banks wouldn’t make any money, huh?!”

A little shocked at his outburst, I stammered, “Well, no, of course not, I don’t really see what their profitability has to do with my question…” but he cut me off. “Yeah, I see what you’re trying to do. You don’t want the banks to make any money, do ya?! Well, it’s a nice ideal but it doesn’t work in the real world and if banks didn’t make any money, we wouldn’t have any banks and you wouldn’t want to live in a world without banks!” he growled, signaling that question time was over and it was time to get back to his brilliant lecture on fraud-based banking economics.

The episode was so instructive for me. So THAT’S what he’s about– shilling for fraudulent reserve banking, not trying to explore the truth of the matter. He neatly dodged my very simple, very honest inquiry of how we might live in a world without systemic banking risk, a world which would still allow profit opportunities for banking operations. Instead, he constructed a false dichotomy — systemic risk due to fraud, and profit; or no profit and no banks — and then browbeat me and anyone else in the class who was listening to avoid serious discussion of the principle. It suddenly put things into perspective for me. He wasn’t there to impart any real knowledge about the economy to me, he was there to be a hatchet man and paid minion for the banking establishment as it stands today. Wouldn’t want any bright-eyed college kids getting uppity and questioning the scam now, would we?

I really thought that would be the tops. But then I got to my Labor Economics class in my fourth year.

You might be wondering at this point, “Labor economics? Are you mad? Why did you take that course as an elective?” It would be a reasonable question, but the truth is that it was the least horrible option amongst what I had to choose from at the time. To say I went into it with low expectations is an understatement.

Those low expectations were met admirably on two separate occasions, which were not the only examples to choose from but simply the most illustrative.

My professorista had spent her entire life after high school in academia and government bureaucracies like the Bureau of Labor Statistics. I would be surprised if she ever held a part time job as a youngster in the private sector. She demonstrated zero familiarity with the reality of markets. One day she provided the class her argument for government intervention in the economy, which was based on the “paradox of capitalism”, this being that capitalism is SO efficient and SO productive, that it drives things down to the cost of “near 0” (not actually zero, because that’d obviously imply superabundance and the end of scarcity for that good or service) and therefore these things become “uneconomic” to produce and won’t be provided for under the profit system, which means if we want them government must provide them as a public good.

One example she gave of this was childcare services. Now, let’s ignore the “empirical” fact that there are numerous for-profit childcare services out there, right here and now, which would seem to undermine her argument completely. Let’s just think about this logically for a second.

So long as a given good does not have a cost of 0, it is not superabundant and it is an economizable resource. For example, air is not an economic good because it is superabundant. You can breathe as much air as you need and don’t have to think about what you’d give up to ensure your supply of air, it’s just there. It has a cost of 0. But if it has a cost above 0, it must be economized, something must be given up to get it. And if at a particular point in time firms are so numerous and efficient at supplying a good, such as childcare services, that they can’t make a profit, what will happen is that the least efficient firms of the bunch will consume their capital (by earning losses over and over again) and exit the marketplace. And when they do this, the level of profitability for remaining firms will rise because the lowered supply will result in the ability to charge higher prices.

And this dynamic will play out forever over the life of the industry so long as people value childcare services. There will be a constant competitive dynamic tending toward the “right” supply of childcare services because the least efficient providers will exit with losses. And this is “good” from the standpoint of anyone interested in participating in the economy because it means that those extraneous resources will flood into other, underserved industries where profitability is much higher, indicating a relatively more important use for the resources versus childcare. At no point will the market stop providing childcare services entirely, requiring a timely government intervention and provision of this service to correct a “market failure.”

Well, recognizing that as the hogwash it was, I raised my hand and began disputing the logic just as I did above. She was so dumbfounded that I had the temerity to question her transparently flawed reasoning that she began what could best be called “sputtering”, rolling her eyes and trying to form even one word in response as if she were having a seizure. Finally, she gave up and said, “Would anyone like to respond to that and explain why he is wrong?” About ten different hands shot up, eagerly, and she called on a young man who halfway turned around in his chair to straddle his view between me in the back and her approving glances in the front. He began, “Governments can and should correct market failures, which happen frequently. For example, while I was studying abroad in Ghana, the government provided public bus service to the village I was staying at because it wasn’t profitable for private businessmen…”

I stopped him right there and pointed out that the lack of profitability is part of the phenomenon I just described, and it suggests the wastefulness of bus service to a small African village. The class erupted with anger and indignation. This was so not politically correct to suggest some poor villagers in Africa didn’t merit a dedicated bus service just because it wasn’t profitable to provide it! This lecture hall had about one hundred students in it. Suddenly, they were a-chatter, half of them noisily discussing how outrageous my view was amongst themselves, the other half turned and shouting/arguing with me simultaneously while the young man with the bus service anecdote continued droning on. This went on for several minutes before the professorista tried to get control back over the class and insisted we finish up the lesson, but by then it was too late as class was over and everyone made for the exits.

