Year: 2010

Americans saving more: too bad

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At the Wall Street Pit, Donald Marron says that Americans are saving more to the point that the US government has borrowed less from foreign investors:

Individual Americans started saving again, reducing our nation’s borrowing needs [He means from foreign sources, PWD] by $455 billion at an annual rate. And private investment plummeted, reducing borrowing needs by another $458 billion. Together, those two changes largely explain how U.S. borrowing from the rest of the world could fall by $400 billion over the past year, despite booming government deficits.

In the long run, the increase in personal saving will be a welcome development, as Americans rebuild their wealth and help finance government deficits (in the short run lower consumer spending may weaken the recovery). The decline in private investment is more troubling. In the short run, some of that decline is healthy as we work through excess inventories of products, houses, and some types of commercial real estate. In the long run, however, we will need growing investment to boost the nation’s productive capacity.

Well, first of all, foreigners are catching on to how buying US debt is a major trap, so the Chinese and the Indians, e.g., are investing in such things as gold and Canadian oil companies.  But second, while it is good for Americans to reduce debt and to save, it is folly for them to put it in fixed income assets, especially government debt, when inflation is nigh.  When that hits, those who are holding government treasury bills or bonds will be holding worthless paper:

… those who had supported the government during the war by buying State bonds had lost heavily by the depreciation of the mark, and the whole population were now engaged in evading taxation and devoting their money to speculative purchases, … [British Consul-General in Munich, Mr. William Seeds, cited in Adam Fergusson, When Money Dies:  The Nightmare of the Weimar Collapse (1975), p. 70.

Invest in gold or gold stocks?

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David Berman of the Globe and Mail writes about the pros and cons of owning gold versus gold stocks.  Sometimes I wonder how much experience financial journalists have in investing.  Usually, I think that they don’t really invest much besides perhaps their own RRSP’s.  I would guess that many of them, particularly the full-time staff writers, have very little hands-on experience, though they do watch the industry closely and this makes them knowledgable.  But there is no substitute for experience and competence.

One thing Berman doesn’t discuss is commissions.  I’ve had some experience trading gold mining stocks but very little with physical gold; the reason for that is the expense and risk that is involved in buying and owning gold.  If you visit the Kitco site, you will see that gold sells at a premium of about $60 or more per ounce, plus shipping and handling of $30 plus $4 per $1000. So if I were to purchase about $10,000 of physical gold, my expenses equal 10 x 4 = $40 + $30 (for shipping) and 8.33 oz *60 = $500 premium on the gold itself = $570 total costs. That’s roughly 5.7% commission. Then one has to consider storage costs. I would leave it in my house, which could be broken in and the gold stolen. Thus, I find that gold mining stocks are much more attractive than physical gold, since the discount brokerage fee of $9.99 per transaction means that I can take possession of $10,000 worth of stock at a commission of 0.1%. Thus, commissions are an important factor when deciding what to invest in.

But I think there will come a time when I will want to own physical gold.  If I lived in the US, I would consider storing a few thousand in gold, but I’ve more confidence today that the Loonie will maintain a semblance of its value, probably losing no more than 2-7% per annum. That’s why I am shorting the US dollar in favor of the Loonie.  But if I were an American, I would consider having some gold on hand, because paper money becomes worthless when hyperinflation hits, and then people resort to alternative currencies.  At that point, silver and gold coins may come back into circulation.  These will not necessarily be government approved currency, but coins with intrinsic value minted by third parties.  Once the Federal Reserve has discredited the US dollar completely, people will have no choice but to barter or do transactions in other currencies.  In Austria after WW I, the Swiss Franc was a sought after currency.  For us in Canada, it will be a very funny irony if the Loonie ever becomes a currency of preference in the US.

Government Ponzi

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It is the height of irony that the US federal government has put Bernie Madoff in prison for running a ponzi scheme: he took people’s retirement funds and spent it frivolously instead of investing it.  Many have pointed out that the largest ponzi scheme in the history of humanity is actually run by the US federal government itself:  the Social Security System.  The US government has taken people’s retirement–but not voluntarily, as the felon Madoff, but by force through payroll taxes.  Then it spent it frivolously instead of investing it.

