Showing posts with label Peter Schiff. Show all posts
Showing posts with label Peter Schiff. Show all posts

7/28/2014

Battle of the Bears: Deflation or Inflation?

In the first corner, we have Harry S. Dent, Jr. Dent is known for predicting both the decline of Japan and the impact of the Baby Boom generation hitting its peak in spending in the 1990s when most economists were proclaiming the opposite.  In his numerous television and media appearances, Dent warns of a stock market collapse and a deflationary depression due to massive debt deleveraging and the mass retirement of the Boomers.  His company is Dent Research, where he sells subscriptions and products that promote "capitalizing on the predictive power of demographics".  His latest book is The Demographic Cliff: How to Survive and Prosper during the Great Deflation of 2014-2019.

In the opposing corner we have Peter D. Schiff.  Schiff is known for being the lone voice to warn of the housing bubble and stock market crash of 2008.  A video compilation of his media appearances between 2006 and 2007 called "Peter Schiff was Right" went viral with 2 million views, showing him make accurate and dire predictions only to be openly mocked by the media.  Schiff calls himself the "original opponent of the 2008 Wall Street bailout" because he predicted the government's reaction to the crisis and opposed it in 2007, a year before it was even proposed.  In media appearances and on his radio show, Schiff warns that the crash he predicted hasn't happened yet, that what we saw in 2008 and 2009 was merely "the tremor before the earthquake".  He is the founder of several companies, including his investment / brokerage firm Euro Pacific Capital, Euro Pacific Precious Metals, and Euro Pacific Bank Ltd.  In his latest book, The Real Crash: How to Save Yourself and Your Country, Schiff warns that the twin bubbles of the U.S. dollar and treasury bills will pop when the rest of the world stops trusting America's currency and credit, giving us the real crash.

These two men have so many similarities.  Both have accurate and less than accurate predictions to their name.  They seem to have hired the same graphic designer for their latest books, and David Stockman, former OMB director under Reagan and author of The Great Deformation: The Corruption of Capitalism in America, gave them both favorable reviews.  They are both opposed to the government's economic stimulus and both claim that a major crash is coming - warning that our economy is built on a foundation of quicksand.  Both have companies and products behind their name and offer advice in their books that will help their readers brace for the storm ahead.  They both have explanations for why economies rise and fall, and yet, they disagree on something that would seem to be basic and fundamental: will we have inflation or deflation?

The Case for Deflation

The essence of Harry Dent's outlook and the basis for his economic predictions can be summed up in 7 words: People do predictable things as they age.  Given the information age we live in, Dent takes readily available statistics like birth indexes and consumer behavior patterns to make both short and long-term predictions.  To Dent, demographics is the "ultimate indicator that allows you to see around corners, to predict the most fundamental economic trends not just years but decades in advance".

The first step is to identify your peak birth years, like the baby boomers who accelerated in 1937 and peaked in 1961.  The next step is to identify the age when the average individual or family spends the most on some good or service.  The last step is to perform simple arithmetic and then... profit!

For example, the typical household spends the most money overall when the head of the household is age forty-six, so using the powers of addition we arrive at a peak in spending and a concomitant economic boom from 1983 to 2007. Dent argues that despite some bubbles in stocks and real estate that burst along the way, this is exactly what happened.

Dent believes this method also works for specialized industries.  For instance, we know when the typical family rents an apartment, buys their first starter home, upgrades to a McMansion, buys a vacation home, downsizes to a retirement home, and then goes onto a nursing home.  Therefore, we know when we should see these real estate markets rise and fall accordingly.  We also know when the average family will spend the most on diapers or potato chips, mini vans or sports cars, prescription drugs or Carnival cruises, so invest accordingly.  Dent believes that the single most important factor driving middle class economies is consumer spending by age.  In The Demographic Cliff, he states, "consumers are 70 percent of the GDP, and business investment only expands if consumer spending is growing and the government taxes businesses and consumers for its revenues; hence, it follows consumer spending indirectly as well."

Indeed, according to Harry Dent, demographic trends are the primary force driving inflation, deflation, and the booms and busts that take place in the economy.  Dent states, "Inflation rises with younger people entering the workforce, then wanes after they become most productive in their forties.  Deflation can set in when more people retire than entire the workforce."  Based on this understanding, Dent found a strong correlation between the growth in the labor force and inflation, with inflation following by 2.5 years.  Because he can predict the average number of twenty-six year old who will enter the workforce and the average number of sixty-three year olds that will exit, he can predict workforce growth and inflation nearly two decades in advance.  Dent used this "Inflation Indicator" to predict near zero inflation by 2010 in the 1980s, and like clockwork, that's what happened.  To Dent, the role of central banks and politicians is of secondary, or even nominal importance compared to demographic trends.  Dent states, "The greatest inflation in modern history was not caused by central bankers, nor was high workforce growth in the 1970s caused by politicians.  Who would want to create 16 percent inflation and mortgage rates and upset everybody?"

With this understanding of inflation and deflation, it is not surprising that Harry Dent also has a thesis on booms and busts that is centered on demographics.  He calls this the "Eighty-Year, Four-Season Economic Cycle" with the duration equaling roughly the average human lifetime.  Just like we have spring, summer, fall and winter in weather, and youth, adulthood, midlife, and retirement, in life, and innovation, growth, shakeout, and maturity in our business cycle, he sees this 4 stage pattern driving the overall economic cycle:
"New technologies and generational boom-and-bust cycles create a sustained boom that starts in the spring, hits speed bumps in summer with high inflation (think high temperatures) and falling generational spending that then descends into an autumn bubble boom with rising generational spending and productivity, falling inflation and interest rates.  That final boom creates bubbles in financial assets and new technologies and business models that, like after the fallow season of winter, will pay off for many decades to follow, but must first get more efficient by means of the deleveraging of debt bubbles and financial assets (as happened in the 1930's and will occur in the decade ahead).

This is a natural cycle of boom and bust, inflation and deflation, innovation and creative destruction that is the invisible hand of the free market system that has driven us to unprecedented wealth and incomes, especially in the last century.  But, as we've seen, governments taking more and more of the debt drug have stopped the rebalancing of our economy after a glorious fall bubble boom.  That means we won't get to spring and long-term growth again unless we allow the rebalancing and deleveraging to happen."
Hence, Harry Dent has major concerns with the governments of the world partaking in stimulus programs - they are directly fighting the natural and unavoidable deflationary "winter season" of the economic cycle.  Of the four major challenges that he sees coming over the next several decades, he lists #1 as "Unprecedented private and public debt - we must deleverage in the coming decade, against the determined efforts of banks and governments, or the debt will weigh us down for decades".  He looks at the total government debt (19.8 trillion), the total private debt (39.4 trillion), the foreign debt (2.3 trillion) and our unfunded liabilities (66 trillion) to arrive at $127,000,000,000 of debt, or 8.2 times the GDP.  This is the elephant in the room that cannot be ignored forever.

While Dent shares this concern of our debt with many other economists, primarily those he deridingly calls "gold bugs", this is where we start to see big differences.  Dent sees the dollar maintaining its value relative to other currencies, as he believes, "The lesson of the late 2008 meltdown was that the U.S. dollar is the safe haven."  He believes it is a myth that "The falling dollar is eroding our store of value and capacity to save".  Inflation is not a concern for him - it's as ridiculous as worrying about heavy snow in the middle of summer!  Dent predicts gold will continue the decline we've seen the last two years and eventually drop to $250/oz. by 2023.  With the demographic cycle and our mountain of debt as more powerful than any other economic factor, Harry Dent is predicting a deflationary depression from 2014 to 2019.  This will be when America falls off "the demographic cliff".

The Case for Inflation

Whereas Harry Dent sees economics as a byproduct of demographic factors, Peter Schiff adheres to the Austrian School of Economics, and next to Ron Paul, he is one of its most famous modern proponents.  Schiff had a head start in life in this regard, as he is the son of Irwin Schiff, a libertarian, economist, and famous tax protestor who testified before congress' committee on banking and currency to speak against the repeal of the gold reserve requirements for United States currency in 1968, 3 years before Nixon took us off the gold standard.  Irwin, at the age of 86, is currently serving a sentence for tax crimes and promoting his view that the United States government is applying the income tax incorrectly and unconstitutionally. Peter Schiff has spoken about his father's sentence, but I have also heard him tell stories of his father taking him to stores in the 60's as a boy to exchange dollars for pre-1965 coins that had 90% silver content.  Growing up, Irwin would also tell Peter and his brother stories that taught economic theory, which eventually came to be published as How an Economy Grows and Why it Doesn't.  In tribute to their father, Peter and his brother Andrew released a retold version of that story titled How an Economy Grows and Why it Crashes, which I think is one of the best introductions to economics ever written.