It was at this point that as people filtered out a guy sitting a little in front and to the right of me turned around and said, “For what it’s worth, I agree with you,” and then grabbed his bag and walked out. I guess it was better than thinking the entire class was ready to lynch me, but he certainly didn’t feel the need to come to my rescue in the heat of the argument!

The other memorable moment from that class came right near the end of the semester. The Wall Street investment banks were beginning their meltdown and that particular morning Bear Stearns had failed, which was all over the news and which had greatly agitated the students as several had received offers of employment there at the conclusion of the semester which were now in jeopardy. The professorista sought to calm everyone’s nerves by saying that this was a limited event, contained to a specific firm with poor risk controls and the Fed and the regulatory agencies were all over it.

I raised my hand and pointed out that this was indicative of a systematic impending crisis, that the authorities were NOT in control as evidenced by the fact that it had happened, and that it would get a lot worse before it got any better. I suggested that this was the first of many failures to come.

“Would you like to bet on that?” she said, mischievously, expecting me to back down with the bravado.

“I already have!” I exclaimed, as I had taken a few minor positions in my brokerage account at the time (don’t worry, I didn’t make out like John Paulson).

“Well, we’ll see…” she said, trying to quiet me down.

Yes, we did, didn’t we? I never followed up with her to see what she thought of giving me a hard time about my prediction in class, or whether she was willing to confess she had had it all wrong, but I think it demonstrates again a clear blind spot in the mindset of mainstream academics who are responsible for instructing this country’s (and the world’s) future leaders and productive people about intellectual curiosity, academic honesty and the nature of reality.

How many parents are aware of this when they insist their children must go to college? How many have audited the value of their kid’s higher education and determined that the small fortune it takes to get them through a “better” private institution is worth it in the face of antics like what I’ve described above?

Review – The Richest Man In Babylon

The Richest Man In Babylon

by George S. Clason, published 1926, 1988

The Richest Man in Babylon

Do you want to know the secret to wealth? Do you want to know how the richest man in Babylon came to a prosperous life?

He never forgot, A part of all you earn is yours to keep.

Seven Cures for a Lean Purse

  1. Start thy purse to fattening; save at least 10% of everything you earn
  2. Control thy expenditures; budget your expenses so you never spend more than 90% of what you earn on necessities and luxuries alike
  3. Make thy gold multiply; put your savings to work and let your wealth multiply
  4. Guard they treasures from loss; always ensure first that you don’t lose what you have and that you can get your money back out of any investment you make
  5. Make thy dwelling a profitable investment; own your own home
  6. Insure a future income; your financial planning should take into consideration the fact that you will have decreased earnings power as you age, and that one day you may pass on and leave dependents behind who need financial sustenance
  7. Increase thy ability to earn; cultivate your own powers, study and grow wiser, learn new skills and enhance your ability and number of ways you can earn income

Meet the Goddess of Good Luck

Men of action are favored by the goddess of good luck

The Five Laws of Gold

  1. Gold comes easily to anyone who would put aside 10% of his earnings to provide for an estate for his future and his family
  2. Gold will work for the wise person who finds safe investments in which it can multiply on its own
  3. Gold clings to the owner who looks after its safety in his dealings
  4. Gold slips away from those who invest it carelessly or in ways he is not familiar with
  5. Gold flees the man who has unrealistic earnings expectations, listens to tricksters and schemers or who follows his passions and desires rather than consideration and experience

The Gold Lender of Babylon

Better a little caution than a great regret

The Walls of Babylon

We cannot afford to be without protection

The Camel Trader of Babylon

Where determination is, the way can be found

Ron Paul’s Ten Principles Of A Free Society

I thought this deserved a separate post from my recent review of Ron Paul’s Liberty Defined.

At the end of the book, Ron Paul listed “ten principles of a free society” and I have slightly edited them below:

  1. Rights belong to individuals, not groups; they’re derived from nature, not political agreements
  2. Consent is the basis of social order; any arrangements built on voluntary consent are permissible
  3. Private property is owned by individuals and their voluntary organizations; it is not rented or permitted by political organizations
  4. Government is not a tool for redistributing wealth or granting special social privileges to certain individuals or groups
  5. Individuals are responsible for their own actions and can not be protected from their consequences without shifting the cost to others
  6. Money should be determined by the market and not monopolized and counterfeited by government fiat
  7. Aggressive and preventive wars are incompatible with the voluntary social order of the free society; embargoes are a form of warfare
  8. Juries may nullify (judge the laws, not just the facts) at will
  9. Involuntary servitude is not permissible, this includes: slavery, conscription, forced association, and forced welfare distribution (ie, taxation and “deputizing” private businesses and their resources to perform regulatory functions such as tax collection, immigration enforcement, etc.)
  10. Government agents must obey the same laws and moral codes as private citizens