Yet today, Zacks (via Yahoo) defends the ponzi security system:

There is a huge amount of hysteria in the country that says that Social Security is nothing but a ponzi scheme and is about to go bankrupt. This is simply not true, and is mostly being propagated by those who would love to see Social Security turned over to Wall Street. Doing so would put the retirement security of millions of Americans into grave danger. …

Starting in 1982 with the Greenspan Commission, Social Security recognized the demographic time bomb posed by the “baby boom” and subsequent “baby bust.” As a result, the idea was that people would pay in more than required for Social Security to run on a pay-as-you-go basis (which is how it was run up until that point). The extra funds would go into a trust fund. That trust fund now holds $2.5 Trillion. So how is that money invested? It is invested in the safest assets around: T-Notes and Bonds. The government holding its own liabilities is a bit strange, and that is where the claim that the Social Security trust fund is composed of nothing but “worthless IOUs comes from. However, if that is true, then it is equally true that the assets of a T-bond fund run by Vanguard or PIMCO are also composed of worthless IOUs.

So the Social Security System has basically taken people’s retirment money and lent it to the Federal government which has spent it as part of its continual deficit spending. It did not invest it in anything that could give workers a return on their investment, but spent it.  Now, in order for the government to pay back the Social Security System–all those wonderful t-bills and bonds–it will have to either borrow from someone else, or steal it a second time in the form of further taxes from the very people who are paying into the system.   Either the anonymous author of the article is dumb, or she thinks all the rest of us are.

Meanwhile, Monty Pelerin asks his readers to name the author of the following quote:

The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. Deficit spending is simply a scheme for the confiscation of wealth.

… the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold.

And Vasko Kohlmayer writes about the demise of the US dollar:

The dollar has already entered its terminal phase. The word “doom” is written across it for anyone with the eyes to see. Sad to say, there is no way to reverse its downward slide. With more than $13 trillion in public debt and some $100 trillion in unfunded mandates, our federal government has assumed far more obligations than it can ever make good on. Worse still, these figures are growing larger every year.

Thus, the basis of a civil society is breaking down in the US because the world’s most powerful political entity is a criminal organization which is running ponzi schemes and uses its power to borrow and create money, producing inflation which robs citizen’s of their wealth.

What’s wrong with inflation? Do you have enough to eat?

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Monty Pelerin has a excellent article on inflation this morning.  He maintains that the great temptation for government will be to try to solve the problem of debt and unfunded obligations by inflating it away, and that, since politicians are cowards, they will not make the tough decisions to avoid inflation.  He writes, however, about the consequences of inflation:  “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.”

I believe that the real danger of inflation may lie in the consequences it will  have on the food supply.  Never mind that food shortages have never been a problem in the living memory of most North Americans (unless they are over 75 or immigrated here from a war zone or something).  Today, obesity in developed countries is feared more than starvation.  So I made the following comment on Pelerin’s blog:

I am reading Adam Ferguson, When Money Dies (1975). He tells the story of Frau Eisenmenger, an Austrian who at the end of WWI had sufficient investments to live on and care for her family (31). She went into her bank in 1918 to withdraw some funds and her banker advised her to buy Swiss Francs, but it was illegal to hoard foreign currencies, and so she declined. Eventually, her savings became worthless. Her situation was greatly helped by her daughter working in the “American mission” paid in dollars, renting a room in her apartment to an American, and speculative investments in the Austrian stock market.

I fear that what will happen is similar to Europe in that period, when food was scarce and required a large percentage of income to procure. Eventually, the price of food will sky rocket and so more dollars will be created ex nihilo. Eventually the farmers will refuse to supply their food to people for worthless dollars and foods stamps from the government, and they will have to stop producing–because their costs have to be covered too. Then, we will see shortages like never before. A farmer offered Frau Eisenmenger three month’s provision for her grand piano (33); and acquaintance of hers sold her own piano for a sack of wheat flour.