Hence, The Real Crash is a book written by someone with a solid background in economic theory.  When you hear him predict the housing bubble to a group of mortgage bankers in 2006 or hear him explain why the economic meltdown should have surprised no one at the Austrian Scholars Conference in 2009, he gives the same point-by-point, detailed analysis as he does in his book of how various interventions in the market have side effects that are easily predictable to someone with an understanding of how the free market works.  For Schiff, the solution is clear and consistent:
"We need to stop bailouts, government spending, government borrowing, and Federal Reserve manipulation of interest rates and debasement of the dollar.  We need to reduce government spending so we can offer real tax relief to the productive sector of our economy.  We need to repeal regulations, mandates, and subsidies that create moral hazard, lead to wasteful and inefficient allocation of resources, and artificially drive up the cost of doing business and hiring workers.  We need to let wages fall, allow people to pay down debt and start saving, and allow companies to make capital investments so that America can start making things again."
His proposed solutions aren't a silver bullet.  As he explains, this is like taking control of a car going 80 miles an hour and steering it into a ditch.  You might walk away with some injuries, but its better than crashing into a brick wall at 120 mph down the road.  But this is the only solution to keep us from continuing our habit of repeating the same mistakes over and over again.  In the 1990s we saw the Federal Reserve inject money into the economy that blew up a bubble in stocks, particularly dot-com companies.  When that bubble burst, instead of learning from that mistake, we allowed Greenspan to manipulate rates even lower, and combined with other government subsidies and programs, we inflated a bubble in housing and the financial institutions that were involved.  Just as Schiff predicted, we didn’t learn from that mistake either, and we compounded the problem with the Wall Street bailouts and government stimulus.  Without another bubble to inflate, we are setting ourselves up to destroy the dollar.  Schiff explains:
"Just as the housing bubble delayed the economic collapse for much of the last decade on the strength of imaginary wealth, the government bubble is propping us up now.  The pressure within the bubble will grow so great that the Federal Reserve will soon have only two options: (a) to finally contract the money supply and let interest rates spike - which will cause immensely more pain than if we had let this happen back in 2002 or 2008; or (b) just keep pumping dollars into the economy, causing hyperinflation and all the evils that come with it.

The politically easier choice will be the latter, wiping out the dollar through hyperinflation.  The grown-up choice will be the former, electing for some painful tightening - which will also entail the federal government admitting that it cannot fulfill all the promises it has made, and it cannot repay everything it owes.

In either case, we'll get the real crash."
Schiff is concerned about our 127 trillion debt and some of the other same economic indicators as Harry Dent, he just has faith that our government is going to make the same mistakes that they've been making the last few decades.  It's like watching a twilight zone fire department attempt to put out fire with gasoline.  It would be great if they'd admit their incompetency and try using water, but this is an institution that has been taught and trained to do things their way for decades.  So if you had to take a bet if the fire would continue to grow or get extinguished, knowing what you do about the people trying to put it out, where would you put your money?

The difference is two-fold, first the question of political expediency.  Can anyone imagine the government admitting we've made a horrible mistake, that social security and our other entitlement programs are bankrupt, and that we need to declare bankruptcy as a country and restructure our debts with our creditors?  No, with a 4 year term limit, any administration is going to continue business as usual and kick the can down the road for someone else to inherit.  The way Schiff sees it, we'll hear:
"Need to pay off the national debt?  Fine, just print more money, and pay it off with that money.
Need to pay for unsustainable entitlements like Medicare and Social Security?  Fine, just print more money, driving up nominal wages and thus tax revenue."
The second big difference between Dent and Schiff is to question what other governments will do when it's clear that the United States has neither the means no the ability to pay off its debts without massive inflation.  Dent argues that it doesn't matter, the dollar will not lose value because other countries are also inflating, and besides, 2008 taught him that the dollar is the save haven.  Schiff asks the question, will that dynamic last forever?
"As of 2010, 60 percent of foreign exchange reserves are in U.S. dollars.  That means, as a foreign country, you're willing to take dollars because you know some other country will be willing to take dollars.  That other country will take dollars because some third country will take dollars.  If this sounds familiar, its because we've seen it before.

In 1999, people were investing in dot-coms not because they thought these companies might make a profit, but because they thought someone else would be willing to buy the stock at an even higher price.

In 2006, people were buying houses not because they thought the house was worth that much, but because they thought they'd be able to flip it for more money to someone else.

This is only slightly different from a Ponzi scheme.  It all depends on the existence of a greater fool.  Eventually you run out of fools and the bubble pops."
So again, are we never going to run out of fools?  Will China continue to send us ships full of goods, only to return to their shores empty with nothing to show for it but more of our bonds?  Will they do this forever?  And if this won't last forever, what will happen then?  Schiff doesn't claim to be able to predict to the same level of accuracy as Harry Dent with respect to when events will happen.  He doesn't take the short term approach, but he has confidence in what will happen in the long term, and he's willing to ride out the temporary bumps in the road until we get to that destination.  It's not a destination he wants, because it's not a pretty picture:
"Unfortunately, the only way the Fed can keep rates artificially low as inflation rises is to create even more inflation.  Our creditors are only willing to lend us money at low rates because they believe inflation is not a problem, and that if it were to become one, the Fed would quickly extinguish it.  Once they discover otherwise, our creditors will refuse to lend.

So to keep rates down, the Fed will have to buy any bonds our creditors will refuse to roll over.  The problem is that the more money the Fed prints to pay off maturing bonds, the more inflation it must create to buy them.  This process feeds on itself.  Soon it's not just Treasuries the Fed has to buy, but all dollar-denominated debt.  No private buyers will purchase corporate or municipal bonds at rates far below the official inflation rate.  That is when its balance sheet really explodes.  Soon the inflationary fire threatens to burn the dollar and our entire economy to a cinder.  At that point the only choice is between hyperinflation and default.  This is the rock and the hard place the Fed will eventually be between."
Dent may have a point when it comes to the role of demographics in economic trends.  It is plausible that you can foresee when the economy will need more apartments vs McMansions vs retirement communities based on the years since the baby boomers peaked.  But to ignore the power of a government that will do anything to maintain its status of having the world's reserve currency or of the reckless nature of politicians that will do anything to stay in office is to pretend that the hyperinflations of Weimar Germany or Zimbabwe never occurred.  If the bankers are willing or forced to print endless amounts of money, then we will see inflation, demographics be damned.

Lost in Translation

Now that we've reviewed the cases for deflation and inflation from two leading experts that both predict a coming crisis during this supposed stimulus-induced recovery, let's take a step back and revisit our core definitions.  Recently the Austrians have been mocked and accused of making up their own definition for inflation out of thin air, but in actuality there has been a difference of opinion on this term for over 100 years, making meaningful discussion of this concept all the more difficult.

As Robert Murphy recently wrote, Ludwig von Mises and other proponents of the Austrian School of Economics refer to the object of inflation as the money supply itself, while other economists refer to inflation as a rise in the price of goods.  Specifically, Mises said the only rational definition of inflation would be "an increase in the quantity of money … that is not offset by a corresponding increase in the need for money."  This qualifier is important, because according to the Austrian school an increase in the supply of money and an increase in prices are not the same thing or even a necessary consequence of each other.  True, if you imagine a thought experiment where you magically double the supply of money that everyone possesses and hold everything else the same, then twice the number of dollars would be chasing the same amount of goods and services so you would see those prices increase.  But in the real world there are many factors that could drive prices down, including demographics and other consumer trends.  So all the Austrians can say is that logically, an increase in the supply of money will increase prices higher than they would otherwise be absent that increase in the money supply.  What would the prices be absent the inflation of the money supply?  It's impossible to say.  Maybe other factors would have driven prices down 10%, but due to the inflation of the money supply they only went down 5%.  In this case an inflation of the money supply didn't result in "prices rising" - so it's important to distinguish the two.