I think this is a pretty good list. It definitely could get a conversation going. However, I wonder about some of the items on this list being redundant. I think the list might be able to be further circumscribed. I also think that the list goes back and forth between prohibitions, and declarations of principles or conditions or reality (thankfully, it doesn’t contain any positive obligations!) While the list seems fairly complete, I wonder if it captures all essential issues of a free society.

Review – The Age of Cryptocurrency

The Age of Cryptocurrency

I should’ve known better than to buy a book touting “the age of” something that came into existence only a few years ago and is currently playing out. Living history? Only if it leaves a meaningful legacy behind. But after reading this breathless book about bitcoins and blockchains, I have my doubts.

According to the authors, the primary usefulness of the blockchain, what makes it revolutionary, is that it will allow for low cost financial transactions. Not improved privacy, accuracy or honesty in exchanges. Not an end to the menace known as government. A few basis points in savings on transactions requiring a financial intermediary.

And even then, that is doubtful. The blockchain does nothing of and by itself. Despite being the heralded horseman of the middleman apocalypse, it requires a bunch of middleman applications and services (still being developed!!) to be practically useful to anyone, and of course no one is building and operating those mechanisms for free. Hello, economic scarcity, nice to see you again!

That’s kind of the theme of this entire, horrible book. “Wouldn’t it be so cool if…” and “Things are going to be totally different when…” but we’re not there yet, and we might never be.

This book was prematurely written, poorly researched (hyperventilated hype and name-dropping is not journalism, it’s puff piece paid marketing) and offers little to anyone seeking to understand how the blockchain operates in layman’s terms, nor does it put the extremely short lifespan of this technology into a meaningful chronological context so one can follow where it came from and where it might be going.

Challenging the global economic order? Considering the amount of fraud the community has already witnessed as disclosed in the book, it appears to be more part and parcel and less revolution in the streets.

The blockchain may offer some interesting applications in due time that don’t involve stupid self-owning companies pursuing their robotic amoral self-interest, but in the meantime I’m bearish to indifferent about it all and will continue to keep a bemused distance from the phenomenon, including schtick introductions like this work.

The Best Interview On Gold, The Gold Market And Investment Implications I’ve Ever Read

In “What is the key for the price formation of gold?” at GoldSwitzerland.com, SF-based software developer Robert Blumen covers a lot of fascinating and, to my eyes, original ground in an interview with the site’s host.

This has got to be the best interview on the subject of gold in general, the functioning of the gold market and the implications for investors that I’ve ever come across. Blumen not only covers these specific subjects related to gold, but also discusses the Chinese economy, the US economy and the state of monetary and fiscal affairs and even the attitudes of value investors, demonstrating thoughtful familiarity with all he touches. Blumen is well-versed in Austrian economic philosophy and applies this theory to the various practical considerations resulting in surprising new perspectives on common themes.

It’s a long interview and it will only fully reward those determined to dive all the way in. Here’s an excerpt:

There are two different kinds of commodities and we need to understand the price formation process differently for each one. The first one I’m going to call, a consumption commodity and the other type I’m going to call an asset.

A consumption commodity is something that in order to derive the economic value from it, it must be destroyed. This is a case not only for industrial commodities, but also for consumer products. Wheat and cattle, you eat; coal, you burn; and so on. Metals are not destroyed but they’re buried or chemically bonded with other elements making it more difficult to bring them back to the market. Once you turn copper into a pipe and you incorporate it hull of a ship, it’s very costly to bring it back to the market.

People produce these things in order to consume them. For consumption goods, stockpiles are not large. There are, I know, some stockpiles copper and oil, but measured in terms of consumption rates, they consist of days, weeks or a few months.

Now for one moment I ask you to forget about the stockpiles. Then, the only supply that could come to the market would be recent production. And that would be sold to buyers who want to destroy it. Without stockpiles, supply is exactly production and demand is exactly consumption. Under those conditions, the market price regulates the flow of production into consumption.

Now, let’s add the stockpiles back to the picture. With stockpiles, it is possible for consumption to exceed production, for a short time, by drawing down stock piles. Due to the small size of the stocks, this situation is necessarily temporary because stocks will be depleted, or, before that happens, people will see that the stocks are being drawn down and would start to bid the price back up to bring consumption back in line with production.

Now let’s look at assets. An asset is a good that people buy it in order to hold on to it. The value from an asset comes from holding it, not from destroying it. The simplest asset market is one in which there is a fixed quantity that never changes. But it can still be an asset even when there is some production and some consumption. They key to differentiating between consumption and asset is to look at the stock to production ratio. If stocks are quite large in relation to production, then that shows that most of the supply is held. If stocks are small, then supply is consumed.

Let me give you some examples: corporate shares, land, real property. Gold is primarily an asset. It is true that a small amount of gold is produced and a very small amount of gold is destroyed in industrial uses. But the stock to annual production ratio is in the 50 to 100:1 range. Nearly all the gold in the world that has ever been produced since the beginning of time is held in some form.

Even in the case of jewelry, which people purchase for ornamental reasons, gold is still held. It could come back to the market. Every year people sell jewelry off and it gets melted and turned into a different piece of jewelry or coins or bars, depending on where the demand is. James Turk has also pointed out that a lot of what is called jewelry is an investment because in some parts of the world there’s a cultural preference for people to hold savings in coins or bars but in other areas by custom people prefer to hold their portable wealth as bracelets or necklaces. Investment grade jewelry differs from ornamental jewelry in that it has a very small artistic value-added on top of the bullion value of the item.

So, now that I’ve laid out this background, the price of a good in a consumption market goes where it needs to go in order to bring consumption in line with production. In an asset market, consumption and production do not constrain the price. The bidding process is about who has the greatest economic motivation to hold each unit of the good. The pricing process is primarily an auction over the existing stocks of the asset. Whoever values the asset the most will end up owning it, and those who value it less will own something else instead. And that, in in my view, is the way to understand gold price formation.

Many of the people who follow and write about this market look at it as if it were a consumption market and they look at mine supply and industrial fabrication as the drivers of the price as if it were tin, or coal, or wheat. People who look at gold as if it were a consumption market are looking at it the wrong way. But now you can see where the error comes from. In many financial firms gold is in the commodities department, so a commodities analyst gets assigned to write the gold report. If the same guy wrote the report about tin and copper, he might think that gold is just the same as tin and copper. And he starts by looking at mine supply and industrial off-take.

I wonder if more equity analysts or bond analysts were active in the gold area, if they would be more likely to look at it the same way they look at those assets.

Notes – Dying Of Money

Dying of Money

by Jens O. Parsson, published 1974, 2011

The collapse of a monetary regime

The following note outline was rescued from my personal document archive. The outline consists of a summary of Jen O. Parsson’s classic tale of monetary woe, Dying Of Money. Parrson catalogued two mass inflation events in modern Western history– the German post-war hyperinflation and the US monetary boom of the 1960s and 70s which culminated in the abrogation of the gold-exchange mechanism by Nixon in 1971; both are instructive for different reasons.