This qualifier is important considering some of the claims that Harry Dent makes when he makes the case for inflation being a good and necessary thing:
"All debt and financial asset bubbles are followed by deflation, not inflation or hyperinflation.  The core theory behind the hyperinflation view is that governments, by endlessly inflating, create inflation.  The argument is that this causes a debasing of the currency, robbing you of your purchasing power and standard of living.  This is simply not the case, and if you don't understand what actually causes inflation and why it is often not a bad thing, you will make bad investment decisions."
I was hoping for a well thought out rebuttal, but I came away disappointed:
"Since its invention in 1971, the ever-multiplying microchip has created a revolution in human communications.  The microchip's rapid evolution has also been a clear sign of progress and a harbinger of a higher standard of living.  So why would the multiplication of dollars not also be a sign of progress that similarly fosters a revolution in urbanization, a more complex and richer specialization of skills, and an improved standard of living?  We're not talking about the recent QE here.  We are talking about the story of economic history: more dollars per person and, more to the point, increasing urbanization that leads to rising affluence and the need for more dollars for transactions."
So according to Dent, as more people enter the work force, the increased specialization requires the need to pay people more money.  Through a mechanism that Dent doesn't identify, this need for money results in its creation, thus, inflation is natural and even welcome.  Schiff argues the opposite:
"For most of our country's history, the dollar gained value.  The dollar was worth 75 percent more in 1912 than it was worth in 1800.  You know those stories were your parents or grandparents tell about how they used to buy a sandwich and a fountain soda for a dime?  How everything was so much cheaper back in the day?

If you were around in 1900, for instance, the old folks didn't tell those sorts of stories.  What cost a dime in 1900 probably had cost fifteen cents in 1875, and twenty cents in 1800.

Of course, since 1912, the dollar has lost more than 95 percent of its value.  What cost a nickel in 1912 costs a dollar today. What cost $50 in 1912 costs $1,000 today."
Schiff goes onto explain the economic reasons that inflation is harmful:
"Inflation discourages savings and encourages consumption.  If you save your money for later, you know it won't be worth as much later.  That means you may as well spend it today before it loses its value.

Savings are the only way an economy can progress.  Only with savings does anyone have the capital or the leisure time to make machines, invent something new, or launch companies.  So by discouraging saving, steady inflation stultifies economic progress."
Dent uses the same rationale for explaining why inflation is good to make the case that the dollar hasn’t really lost value since 1913 since we are so much richer today.  Ironically, Dent writes:
"Are you better off than your great-granddaddy was? Indeed you are: after adjusting for inflation, wages are 7.1 times higher than in 1900, the very period of rising inflation and the supposedly falling "value" of the dollar.  Hence, it's not the "value" of the dollar but what your income in dollars will buy over time that counts."
The purchasing power of the dollar has dropped while real manufacturing wages have increased (according to government CPI).  So which is it, have we gotten richer or poorer than our grandparents?

Finally we come back to something that Schiff and Dent would agree on, the "value" of the dollar cannot only be expressed in nominal terms, but in relation to other items.  But while Dent points to the conveniences of modern times in proof that the "Purchasing Power of the U.S. Dollar" chart is misleading and wrong, Schiff has made the opposite case through real world examples.

In one broadcast, Schiff expounded on the statistic that in 1947 the average non-farm worker made $50 per week.  Translating this into "real money" (gold), that would be 1.4286 ounces of gold a week (at $35/oz.), which today would be $1,928.61 per week (at $1,350/oz.).  But back then people didn't pay income taxes, so instead of making the equivalent of $108,002 a year, assume 30% more from income tax and you arrive at $140,401 per year.

Now recall that today the average person makes $43,000 per year, and that person is probably a college graduate.  Now the mystery of how the average worker in 1947 with nothing but a high school degree could afford to support a wife and 5 kids in a house with a two car garage - he was making 3 times as much!

In another episode Schiff reminisces about the Brady Bunch and wonders how a modern day Brady Bunch could afford their live-in house keeper, Alice.  Again, we arrive at the same conclusion: back then Mike Brady, an architect, could afford a 4 bedroom house, a live-in house keeper, 6 kids, a wife that didn't have a job, and 2 cars.  That show wasn't based on science fiction - that is how the average American could live back then.

People can disagree on this point, but I don’t believe the proliferation of iPhones and iPads constitutes an improvement in the standard of living when it now takes two wage earners to put bread on the table instead of one.  In a free market economy we should expect falling prices and higher quality as the natural order of things, not higher prices.  Since everyone reading this has always lived in a world of rising prices due to the Federal Reserve creating artificially low interest rates and an expanding monetary base, this might be hard to imagine, but Schiff explains:
"Slow, steady deflation, though, is the natural state of things in an economy with sound, stable money.

Think about it this way: does creating a particular product or performing a particular service generally become easier or harder over time?  In most cases, it becomes easier: your computer becomes faster and the software gets better.  Manufacturing equipment improves.  Through practice, people figure out more efficient ways of doing the same thing.

So as widgets get easier to make, the cost of production goes down.  In a competitive market, this will bring the price of the widget down.  In other words, what we see with electronics would be the case with everything.
...
As long as you keep pace with the market, you can keep your pay steady, but prices will fall.  That way, you're getting richer."
Indeed, we should be getting richer.  Absent the government interferences described in The Real Crash, we should be enjoying all the material goods of modern technology while at the same time being able to work less and enjoy more leisure.  We should be working 10 hours per week and living in a Jetson's world, but instead our government seems intent on returning us to the world of the Flintstones.

Conclusion

Given the hero like status I confer to Peter Schiff it's hard to come off as objective.  That said, since I've been fearing inflation and preparing for the collapse year after year, I wanted to give Harry Dent the benefit of the doubt and let him make his case for deflation with an open mind.  After all, he shares many of the same concerns as other economists I respect, so maybe he is just seeing something that they're not.

Needless to say, I came away from his book very much unconvinced.  What I admire in people is consistency, and that is not something I find in Harry Dent.  While Dent claims to "espouse free-market capitalism as much as anyone", he goes on to call for a carbon-tax to "account for costs that the free market can't control", he supports government enforced savings programs to "combat our worst tendencies to not save", he says we need more government and more taxes to fund it because "Capitalism cannot excel in a libertarian society", and he supports a government-driven one-payer system for the most basic health care services because that brings "universal care and economies of scale and bargaining power to lower costs".  With a friend of free markets like that, who needs enemies?

Compare his recommendation of how to fix our healthcare system with Peter Schiff's analysis and the difference is striking.  Schiff devotes 34 pages to explaining how the government interventions that have been created over the last 50 years have caused our health-care system to be the mess that it is today.  It's almost like he's speaking directly to Dent when he writes:
"Health Care is different.
...
Often, politicians and journalists say it in order to justify government interference.  We can't just live this up to the market, because the market doesn't work here. Health care is too different.

Or people say "health care is different" as a way of explaining away all the problems regarding health care in our economy.  It's easier than trying to root out the causes.

But no, health care isn't that different.  The laws of supply and demand still apply.  If health care seems to operate outside the normal laws of economics, it's because our government treats it so differently."
From there Schiff goes on to explain the how the third-party-payer problem, the tax deduction on health care, over regulation of insurers, Obamacare, socialized medicine, the employer-based insurance system, malpractice reform, the FDA, and the licensing model for doctors all conspire to wreck our healthcare system one way or another.  He explains the history of each government intervention and logically traces how it has caused a problem.  That problem only leads to another "solution" by government intervention, which leads to another problem, until we get to the point that we're at today where a supposed supporter of free-markets like Harry Dent is endorsing a full-blown single-payer socialized healthcare system as the solution.

If there is something to be gained from Dent's book, I find some of the detailed investment advice interesting, such as when would be the best time to invest in apartments, starter homes, or retirement / vacation homes.  He believes that businesses that focus on health facilities, nursing homes, and assisted living care facilities will be needed for the next few decades - that makes sense.  But given his overall outlook on the future and his severe lack of solid economic theory, I'd take his advice only for short-term investments that I'm willing to lose.  When it comes to where I'm putting my money for the long-term, I'm unconcerned with The Demographic Cliff and I'm preparing for The Real Crash.

7/07/2012

The Libertarian Response to Vices

Looking back on my run for State Representative, my most rewarding experience was being invited to speak about libertarianism to a class of gifted students at a local high school.  I started by handing out the Worlds Smallest Political Quiz and gave a brief overview of what libertarianism is all about.  Then I opened the floor for questions, and no one can accuse the students of pulling any punches.  We discussed many different topics, but I clearly remember that one of the main subjects that kept coming back was drugs.  Several students challenged my support of legalizing drugs, telling me that drugs are bad, they destroy families and communities, etc.  How could I support the use of deadly drugs that cause so much harm?

I distinctly remember defending my position along empirical grounds.  I explained that while "drugs are bad" the effects from prohibition are the main cause of the problems associated with drug use.  I made a parallel to alcohol prohibition, explaining that our experiment with outlawing booze resulted in increased alcoholism, deadlier and lower quality alcohol (moonshine), higher prices attracting criminal mobsters, an increase in violence as those mobsters fought the police and each other for territory, and the corruption of the police.

However, one thing I don't remember explaining is the moral argument, the "who am I to judge" argument.  I'm not sure if I was bold enough to propose that drug use is a vice and not a crime.  Perhaps the students were familiar with the phrase, "I may disagree with what you have to say, but I will defend your right to say it".  But if they were, many of them didn't draw the parallel between offensive language and offensive behavior.

Lysander Spooner defined vices as "those acts by which a man harms himself or his property… simply the errors which a man makes in his search after his own happiness.  Unlike crimes, they imply no malice toward others, and no interference with their persons or property."  Today we live in a world where many vices are outlawed, and the price for breaking these laws include fines, imprisonment, and even death.  Libertarianism is often portrayed as an extreme ideology, where the libertarian position of being opposed to drug prohibition is seen to imply favoring drug use.  Nothing could be further from the truth.

This blog will show that endorsing a vice and using government violence to combat a vice are two extreme positions on a spectrum that includes other options, including tolerance and the use of ostracism.  We will see that libertarians adopt these median options as the proper response to various vices, and consequently show that libertarianism is actually the moderate position compared to irresponsible promotion of self-destructive behavior on the one hand, and the use of aggressive violence by government agents on the other.

The spectrum of possible responses to other people's vices


Starting from the far left of my "Responses to Vices Spectrum", we can think of a few scenarios where someone would be inclined to endorse, support, and approve of another person's vices.  One scenario would be when a person himself suffers from the vice that he endorses.  People that are considered addicted to a drug or a behavior like gambling often surround themselves with people that share the same vice.  This mutually reinforcing support network allows them to both normalize their destructive behavior because "everyone else is doing it", while also creating an example that allows them to legitimize their behavior, "Yes I just got my second DUI, but at least I haven't gotten a fourth one like Bob.  Now he really has problems."

On the flip side, there are countless examples of promoting vices where the person or organization making the endorsement does so for self-interested reasons.  The pimp that convinces a confused girl to sell herself for money and the drug pusher that encourages a teenager to sample his products to ensure a new customer are examples of endorsing illegal vices.  However, let us not forget that, thankfully, many vices are not illegal.  One can't watch more than a few minutes of television without being bombarded with countless endorsements of vices, whether outright commercials or strategic product placement.  The abuse of alcohol, cigarettes, and pharmaceutical drugs cause far more social damage than many illegal drugs, especially compared to marijuana.  Even the over indulgence of junk food and soda would rate higher on a social damage scale in terms of health costs, yet commercials promoting endless consumption of these products populate our billboards and rank as our favorite super bowl commercials.

Even when you don't have a specific product to sell we see vices glamorized in American culture, including promiscuity and gambling.  But don't think private greed is the only source of this endorsement, as the government also has its hands in the dirty pot when encouraging the poor and mathematically ignorant into spending their few precious dollars on state-sponsored lotteries.


Moving rightward on my spectrum, the next logical option for responding to a vice is tolerance.  In this case, an individual may not personally approve of the behavior, may even actively try to persuade others against the particular vice, but nonetheless they tolerate those that engage in the vice and keep a place for them in their lives.  These scenarios could include the permanent designated driver that responsibly handles alcohol and drives his booze-hound friends from bar to bar, the person that goes to Vegas and takes in a few shows while a friend loses his life savings, or a religious fundamentalist that believes homosexuality to be a sin but maintains a loving relationship with an openly gay family member.

As we move from tolerance to intolerance, the next non-aggressive response to a vice is ostracism.  In this case the person believes the vice to be so dangerous that they don't want anything to do with the vice, nor with those that engage in it.  According to Wikipedia, the word ostracism comes from the Greeks and described a procedure where a citizen would be expelled from Athens for ten years.  Ostracism could be practiced for the benefit of the ostracized, where a parent realizes they have been enabling destructive behavior by condoning a hopelessly alcoholic or drug-abusing child, and decide to "cut them off" from the family until they get their lives back on track.  On the other hand, the parent could ostracize the "prodigal son" not for his own well-being, but for the sake of sparing the negative influence from the other children.

At last we arrive at the option available to the State, the use of aggressive violence against someone because of their vices.  Remember, we are not talking about a response to crimes, where the committer of theft, rape, assault, or murder is the aggressor and a government or private security company is acting in the defense.  No, this is the unfortunately common response used today that when someone doesn't approve of the behavior of another, including a mutually beneficial voluntary arrangement between two or more other people, and they respond by passing a law.  Even if the penalty is merely a small fine, we must remember the price of non-compliance and escalation with the State.  To resist a fine can mean imprisonment, and to resist imprisonment can mean death.  As law enforcement officers, formerly known as peace officers, become increasingly militarized, it should become more and more clear how crazy it is to employ state violence against those that "imply no malice toward others, and no interference with their persons or property."

Unfortunately, the use of violence by government to respond against men and their vices has a long history in America.  As I found in Murray Rothbard's Conceived in Liberty, many of the pre-revolutionary colonies were much more oppressive than the British, where the price for exposing too much skin or missing church included fines, whipping, and locking people up.  While we no longer outlaw those specific infractions, we have not evolved much past our Puritan ancestors.  Instead, we have replaced every religious law with a thousand or ten-thousand regulatory laws.  Selling raw milk, more than 16 oz. of soda, or a toilet that uses more than 1.6 gallons per flush can land you in the crosshairs of the State.  Books like Paul Craig Robert's The Tyranny of Good Intentions and Harvey Silverglate's Three Felonies A Day are two of my favorites that expose the outrageous extent to which we have criminalized people's vices, and the danger that we have put ourselves in now that the precedent has been set.

Now that we have defined the four major categories of how a person can respond to another's vice, we can explore how a libertarian might respond to some of the hot-button issues facing America today that are so often misrepresented in the public.

Drug Use

Undoubtedly, drug use is a vice and not a crime.  On the one hand we have those that abuse drugs, both the pharmaceutical and illegal variety, which harms no one but themselves.  On the other hand, we have the pushers of drugs qua drug pusher, where they are guilty of nothing but voluntarily offering a product which the person is free to accept or reject.  After quickly reviewing the empirical arguments for repealing prohibition (I highly recommend Mark Thornton's The Economics of Prohibition, available at mises.org for free) we can turn to the libertarian solutions to this vice in a world that has rejected the government-violence response.

First, let's remember that a world where drug possession and selling is not illegal would look very different from the one we have today.  Many illegal drugs come from naturally growing plants and have no patents or intellectual property rights associated with them.  Absent this artificial monopoly, we would see the prices for these drugs plummet.  Absent enormous profits, we would see the violence and corruption associated with drugs disappear.  Criminal gangs would not be interested in selling marijuana for the same reason they are not engaged in selling wheat or rice, as their strategic advantage only applies in the trade of illegal products with the accompanying need to evade or bribe government agents.

However, we would still be left with the problem of the abuser of drugs.  The poor soul who cannot take responsibility for his actions and finds himself making one mistake after another due to his short time-preference and inability to resist the highs and lows of drugs would still exist.  What to do with him?  First off, we have already done a great service to this person by reclassifying him from a criminal to a person in need of help.  If he already has a drug addiction problem, the last thing that would help is throwing him in a cage with violent criminals.

Under the category of tolerance, we can predict that for-profit and charitable rehabilitation centers would cater to drug abusers and their families.  These institutions would compete by offering the lowest costs and the highest quality service, trying to win the business and donations of others by advertising the best recovery rates.

Finally, considering that mandatory minimum sentencing for drug "crimes" have exploded our prison population beyond capacity, forcing jails to release truly dangerous criminals while keeping millions of non-violent drug offenders performing slave labor, I hope the libertarian solution is looking less radical and more sane.