Dying Of Money

  1. Prologue: The German Inflation of 1914-1923
    1. The Ascent
      1. “Disastrous prosperity”
        1. old mark had been worth 23 US cents; written off at 1T old marks to one new mark at end of inflation
        2. all the marks in the world in summer of 1922 (190 billion) were not enough to buy a newspaper or tram ticket in November 1923
        3. first 90% of Reichsmark’s real value had been lost before the middle of 1922
        4. inflation cycle: gestation of 8 years, collapse of 1 year
      2. The beginning
        1. summer of 1914, Germany leaves gold standard, runs up debt, prints money in anticipation of WWI
        2. war financed through issuance of new debt (war loans) paid for with newly printed currency
        3. domestic prices slightly more than doubled by the end of the war in 1918, even though money supply increased more than 9x
        4. 1919, Germany sees violent price increases of 17x prewar level
        5. other nations, including WWI victors, stop spending and suffer recession 1920-1921; Germany continues printing and experiences a boom while prices stabilize for fifteen months between 1920 and 1921, money supply doubles again
      3. Benefits of the inflationary boom
        1. Exports thriving
        2. Hordes of foreign tourists
        3. New fortunes minted overnight
        4. Berlin becomes one of the brightest capitals in the world
        5. Great mansions of the new rich in abundance
        6. City life took on a wanton, careless manner
        7. Frugality absent as no one took time to search for real value
      4. Losers of the inflationary boom
        1. Crime rate soared
        2. Unionized workers kept up with inflation while non-unionized fell behind
        3. Salaried and white-color workers lose purchasing power even as unemployment virtually disappears
        4. Total production rose
      5. Paradoxical wealth and poverty
        1. much employment in “spurious and unproductive” pursuits
        2. paperwork and paperworkers abounded
        3. government employment grew, heavy restraints against layoffs and discharges kept redundant employees on payroll
        4. incessant labor disputes and collective bargaining consumed time and effort
        5. business failures and bankruptcies were few
        6. almost any kind of business could make money
      6. Speculative fever
        1. speculation became one of the largest activities
        2. fever to buy and sell paper titles to wealth was enormous
        3. volumes on Berlin Bourse were so high that, even with bloated back-office staff, Bourse was closed several days a week to work off the backlog
        4. capital goods and industrial construction industry experience a boom, many new factories built all while neighboring countries continued using old equipment
        5. M&A, takeovers and proxy fights in vogue
        6. massive conglomerations of non-integrated businesses took place; these businesses and the “kings of inflation” disappeared after the collapse
    2. The Descent
      1. Price increases catch-up with money printing
        1. From July 1921, prices double in next four months and increase 10x through summer of 1922
        2. consumers put on “buyer’s strikes” that are fruitless
        3. interest rates soar as lenders attempt to anticipate inflation
        4. businessmen transact in gold or constant-value clauses or foreign currency
        5. government’s budget deficits close to balance; nonetheless, government is only able to refinance existing debt through money printing
      2. Final moments
        1. July 1922, prices rise 10x in four months, 200x in 11 months
        2. near end in 1923, prices nearly quadrupling each week
        3. prices raced so far ahead of printing that the total real value of all Reichsmarks in the world was smaller than ever
      3. The end of the inflation
        1. August 1923, government of Wilhelm Cuno falls; October 1923, Gustav Streseman made chancellor, given dictatorial powers, hires Dr. Hjalmar Schacht as commissioner of new Rentenmark (“investment mark”)
        2. Rentenmark placed in circulation beside mark with the avowal that Rentenmark’s would not be inflated
        3. Germans believed it, and Rentenmarks supply was held constant
        4. November 15, 1923: final exchange rate, 1T mark: 1 Rentenmark
        5. Government budget balanced by finance minister Dr. Hans Luther
      4. The fallout of the collapse
        1. Schacht orders end of credit from Reichsbank April 7, 1924; credit squeeze ensues; price increases halt
        2. Savings destroyed
        3. Inflationary boom businesses go bankrupt
        4. Credit nearly impossible to get
        5. Unemployment temporarily skyrockets
        6. Govt spending slashed, govt workers dismissed, taxes raised
        7. Working hours increase, wages cut
        8. Millions of voters join Communist and Nazi parties in the “inflation Reichstag” of May 1924
      5. Economic recovery
        1. New elections in December 1924 erase extremist party gains
        2. business recovery based upon foreign loans due to German credit tightening; world depression of 1929 knocks debtor Germany down
    3. Gains and Losses
      1. Debtors: winners
        1. every contract or debt fixed in marks was paid off in worthless marks
        2. Germany’s total prewar mortgage indebtedness, equal to 40 billion marks or 1/6th of total German wealth, worth less than one American cent after the inflation
        3. Savers and owners of mark wealth (bank accounts, savings, insurance, bonds, notes) lose out big
        4. those who borrowed up until the last minute to buy assets turned out to be winners
      2. German Govt: winner
        1. Largest debtor
        2. Entirely relieved of crushing war debt, representing cost of war, reconstruction, reparations and deficit-financed boom
        3. beware being a creditor when the government is a huge debtor
      3. Farmers: winners
        1. always had food
        2. farms were constant values
        3. mortgages were forgiven outright
      4. Foreign owners of marks and other losers
        1. Germany made a profit of 15 billion gold marks, or 40% of annual national product, on sale of paper marks to foreigners, after deduction of reparation payments