Racism

Racism, or any kind of unjust discrimination for that matter, is a practice that most people find disgusting, and many would probably end a friendship with someone who suddenly revealed themselves as some kind of hateful racist or bigot.  Yet the libertarian views this as a moral issue, not a legal issue.  The right to associate implies the right to not associate.  So far at least, it is not a crime to choose friends or lovers based on race or some other superficial characteristic, yet it is a crime calling forth the violence of the state to choose private employees and customers based on being a member of a government recognized minority group.

On the empirical side, Peter Schiff has made excellent arguments calling for the repeal of racial discrimination laws.  From the perspective of a customer and a Jewish American, Schiff has claimed that he'd rather a business be free to discriminate against him so that he can in turn identify the racist / bigoted employer and cease doing business with him.  This is an example of the ostracism approach to racists.  Today we have no idea which business owners are racist or not, but allow them to expose themselves and we'll be able to ostracize the racist and even lead boycotts against him.  The consequence will be that racist store owners will be put out of business, while non-racist businessmen will gain market share.  As Walter Block has said, the only color a smart businessman sees is green, and if racist behavior causes him to lose money, this could in itself cause him to change his tune without the need to bring in the violence of the state.

Peter Schiff has also made the case for repealing racial discrimination laws from the perspective of an employer, as he has made a compelling case that these laws can create racist behavior in a person who would not be racist absent these laws.  Anyone who has hired or supervised an employee can testify that not every employee works out.  Sometimes people lie on their resumes, slack on the job, or reasons having nothing to do with the particular employee require a business man to let someone go.  Knowing that hiring any employee carries the risk of firing them in the future, the non-racist employer will rationally respond to the fact that there are some people who have the potential to sue them under racial / minority discrimination laws.  Hence, the employer may choose the white straight male over a more qualified member of a minority because the former cannot sue him, while the latter has that option available.  Even if the lawsuit is totally without merit, the time and cost of fighting and winning such a lawsuit can certainly influence the business decision that would be about pure dollars and cents absent these laws.

Thus, by rejecting the government-violence response to the vice of racism, we may not end racism overnight, but at least we will unleash market incentives to punish racist employers with ostracism and refusing to do business with them, while abandoning the perverse incentives that may cause a non-racist employer to engage in racist behavior that exist today.

Abortion

The Libertarian Party platform states,
"Recognizing that abortion is a sensitive issue and that people can hold good-faith views on all sides, we believe that government should be kept out of the matter, leaving the question to each person for their conscientious consideration."
At the risk of opening up a controversial can of worms, I'd like to explore this hot-button issue, as it is often the single issue that people vote on.  The 1988 Libertarian Party Presidential Candidate Ron Paul is Pro-Life, endorsing laws that would define life at conception and outlawing abortion.  Many other libertarians are Pro-Choice, including 2012 Libertarian Party Presidential Candidate Gary Johnson, supporting a woman's right to choose.

Having libertarian representatives on opposite sides of this polarizing issue may seem schizophrenic, but there is a libertarian position that doesn't have a simple label and requires a little explaining.  One can be Pro-Life in their capacity to influence and persuade those around them, including the choice they would personally make in the position of choosing life or death for the fetus developing in the womb of the mother.  At the same time, this person can be Pro-Choice in that they reject using the government-violence response of locking up women who make this questionable choice and the doctors who offer this service.

As all libertarian positions logically flow from our principles of Self-Ownership and Non-Aggression, it is not surprising to find Murray Rothbard frame the issue in this manner in For a New Liberty (free pdf):
"If we are to treat the fetus as having the same rights as humans, then let us ask: What human has the right to remain, unbidden, as an unwanted parasite within some other human being's body?  This is the nub of the issue: the absolute right of every person and hence every woman, to the ownership of her own body."
Thus, we are separating the moral issue from the legal issue.  Just as I might oppose what someone does to their body when it comes to the drugs they ingest, I might be extremely opposed to the choice a woman makes to abort her baby.  However, as a libertarian I will not endorse the use of government violence as the proper response to this decision.  I can try to persuade the woman out of the decision, I can donate money to an organization that pays women to keep their babies and finds good homes for them, I could even use the ostracism response and decide to not associate with abortion doctors and the women who make this choice, but what I won't do is lock them up in a cage or endorse a government agency to do so in my name.

Conclusion
"The ultimate result of shielding men from the effects of folly is to fill the world with fools " -Herbert Spencer
I hope that my "Responses to Vices Spectrum" can be a useful aid when explaining the libertarian options that are aligned with the non-aggression principle.  Libertarians are portrayed in the media as having extreme positions, as our policy recommendations do not fit into the left / right narrative where there are two and only two choices presented, where often both choices are two versions of the government-violence response.

Just because we libertarians don't want to initiate violence against others for their vices, including stealing their money, locking them in a cage, and killing them, mainstream opinion seems to imply that we seek a world where 12 year olds are addicted to heroin working for a dollar a day in a coal mine for racist employers.  This is not the case.  We want peace and prosperity for ourselves and our children, we just believe there is a better way to deal with social issues then the extreme position of government violence.  The cost of freedom is personal responsibility, and we believe that allowing people to learn from their mistakes is not only the best way to promote personal growth, but that non-aggressive methods of responding to the vices of others is morally superior than trying to combine two wrongs and somehow arriving at a right.

8/26/2011

Why and How to Protect your Savings with Gold and Silver

I started getting into gold and silver in March of 2008, buying as low as $909/oz for gold and $10.46/oz for silver.  Observing the current prices of $1800 and $40 per oz, I have seen a handsome return in paper profits.  However, I have never sold a single oz and continue to invest 25% of my after-tax income into gold and silver, thinking of it as my true savings.  Without getting into the intricacies of Austrian Business Cycle Theory, the purpose of this post is to give a high-level overview of why I have been investing in gold and silver, and how I recommend people do it.  In terms of Why, I will give a review of the history of commodity money, fiat paper money, how the United States got the dollar to be the world's reserve currency, and where the dollar is going from here.  For How, I will cover my perspective on the basic questions, the debates within the precious metals community, scams to avoid, and my detailed recommendations for which companies to use and what to buy depending on your unique situation.

As an introduction to this post, I highly recommending watching this 30 minute animated documentary The American Dream.  It's a humorous and surprisingly accurate introduction to the history of money and how we've gotten to where we are today.


Why?
Gold and Silver is real money

Imagine a world without money where everything we possessed would need to be created through our own production or direct exchange, also known as barter.  Despite my family heritage, I'm not much of a farmer, carpenter, or tailor, which leaves me with the option of bartering to obtain the goods I need to survive.  It would be unlikely that I could find others in a unique situation willing or able to directly accept my IT consulting services in exchange for food, shelter, clothing, or any other goods I may desire.  I would be left with few options and resort to producing these goods myself.  In such a world my standard of living would decrease dramatically, assuming I could survive at all.

Fortunately we don't live in a world without money.  Long ago, men in ancient barter economies realized that some goods were more readily accepted than others.  These goods rose in value in the minds of their owners not for their value in direct consumption, but because they could be traded in the market to others in order to obtain the things the owner actually wanted.  These goods became known as money, the medium of indirect exchange.  The discovery of money enabled savings, lengthened time preferences, and the division and specialization of labor; all of which are necessary conditions to facilitate modern civilizations and the high standard of living that many of us are blessed to enjoy.

Examples of early money include cowry shells, ivory jewelry, iron nails, salt, rice, barley, tobacco, alcohol and livestock.  The characteristics these goods generally had in common was portability, divisibility, durability, and acceptability.  Obviously, some of these examples performed better in one category than another.  A cow or piece of ivory jewelry isn't very divisible, and perishable goods such as tobacco or rice are not very durable.  Over time, precious metals, particularly gold and silver, rose in the market place as the best goods having the qualities of money.  No king decreed this to be so, in fact, no law could ever establish money out of a vacuum.  Instead, individuals acting in their own self-interest realized that gold was portable, divisible, durable, and acceptable, and as this truth became widely accepted the 6,000 year track record of gold as money began.