        2. Trustees, forced by law to own fixed obligations, lost
        3. Wealthy Germans invested in marks lost
        4. Great charitable institutions wiped out
        5. Banks and insurance companies were weakened but not destroyed (they are both lenders and borrowers)
        6. Sound business survived, but in a weakened state, boom businesses wiped out
      5. Industrial stocks
        1. height of the boom, astronomical P/E ratios
        2. dividends cancelled
        3. stock prices increase 4x from February 1920-November 1921
        4. Stock market crash of December 1, 1921, in the middle of inflation
          1. prices fell by 25% and hovered for 6 mos while other prices were soaring
        5. real value of stocks decline because their prices lagged behind the price of tangible goods
          1. Entire stock of Mercedes-Benz valued at price of 327 cars
        6. near end of 1923, stocks skyrocket again as investors realize that stocks have value even when bonds do not and have a claim to underlying real value
    4. Roots of the inflation
      1. Prices contained by faith
        1. Germans and foreign investors, until 1922 and the brink of collapse, absorbed the Reichsmark
        2. faith was in the idea that an economic giant like Germany could not fail
        3. willingness to save marks kept them from being dumped immediately back into the markets
        4. realization that Germany would not back the money was the moment the dam let loose
      2. Balance of payments
        1. More cheap Reichs flowed out than hard money came in
        2. This despite constantly rising exports and constantly falling imports
        3. payment deficit actually muted price increases by keeping Reichs outside of German markets
        4. Reversal of payments deficits marked the proximity of the end
        5. in collapsing stages, Germany ran a huge payments surplus
      3. Foreign exchange rate
        1. unlike era after WWII, free and uncontrolled “float” of forex
        2. German mark almost always falling and almost always had a lower forex value than its purchasing power within Germany
        3. Thus, forex rate proved a quicker and more sensitive measure of inflation than internal prices
        4. German exports were abnormally competitive on world markets due to forex vs. internal purchasing power discrepancies
        5. Germany lost 10 billion gold marks, or 25% of a year’s national product, on underpriced exports due to inflation
    5. The Great Prosperity of 1920-1921
      1. March 1920-December 1921
        1. prices stable
        2. businesses and stock market booming
        3. exchange rate of mark against $ and other currencies rose for a time, was momentarily strongest in the world
        4. ROW enduring severe recession; Germany envy of the world
      2. Reign of finance minister Matthias Erzberger, June 1919
        1. Raised taxes on capital; real tax yield of 1920 highest of any year from beginning of war to end of inflation
        2. tight money induced for an extended period in late 1919; only time money supply stopped rising for more than a month or so
        3. March 1920, price level was 17x prices of 1914, roughly equal to increases in money supply, new equilibrium reached
        4. Price increases halted for nearly a year, real burden of war debt had been cut by 5/6ths as a result of price increases of 1919
        5. March 12, 1920, Erzeberger exits govt, disgraced after a libel suit, and his pro-inflationary rivals take over
        6. March 1920 is the month prices stop rising, but with Erzeberger’s exit, the boom prosperity begins
          1. prices remain passive
          2. exchange value of Reichsmark rises
          3. stock market rises 3x before crashing in December 1921
          4. Reichsbank doubles over next year into summer of 1921 when price increases catch up
    6. The Lessons
      1. Unrealized depreciation
        1. built upon faith in the German economy to recover
        2. built upon faith in German government to make good on debts
      2. Booms
        1. built upon increasing rates of inflation
      3. Hitler and extremists thrive in wild, inflationary conditions
        1. Hitler’s putsch was in the last and worst month of the inflation
        2. totally eclipsed when economic conditions improved
        3. took power through elections during another economic period of trouble
        4. middle class voters wiped out in the inflation moved to the extremes in polling, bolstering Hitler and others
  2. ACT ONE: The Rise of the great American Inflation
    1. The War
      1. Dollar lost 70% of its value from 1939-1973, prices rose 3.5x
      2. Seven years of WWII, Federal debt increased to $269B
        1. 1/4th greater than the annual gross product of the country at that time
        2. money supply grew by 3.5x between 1939 and 1947
        3. June of 1946, prices had increased by less than half from 1939
          1. price controls
          2. new money was absorbed by the issuance of war debt rather than bidding for consumer goods
          3. many saved money during the war for “safety” rather than spent it
          4. low money velocity resulted
        4. real value of dollar at the end of the war was 2/3rd what it had been at start of war
        5. government stopped inflating, allowed price increases to reach new equilibrium
      3. Prices controls end 1946
        1. prices double from levels in 1939 in two years
      4. Money supply held stable 1947-1950; prices remain stable as well
        1. economic recession 1949
      5. Comparisons: German war inflation vs. US war inflation
        1. American war debt of $269B, about 1.25x annual national product; Germany 153B marks, about 1.5x annual national product
        2. American monetary inflation, 3.5x; German 25x
        3. American price inflation 2x; German 17x
        4. Ratio of monetary to price increases about the same, 60%
    2. Grappling with Stability
      1. Korean War, 1950
        1. Federal budget did not run a deficit fighting the war
        2. money supply increases by 16%; prices increased 13%
      2. Eisenhower administration