Despite recent statements by Ben Bernanke, gold and silver retain the characteristics that define them as money and remain so today.  Another crucial feature desired in money that precious metals posess is that they are finite and limited in supply.  For a good to have the money characteristic of acceptability, you would not want something overly abundant like air or water.  The limited supply and difficultly to counterfeit gold are the reasons it has maintained a remarkably steady value over thousands of years.  For instance, it is widely claimed that in ancient Rome a 1 oz gold coin could obtain the finest toga, sandals and belt.  Fast forward to the 1700's, 1800's, 1900's and today, that same 1 oz gold coin could purchase the finest men's suit of that era.  More recent examples from the last 100 years illustrating gold and silver's ability to maintain purchasing power include a meal, a fine rifle, and a barrel of oil.

Why?
The history of fiat paper money is not impressive

Leaving aside the ethical questions concerning our modern system of giving privileged institutions the role of printing money under force of legal tender laws, side-stepping the history of how warehouse receipts of commodity money were turned into money substitutes, and ignoring the arguably fraudulent nature of that transformation and of fractional-reserve banking itself, a mere empirical glance at the history of fiat paper currencies should give us pause to consider the potential fate of the US dollar and its status as the world's reserve currency.

The attempt to by-pass the role of traditional savings to obtain the illusory "free lunch" with paper money has been attempted numerous times in many nations since the birth of the printing press.  Some of the first examples of government issued paper money occurred in the American colonies before the revolution.  For one excuse or another, virtually all the original 13 colonies experimented with their own state-issued paper money.  While many assertions were made to only issue a certain amount of notes for a limited time and to redeem them back for silver at official rates, these promises were always broken under the force of economic law.  The pre-revolutionary colonies' attempts to keep the newly printed money at par with existing commodity backed money drove many of them to attempt price controls, which only contributed to shortages of the very goods in highest demand.  The continental currencies became so devalued that the phrase, "not worth a continental" was born.  This hard lesson guided the writers of the constitution to permit the Congress the exclusive power to coin money and forbid the states from emitting Bills of Credit or making "any Thing but gold and silver Coin a Tender in Payment of Debt."

This restriction on Congress was quickly subverted by Hamilton and his ideological branch of the founding fathers.  While hard money would be restored by presidents Thomas Jefferson and Andrew Jackson, the tide turned in 1913 with the creation of the Federal Reserve.  Since its inception, the dollar has lost 96% of its purchasing power.  The US is by far not alone in the unfortunate list of countries that have experienced high rates of inflation or even hyperinflation as they've failed to resist the temptation to print money.

I bought some of these from ebay to use as bookmarks and teaching aids... That's right, I'm a Quadrillionaire.
The most infamous example of hyperinflation was in Weimar Germany between 1921 and 1923, when the rate of inflation became so high that workers were paid twice a day so they could trade in their paper money for goods before it became worthless.  How did this happen?  At a high level, the combination of Germany leaving their gold standard to pay for remnant expenses of the first World War together with the massive reparations imposed on Germany at the Treaty of Versailles left them with an unpayable debt.  Backed into a corner, Germany printed money day and night to keep up with their falling exchange rates to obtain the gold and goods they needed.  Between 1921 and 1923, the amount of banknotes in circulation rose from 66 billion to 400,000 quadrillion marks.  In lieu of money printing accomplishing the miracle of transforming stones into bread, it left the German people more devastated than four years of war could ever achieve.

Why?
So what makes us different?

After World War II the United States was on a pseudo gold-standard where central banks, but not individuals, could redeem 35 federal reserve notes for 1 oz of gold from the US treasury.  Under this arrangement foreign countries around the world were more than willing to trade their goods and services for dollars. However, the money printing that funded LBJ's guns and butter programs and the massive costs of the Vietnam war caused US gold reserves to drain at a frightening rate as foreign countries and their central banks attempted to redeem their reserves of paper money for the gold we promised.  Hence, on August 15th 1971, under the excuse of protecting the dollar against evil speculators, Nixon severed the last remnant of the gold standard by introducing a new world of pure fiat paper money not tied to anything.  The $35 dollars that would theoretically entitle its owner to 1 gold oz now could only be redeemed for a twenty and three fives.

Rather than suffer the inflation typical of a money that is de-pegged from its commodity backing, the dollar was able to continue as the world's reserve currency.  This was possible due to the unique geo-political circumstances of the world's strategic energy resource, oil.  1971 saw the peak of US oil production, and the cartel created by the leading oil producing countries in the 60's, OPEC, traded their oil exclusively for dollars.  Thus, the dollar made a relatively easy transition from being the strongest actor in the world gold standard to maintaining the world's reserve currency status due to every country's need for oil and the happy circumstance that required dollars to buy it.  John Perkins, best selling author and former economic hit man, wrote that he helped facilitate a secret agreement between Saudi Arabia, the dominant partner in OPEC, and the United States, where oil would be sold exclusively for dollars at prices acceptable to American interests in exchange for military support for the Saudis and the understanding that the petrodollar profits would be invested in United States treasury bonds and other US interests. 

Whether this conspiracy transpired as described or not, the result is the same: for 40 years countries that would otherwise have no interest in amassing reserves of US paper have been required to trade their goods and services for US money and bonds in order to buy oil from other countries.  With Americans able to export inflation overseas, we have not had to exercise disipline over our money printing like other countries.  Noting that the price of oil has fluctuated against the dollar in line with the trend of gold and silver over the last ten years, remember that the common denominator is their measurement against the dollar and its major driver, money printing.  How much longer will this last?

Gold, Silver, and Oil.  The common denominator is US money printing.
Why?
The US government will continue to print money to pay its debts

Using the patterns of history and the laws of economics as our guide posts, it is clear that there are only a limited number of ways the future could pan out.  None of the likely options look good for the long term status of the dollar and the high standard of living Americans have grown to accustom.  We know that money operates under the law of supply and demand just like any other scarce good, such that other things being equal, a rise in the supply of paper dollars would translate to less demand for those dollars measured in everything else including food, gas, and gold.  So when we see gold, silver, and oil price graphs like those above and take into account the money supply chart below, it's clear that gold and silver pricing are not rising, it's that the dollar and other fiat paper currencies are actually falling.  Similarly, if we expect massive amounts of money printing in the future, we can expect a concomitant rise in the price of goods including gold and silver.

Increasing the supply of money is inflation, the rise in prices is the inevitable consequence.
Given this relationship between the amount of paper dollars created out of thin air by central banks and the price of gold and silver, what does the future hold?  With nearly every imaginable type of Keynesian stimulus program having been implemented, is it possible that sounder heads will prevail, new policies will be implemented, and we can get the 14 trillion dollar debt under control to save the dollar before it's too late?  Unfortunately, former U.S. Comptroller General David Walker has been a voice in the wilderness warning that our official debt is just the tip of the iceberg, as it does not include the money that is supposed to pay for the welfare benefits that a large segment of the population has come to expect and rely upon.


Now we have the elephant in the room, the unfunded liabilities of Medicare, Medicaid and Social Security.  Using the Social Security Trustees annual report, one analysis shows the combined unfunded liabilities of these programs is over 100 trillion dollars.  These unfunded liabilities are promises to pay money and benefits to our soon to retire baby-boom generation, many of whom have worked their whole lives paying their taxes and completely dependent on government promises for their retirement.  Just like former clients of Bernie Madoff, they believed in a program that was too good to be true and are now victims of a grandiose Ponzi Scheme.  The promised payouts are too large, the current workers are too poor, and the trust fund is just a briefcase full of bogus I.O.U's.

So what can we expect the government to do in such a situation?  In the aftermath of the recent US credit rating fall, Ben Bernanke assured the markets by promising to add more fuel to the fire by leaving interest rates at 0% for another 2 years.  Meanwhile, our Nobel Prize winning economist believes we haven't been printing enough money, and if only we could have a fake war with aliens we would get out of this slump in 18 months.  While anything could happen in the short run, in the long run I think the US government is going to do exactly what Weimar Germany did when they found themselves between a rock and a hard place: money printing.  If interest rates rise then all the banks that originally needed a bailout will go bust again, while keeping rates at zero prevent the malinvestments from being liquidated, ensuring a future of more recessions which will call for further "stimulus", rounds of quantitative easing, and bailouts.  As Greenspan says, "we have 0% chance of default, because we can always print the money."  A 14 trillion dollar debt, with 101 trillion in unfunded liabilities?  We can always print the money!  With words of wisdom like that from "the Maestro", I recommend you buy your gold and silver now and hold on tight, it has a long way to go.

Why / How?
Recommended Research

If this is all new information and your head is spinning, I would recommend taking a step back and doing some research to validate the claims I've made.  While the purpose of this post is to give high-level advice on the why and how to protect your savings with gold and silver, there remains other methods to protect yourself against the dollar, including foreign currencies, energy and agriculture stocks, and directly betting against the dollar by selling short or investing in an inverse long bond fund.  These options carry different levels of risk, and two great books that explore these alternatives are Crash Proof 2.0: How to Profit From the Economic Collapse by Peter Schiff, and The Dollar Meltdown: Surviving the Impending Currency Crisis with Gold, Oil, and Other Unconventional Investments by Charles Goyette.  While both books give excellent overviews of where we are and how we got here, Schiff's book basically recommends you call his brokerage firm, Euro Pacific Capital, in order to get access to his worldwide selection of hand-picked stocks in mining, energy, agriculture, and emerging markets.  Goyette's book gives specific recommendations of mutual funds and ETFs that provide similar exposure and are likely to be available options if you have a IRA or 401k.

Unfortunately I can't personally vouch from experience for everything I recommend, as this is the case with Euro Pacific Capital.  Due to the increased rules and regulations governing the financial industry, Peter Schiff has had to move much of his business offshore catering to international customers.  He has raised the minimum amount of money for US clients ranging from $25k for a brokerage account to $250k for a managed account.  For those that want to get exposed to Peter's expertise but don't have that starting capital, you can start with his family of mutual funds at just $2,500 each.  If you have the money for a EuroPac account but aren't familiar with Peter Schiff, I challenge you to watch him explain "Why the meltdown should have surprised no one" at the Austrian Scholars conference.  Ask yourself who else you would want managing your fortune?


How?
Introduction

If you've done your homework and see things as I do: that the current economic crisis is only the beginning; that this is the chickens of October 15th, 1971 coming home to roost; that no matter what the Federal Reserve does in the short term, the dollar is dead as the world's reserve currency in the long run; that this experiment with paper money will follow the fate of previous fiat currencies in history with inflation and devaluation; and that these unfortunate circumstances leave precious metals as one of the few safe havens to protect your savings, then it sounds like gold and silver is for you.

The reason I focus on the why before getting into the how of gold and silver investing is because I think it is vitally important that anyone thinking about getting into precious metals has the proper expectations and the right long-term mind set.  For instance, while Peter Schiff was able to predict the housing bubble bursting and the subsequent economic collapse, one thing he didn't foresee was the short term rally to the dollar.  During the recession of 2008 many of the foreign stocks Schiff recommended went down as much as 80%.  A client that didn't understand the why of Peter's strategy could have become scared and sold at the bottom, getting wiped out!  Compare that to the clients that were confident in the fundamentals of their long term strategy and decided to use that decline as a fire sale buying opportunity and doubled down on those stocks.  Needless to say, those foreign stocks that took such a beating in 2008 have now gone up 200% - 500%, blasting through their losses and making substantial profits for those confident enough in their long-term outlook that they could weather the storm of short-term losses.

Make sure you're getting into gold for the right reasons
The strategy I recommend is not about timing the market in the short term, but about positioning yourself to survive and possibly thrive under the long-term conditions I am confident will occur.  While I will offer specific advice for those that have a substantial nest egg invested in an IRA, 401k, or other government investment vehicle, the majority of my advice will apply to people like myself that don't have decades of work experience and hundreds of thousands of dollars to invest.  As a general guide, I think your best options are to get into physical possession of gold and silver with cash savings and begin a monthly accumulation program to achieve dollar cost averaging.  Any money trapped in a government investment vehicle with limited and traditional options should be transferred into precious metals IRAs, gold and silver ETFs and the other funds recommended in Goyette's book, or if possible, into an account with Euro Pacific Capital.  What follows are the details of how to accomplish this.

How?
Physical vs. Paper

I'll cut to the chase, physical gold and silver is the way to go.  This means buying coins and bars from a local coin shop or from one of the online precious metals mints and dealers that I recommend below, or buying physical gold and silver coins through a precious metals IRA that performs a custodial service of storing it for you.  In contrast, paper gold or silver includes certificates issued by banks or mints, futures accounts, and gold and silver Exchange Traded Funds (ETFs) like GLD and SLV.  These products are either promises to obtain physical gold in the future, or instruments that merely give you exposure to the price of gold allowing you to make profits by selling those futures or ETFs to someone that wants to own them.  Some of the drawbacks to owning paper gold include the high management fees of the ETFs, and the extreme improbability that a gold certificate will actually be redeemable for physical gold when you need it.  The other risk is that in an hyperinflationary scenario those paper profits could be wiped out and you'll be left holding worthless paper when you could have been accumulating physical possession of gold and silver instead.

However, there are certain circumstances where paper gold and silver might be a good option.  For instance, if you have a IRA or 401k that you don't want to cash out, and cannot convert to a precious metals IRA without leaving your job, then an ETF like GLD and SLV might be your only way to get exposed to the upside of precious metals.  Another reason one might want to keep some exposure to paper gold and silver is if you have a substantial amount of debt from a mortgage or student loans, in which case you can allow inflation to eat away at that debt and use your easily convertible paper profits to pay it down.

How?
Gold vs. Silver

The debate between gold and silver as being the better buy is another situation where I can't give advice that would apply to everyone indiscriminately, but it would depend on your situation in terms of your time horizon and risk level.  On the one hand, gold has the 6,000 year history of being money, and you still see gold being stored as money by central banks, while silver is the younger brother along for the ride.  However, silver's extensive industrial use and the gold to silver ratio make many speculate that silver has the largest percentage gains to come.  The gold to silver ratio is the amount of silver it would take to buy one oz of gold, and its 200 year average is around 37 to 1, while the naturally occurring ratio in the earth is 17 to 1, and the last time it hit that ratio was in 1980.  Looking at the 10 year chart below, we can see that the ratio recently hit a high of 83 oz of silver for 1 oz of gold, and with silver currently sitting at 43, it still looks like silver is the better buy with larger percentage gains compared to gold.

How much further will it go?  I'm not an expert, so I go with both.
In my short experience buying precious metals my silver has definitely outperformed my gold in paper profits.  Looking at the percentage gains of my earliest and cheapest purchases, my silver is up 378%, while my gold is up 103%, and my accumulated percentage gains including my most recent purchases has silver up 100.36% with gold up 50.23%.  However, the volatility factor should also be considered.  In less than one month between April and May of 2011 we saw silver rocket up to $50 and then fall to $33, a decrease of 34% in less than a month!  Some may not want that level of volatility, but with the right long-term mindset you could see that drop as a great buying opportunity to increase your position.  While gold and silver both have their pros and cons, I for one invest evenly between them, again, keeping my eggs in multiple baskets.

How?
Bullion vs. Numismatic

Let's get something straight, I do not recommend collecting baseball cards or rare stamps, at least not from the perspective of protecting your savings from a falling dollar.  Unfortunately, there are unscrupulous companies out there that advertise traditional gold coins like US Eagles, Canadian Maple Leaves and South African Krugerrands, but when you call them on the phone the salesman starts telling you about this great opportunity to buy rare 'numismatic' coins.  They talk about how these rare coins outperform traditional bullion coins, and use high-pressure sales techniques to set you on this path.  Don't fall for this scam!  Your goal should be to get the very best price and pay the very least premium possible per oz.  These numismatic coins cost hundreds of dollars more than bullion coins, ensuring a nice fat commission for the salesman.  Many people that have fallen for this have seen gold double in price, and yet they are just breaking even on their numismatic coins.

For what types of bullion I recommend, in terms of gold there isn't much difference in price between American Eagles, Canadian Maple Leafs, or South African Krugerrands.  For silver, however, I have decided to move towards privately minted silver coins and bars over government minted Eagles or Maple Leafs because of the much lower premium for the former.  You can save even more on premium per oz by getting 5, 10, or 100 oz bars.  I have found that Northwest Territorial Mint has a very low cost for their privately minted coins and bars, but their major downside is that the last few times I've ordered from them it took 6-8 weeks to get my order!  I also recommend junk silver to make smaller barter transactions an option.  Junk silver is pre-1963 US coins that are 90% silver.  Buying a $100 junk bag means it's face value adds up to $100, so this could be 200 half-dollars, 400 quarters, or 1,000 dimes.  Either way, this will add up to 71.5 oz of silver, and should definitely be part of your portfolio.