        1. money supply increased 1% per year on average from 1953-1962; wholesale prices never varied +/-1% from 1958-1964
        2. “monetary oscillations”
          1. 1953-1954, money growth <1%, recession
          2. 1954-1956, money growth 3.9%pa, boom and price inflation
          3. 1957, money supply contracts, followed by recession
          4. 1958-1959, inflation
          5. 1959-1960, contraction
          6. 1961, inflation
          7. 1962, contraction
    3. The Great Prosperity of 1962-1968
      1. intense monetary inflation beginning 1962
        1. 4.6% per annum for 43 months (through April 1966)
        2. 7.2% per annum for 27 months (January 1967-April 1969)
        3. total inflation over seven years was 38%, interrupted only by the 9month period of no expansion in 1966, accompanied by stock market collapse and economic recession by no effect on prices
        4. combined with an investment tax credit of 7% for businesses to spend on new capital assets, leading to exaggerated investment boom
        5. prices did not keep up, leading to “unrealized price inflation”, despite rising at nearly 5% per annum for the seven year period
    4. The Inflationary Syndrome
      1. economic effects from 1962-1968
        1. gross national product increased $360B, or 7% per annum, compared to 4.8% per annum during Eisenhower years of 1955-1960
        2. unemployment continually decreased
        3. stock market was almost constantly rising for more than 6 years
      2. speculative effects
        1. high stock market volumes, huge capital gains appreciation, large paper profit generation
        2. conglomeration and merger of big business
        3. most wage growth in the speculative class of paper-pushers
        4. overinvestment in capital goods
        5. IBM, Xerox (back-office service/goods companies) were the investment darlings of the era
        6. overproduction and stimulation of the growth of educational and legal industries
      3. foreign exchange and the balance of international payments
        1. current account deficits are a symptom of inflation
          1. when there is excess money in one country it flows out to other countries
          2. the currency in the inflationary country is overpriced relative to world markets, so it goes out and buys imports
        2. current account deficits reduce price inflation in the inflationary country because the currency bids up prices in foreign rather than domestic markets
        3. dollars held by foreigners returning to the US at the point that the current account turns to a surplus, would result in price inflation in the US
  3. INTERLUDE: The General Theory of Inflation
    1. Prices
      1. prices in aggregate are determined by total amount of money availble for spending in a given period of time, in relation to total supply of all values available for purchase with money in that period of time
      2. money supply defined as that which people use to buy things of value with, but which is not a thing of value itself (dollars, coins, checking account deposits)
      3. money available per unit of time, aka money velocity, also a factor, but it is hard to measure or determine
      4. price level = money quantity x money velocity / supply of all real values
      5. this is the quantity theory of money
    2. Real Values
      1. in an inflation, there are many “spurious values” which disguise and conceal the inflation of prices of real values
      2. real wealth consists of land, resources, productive plant, durable goods and people
      3. paper wealth is not real wealth; money wealth is debt, including money contracts such as bonds, mortgages, debentures, notes, loans, deposits, life insurance and pension obligations
      4. debt does not represent the direct ownership of any real assets but rather subdivision of interests in real assets with the direct owners of the assets
        1. for ex, a man is not part of the total supply of real capital as he can not be bought and sold
        2. however, if this man borrows money, he subdivides ownership of his future productive power and adds himself to the supply of capital assets
        3. if he borrowed from a bank which borrowed from a depositor, further subdivision has occurred
        4. government debt represents a “lien” on the part of the productivity of all citizens
      5. this multiplication and stratification of paper wealth can be increased to many times the size of the real existing wealth
      6. paper wealth structure is all built on faith– issuance of new paper wealth does not result in an increase in real values by itself
    3. Government Debt
      1. issuance of government debt increases supply of paper wealth, meaning it is price deflationary
      2. when Fed wants to tighten money, sells govt debt into market, reducing prices
      3. large issues of government debt could not be marketed without a large increase in the supply of money because they’d drive interest rates upward– precisely what govts don’t want; therefore, they’re almost always accompanied by money printing
      4. government surplus is price inflationary; if it is used to pay down debt, it reduces the supply of outstanding values and raises prices
      5. when faith in government debt fails, price inflationary effects will be amplified
    4. Interest
      1. lenders accepted negative real rates only because they didn’t realize what they were doing
      2. “the announced intention of Keynesian economics was to effect [the holder of money’s] extinction”
      3. the rich tend to be net debtors in an inflation
      4. inflation is paid for by the lower classes and the creditors
      5. an attack on interest results in a flight from debt to equity, from money wealth to equity/real values
    5. The Economics of Disaster
      1. occurs when the holders of money wealth revolt
      2. duller the holders of money are, the longer price inflation can be kept at bay by govt, though the greater will be the eventual breaking of the price dam
      3. desertion of money resembles a panic, sudden and unexpected
      4. people’s ability to discern real and spurious values suddenly becomes acute
      5. people flee paper assets and goods and services for known value like food and land