How?
Time the market vs. Monthly accumulation

I have found that timing the market is very difficult and emotionally straining.  When you have the long term perspective that the dollar is dead, and realize that many events could trigger a run from the dollar and all of those consequences could come much sooner than later, it's easy to see a sharp spike in the price and think the worst.  Before I found the option of a monthly accumulations program, I would try to save my money and wait for buying opportunities, but unfortunately those moments rarely overlapped.  I would see silver fall to $9, but I wouldn't have sufficient savings to make a large purchase.  By the time I had enough money saved up, I would see the price increase to $12 an oz, and as I waited for it to return to $10 it would go to $14, and then $16, and then $18.  Now that $12/oz price that I passed up looked great in retrospect, and I panic and buy at $18, only for it to fall back to $14!

Thankfully, I learned some good lessons from my first year in precious metals, and I have been employing a much more successful strategy in the last 2 years.  I have been participating in a monthly accumulation program for both gold and silver, which allows you to select a pre-determined amount of money to be automatically withdrawn from a bank account on a monthly or weekly basis, giving you that amount of gold or silver at that day's price down to the 10,000th of an oz.  I have been using Blanchard's monthly accumulation for gold, and Silver Saver for silver.  I signed up for Blanchard's program before Silver Saver existed, and unfortunately their program is behind the times.  You receive a mailed invoice once a month, your only option is American Eagle 1 oz coins, and you have to fax them to request your balance in whole ounces.

Silver Saver is the way of the future.  You can set up a silver or gold accumulation account with as little as $50 a month, and you can set up monthly, weekly, or one time purchases.  They have a website where you can see every purchase, that day's cost, the premium charge, your total amount of gold and silver saved, and its equivalent value in dollars.  If you were so inclined, you could even sell back your holdings to silver saver and they would write you a check.  However, that's certainly not what I would recommend, as you can take delivery of your precious metals with a wide variety of options, choosing between 1 oz Maple Leafs, American Eagles, Austrian Philharmonics, and Suisse Bars for gold, and $100 junk bags, 1000, 100, or 10 oz bars, privately minted 'Buffalo Rounds', Maple Leafs, or American Eagles for silver.  Best of all, they have a rewards program where you can refer friends to sign up for silver saver, and you will receive half of the premium silver saver charges when they sign up with your share code.  If you decide to sign up, I would appreciate it if you use share-code AX9GP.

The benefits of a monthly accumulation program are many.  For one thing, you take the emotional toil and buyers remorse out of the equation.  You also achieve dollar-cost averaging by buying in smaller amounts at a higher frequency to ride the wave as silver and gold go up and down.  What I recommend is starting a silver saver account at a weekly or monthly schedule that you can consider your true monthly savings (I save 25% of my after tax income), and combine that with saving federal reserve notes on the side, so that when you do see large drops in price you are prepared for that buying opportunity.  About the only time I have successfully timed the market in the short term was when I employed this strategy to pick up a $100 bag of junk silver at $33 right after it fell from $50.  I couldn't see it going much lower than that, and fortunately I was correct, as silver now sits back around the $40 mark.

SilverSaver(R) - Save Physical Silver and Gold

How?
Home storage vs. Custodial storage vs. Safety deposit box

As a firm believer in holding your eggs in multiple baskets, I will outline the main options for how to store your physical gold and silver, as opposed to declaring that one method is the best and only way to go, as each method carries a different type of risk.  First off, if you have an IRA that is not restricted by your employer, a great option is to convert it into a precious metals IRA.  In this case you have the same tax deferment benefits of a traditional IRA, but you use that money to buy gold and silver coins of your choice, and your IRA custodian stores it for you.  While a google search for gold IRA will present you with dozens if not hundreds of options, two companies that I have personally done business with that sell gold and silver for IRAs and offer assistance in setting one up are Blanchard and Northwest Territorial Mint.  Peter Schiff's company Euro Pacific Precious Metals also offer this service, but they have a minimum order size of $10,000 for gold or silver.

Moving past the IRA option, there are other custodial services where a reputable company can professionally store and insure your gold and silver in a vault.  One option is Euro Pacific Capital's Perth Mint Certificate Program.  Under this program your gold would be stored out of the country, and guaranteed by the Western Government of Autralia, and further insured by Lloyds of London.  The certificates are transferable, and while the program requires a high minimum purchase, it offers no mark-up, free storage, and a low service fee.  Another company that offers storage services, but which I cannot personally attest to, is GoldSilver.com.  Apparently they offer insured storage vaults in Salt Lake City, Hong Kong, and Miami, with a minimum monthly fee of $20 - $25.  Finally, you can always store your precious metals in your local bank's safety deposit box.  However, considering the United State's history of confiscating gold from its citizens, the potential risk is that something similar could happen again in the future.  Maybe not outright confiscation, but given the close relationship between the government and major banks, it's not inconceivable that some kind of windfall profits tax could be implemented to punish the evil gold and silver speculators that help bring down the economy, and a government agent would be waiting at your safety deposit box to tax you accordingly.

Given those arguably remote risks, custodial storage of your precious metals does have the major benefit over home storage in protecting your investment from private criminals.  As a collapsing economy triggers social unrest and increased crime, the risk of home invasion becomes a real threat.  I have several suggestions to help mitigate this risk.  First off, loose lips sink ships.  All it takes is mentioning your gold and silver home storage to one untrustworthy friend or family member and your life savings could be at risk.  So first of all, only one trusted family member should know the location of your gold and silver.  While a safe bolted to your basement floor might seem like the ideal location for your entire stash, remember the philosophy of eggs in multiple baskets.  Having a small amount of gold and silver in a traditional safe that serves as a decoy, while keeping other stashes in diversion safes that resemble books, surge protectors, and cans of shaving cream wouldn't be a bad idea.  I've heard of some people hanging bags of coins in the drywall of their homes attached to their electrical outlets, and of course burying your gold and silver in a PVC pipe out in the yard is another option.  While the more creative you get in stashing your gold and silver reduces the risk of a robber stumbling upon it, just make sure that you don't forget the location of the stash yourself!

How?
Conclusion

To summarize this post, here are the bullet-point detailed recommendations taken from above:

If you have a substantial amount of money trapped in an IRA or 401k I would recommend you take a hard look at the consequences of cashing it out early, and at the least transfer it into a precious metals IRA, a Euro Pacific Capital brokerage account, or into the ETFs that track the price of gold and silver.

If you have a significant amount of cash available to make a one time purchase, I recommend you take physical possession of bullion coins from one of these dealers:

Blanchard: I have bought gold from them and they have good prices.  I'd recommend any of their 1 oz bullion coins such as American Eagles, Canadian Maple Leafs, Krugerrands, or Philharmonics.

Bullion Direct: When I was looking for the best price I could find for a $100 bag of junk silver, bullion direct had it.  They offer a wide variety of gold and silver coins, and I received my order in less than a week.

Euro Pacific Precious Metals: Peter Schiff's precious metals company, which has very low premiums, if you can afford the $10,000 minimum purchase.

Midas Resources: Ted Anderson, president and CEO of the Genesis Communications Network, is also a precious metals dealer.  He often has good introductory deals on gold and silver coins as a loss-leader, especially if you refer to an "Alex Jones radio special".  If you want to support his radio network of liberty-minded programs while investing in precious metals, give them a try.

Northwest Territorial Mint: I buy their privately minted bars because of the lower premium per oz over government issued coins.  Their downside is that they have taken 6-8 weeks to process and ship my order in the past.  They also offer custom engraved coins that I have given away for Christmas and birthday gifts.  While I don't recommend those as an investment, they can be beautiful and thoughtful gifts that could inspire the receiver to start thinking seriously about getting into precious metals.

Regardless of your situation, whether you can afford to invest $50 or $1000 a month, I recommend you start a monthly accumulation program to achieve dollar cost averaging.  I recommend Silver Saver over other programs because of it's online account management, variety of options for redemption, and rewards program.

Finally, I recommend that you save money in cash in addition to your monthly accumulation program, so that when you see 10-25% drops in price from the recent all-time high, you have the liquidity to either schedule a one time purchase through Silver Saver, or make a purchase from one of the bullion companies recommended above.

If you have feedback, comments, or questions, I would appreciate your e-mail.
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