      6. no government causes collapse, “when at least it sees the choice, it has no choice”
  4. THE LAST ACTS: The American Prognosis
    1. Act Two, Scene One: President Nixon Begins
  1. Treasury reduces expenditures and attempts to balance budget, July 1969- June 1970
  2. Fed drops inflation rate in May of 1969 from 8%, 1yr later approx 3.8%
  3. Stock market prices fall by 14% within two months of May 1969, another year later down 31 percent; interest rates rise into spring 1970 credit crunch
  4. Approaching two year mark to next election, government begins pumping money again
    1. August 1970, budget deficit plunges to new peacetime lows
    2. money inflation of 6.5%
    3. interest rates plunge, stock market soars
  • Act Two, Scene Two: Price Controls and Other Follies
    1. worst inflation since the end of WW2 and before 1967
    2. economic boom into Nixon’s re-election in 1972
    3. boom quickly wears off
      1. stock market falls
      2. interest rates rise to surpass peaks of 1970
      3. price inflation worse than ever, around 4%
      4. cheap dollar floods world markets
    4. Nixon announces Phase I of price controls, August 15, 1971
      1. detaches dollar from gold
      2. 10% import surcharge
      3. excise taxes on automobiles removed
      4. wage and price controls
  • Self-Defense
    1. No sure safety, safety will change fluidly through an inflation
    2. Best hope is to lose as little as possible
    3. fixed money wealth/debt is the absolute worst investment in an inflation
    4. foreign money can be safe refuge only if the foreign government inflates less wildly than the domestic government
    5. the author shits on gold, but with no reason other than an arbitrary one because he is a Keynesian– gold may be overvalued during and even before and inflation but so long as people continue to think it is money, it can hold some value
    6. real estate provides a shelter for REAL value (usability/livability/productivity of land) but could be harmed in terms of investment value in an inflation
      1. real estate held in high esteem by inflationary prosperity (luxury dwellings, overblown commercial developments) may lose more real value than other investments as they started out overpriced in the inflation
    7. farmland is a special category of real estate
      1. produces what people must have, inflation or no
      2. farmers thrive and farmland excels in dying throes of every inflation
      3. less prosperous in early stages of an inflation
    8. hoarding of useful goods is a possibility, but has large storage, distribution and opportunity costs prior to an inflation
  • Self-Defense Continued: The Stock Market
    1. stock shares are pieces of paper, but they are claims on real assets and real wealth
    2. stock market is incredibly liquid
    3. common stocks provide returns in first madness of an inflation, then fall into disrepute in middle stages of an inflation
    4. a booming stock market is not necessarily part of an economically healthy nation
      1. the opposite is truer: booming stock market is a signal of inflation
      2. falling stock market is a sign of returning to reality
    5. the stock market as a whole rises due to inflation and nothing more
    6. the stock market declines on a weakening of inflation
    7. general business conditions and price inflation operate on a lag; when money is first printed it has nowhere to “work” and goes into investment markets
      1. markets rise while business is still bad
      2. later, as money moves out of the market and into businesses, the market falls
      3. when business is worst, stock markets rise; when business is best, stock markets fall
      4. rising stock market signals nothing but fresh money inflation– it is the earliest and most sensitive signal
    8. stocks bought at any price above their real-value bottom are not a hedge against loss but a guaranteed loss
    9. conversely, stocks bought at real-value bottoms have a good chance of holding their values through an inflation
    10. American stock market’s deflated bottom in 1970 was 43% higher than deflated bottom in 1962, just as money supply in 1970 was about 43% higher than in 1962
    11. as other prices outpace stock market rises (or even stock market decreases), fear can take over that the businesses will not be worth anything; but faith will pay off with real value nearly the same at the end of an inflation
    12. stock markets can enjoy inflated gains if there are laws in place forbidding the inflationary money to bid up prices elsewhere or in foreign markets
    13. the stock market represents real value, but not every stock does
    14. inflationary times tend to reward the most valueless stocks; use a “post-inflationary eye” to have a look around at what might actually survive the inflation in terms of real value
    15. “Attempting to make profits from the stock market, or even to make sense of it, without completely understanding the universal determinant of inflation was like being at sea among uncharted rocks and shoals without so much as a tide table.”
  • A World of Nations
    1. Virtually all of the entire growth of Federal debt after 1967, $55B, was involuntarily financed and acquired by foreigners
    2. by 1973, foreigners’ holdings of liquid dollar debt had risen to $90B from $31B in 1966
    3. America exported inflation; other nations imported it– this is the balance of payments deficit
    4. natural consequence of an inflation, surplus money must flow outward looking for “cheap” items to buy abroad
    5. 100% beneficial to the deficit country
      1. import real value from abroad while exporting worthless paper
      2. price inflation domestically is partially contained
    6. central bankers began a game of printing up new local currency to exchange with the inflowing dollars, sending the dollars back to the US where they would be recycled and re-exported
    7. exchange rates operate on a time lag
      1. first, the internal price level is too low, so the new currency flows out to the rest of the world
      2. then, the internal price level rises, drawing in currency from the rest of the world
    8. the best defense against another country’s inflation, is inflation