Year: 2010

Thoughts on Inflation

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Andrew wrote at the City of God about inflation as welfare for the rich:

(I’m using “inflation” in the Austrian sense here: increase in the money supply, rather than increase in CPI price levels)

I just heard this recently, and it made sense to me:

1. The entire Keynesian scheme of monetary/fiscal spending to stimulate the economy only works because it takes time for people to catch on to the reality that newly printed paper is not real wealth. That is, people don’t immediately realize that they are spending fiat-money, and thus act based on thinking they have more money than they really do.
2. This temporarily causes greater investment, which has the potential to create real wealth and real economic growth.
3. However, as time goes on, sellers realize that buyers have more money, and thus prices rise accordingly, bringing the economy back to status quo ante, except with possibly increased debt (if enough real economic growth did not occur before the sellers caught on).
4. In the case of monetary policy specifically, newly printed money inevitably goes to the rich first: to banks, and from there to massive corporate investments.
5. As time goes on, more of the poor get the new cash, but it also simultaneously becomes less valuable, since prices are rising.

Thus, monetary policy seems to be, inevitably, welfare for the rich.

(Note that none of this would be an argument against government welfare, based on tax-hikes (not spending fiat money), for the poor.)

I responded with some thoughts as an investor:

(1) CPI has not been affected by the inflation of fiat money because there has been no velocity (MV=PQ). Instead of lending money, banks have bought safe US treasury notes to pad their reserves. They have used TARP money to do this. Essentially the US government lends TARP to banks which lend it back to the US government. Also the Federal Reserve bank has bought CDOs from the bank, and the banks have used that money to buy US treasury notes as well.

(2) What we’ve seen since the 2008 credit collapse can therefore be better described as reflation–reflating shrunken credit with fiat money. There are still some mortgages that are collapsing so it may be sometime before we see the most serious detrimental effects of current US fiscal policy (1-2 years?).

(3) Investors are probably more aware of the potential dangers than the public. Therefore we have been making moves in anticipation of a US dollar collapse. This is known as the US dollar carry trade.

(4) Gold is an indicator of inflation, but it also experiences the anticipatory effects of panic about the dollar, as well as periods of profit taking. Its price may therefore at times suggest an overcompensation.

(5) The best hedge against inflation is debt. But you have to buy something with the funds you borrow in order to cover the interest: real estate, dividend bearing stocks, or income investments in foreign currencies or countries (a.k.a., carry trade). The risk is that the investment you make with the debt will not maintain its value, but I consider the current risk of loss of holding currency to be an absolute certainty. So better to own anything except money. For this reason, my current non-registered investment portfolio is 150% in stocks.

(6) Inflation caused by government deficits is not really generational theft as suggested so often by conservatives (or those criticizing current deficits). It is theft of current creditors, bank account holders, fixed income earners and workers, whose current paycheques are garnished through the hidden cost of inflation. It is true that CPI lags inflation, but then pay raises lag CPI. I consider inflation to be especially a heist of the retirement accounts of the older generation–financial advisers often recommend subtracting your age from 100 and that remaining number is what you should have in volatile assets like stocks. The remaining is to stay in fixed income. So if you follow this advice and you are over 70 years old, then 70% of your portfolio is subject to government theft by inflation. Many of these retirees just abandoned stocks altogether during the collapse and now they have cash which is being killed by inflation. It is not a pretty picture. But inflation is not a theft of the younger generation because when the enter the workforce they will earn the currency at its current value.

(7) Inflation in the US will be necessary: (i) to be able to pay the interest and principle on the current debt, inflation is the only way–it is a form of bankruptcy; (ii) to create an effective decrease in the recent minimum wage hike which has put millions of teens and other low wage earners out of work. (iii) to use bracket creep in order to increase everyone’s taxes; (iv) to make effective reductions of entitlement obligations which can’t be paid for.

(8) I am not “rich”, but as an investor, I’ve been able to ride this wave, and I’ve done very well thanks to being able to make the right kinds of move in anticipation of current US inflationary policy, but I may have to bite the bullet on an investment I made with my brother in Austin just before the collapse and that hurts.

(9) While not “rich”, we were able to get a huge amount of bank credit just when I needed it in Oct 2008. That has been great boost to my investments. So indeed, the banks were giving credit to some people, contrary to the widely held belief that no one could get loans.

(10) It is much better right now to be in Canada than the US.

(11) Inflation doesn’t rob the poor but the middle class and wealthy who have holdings which are not hedged against inflation.

(12) Ferengis will make money during periods of inflation.

I’ve since learned that CPI (Consumer Price Index) is manipulated and underestimates inflation by about 7% per annum.

A lawsuit? No way!

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At the last Regent breakfast at the New Orleans SBL, I had the opportunity to share with some friends that I had become an investor.  After finishing my PhD in 1996, I was an adjunct for a year and a half, and after that I began to teach pro bono in Africa for period of eight years between 1998-2006.  During that period, my wife and I started the Barnabas Venture, so that we could raise funding for scholarships to make up for the lack of qualified African professors in French-speaking Africa.  Then, with some spare time on my hands between trips to Africa, I began to dream about how we could make more money so that we would be able to give even more than ever before.  That is when I began to take some serious risks in our personal and registered DIY trading accounts.

When I shared this with Prof. Rikk Watts who presided the Regent breakfast he was extraordinarily positive.  I particularly appreciated his encouragement to “thrive”.  I spent some time one evening with a number of Regent alumni, both men and women (Prof. Watts was there too), and I appreciated their joie de vivre, as we had a time of sharing in the apartment of an alumnus, and then we went to listen to live jazz music in New Orleans.  I took my leave after listening to some spirited trombone solos.  It was a great time.

Recently someone asked me in the comments section if I was going to sue Prof. Stackhouse.  I pretty much hold that as Christians we can be wronged because Christ forgives us.  This person then said that he/she was planning to sue Regent because of being forced to accept Intelligent Design. I find that unacceptable.  I am not interested in winning a battle in the courts.  The courts are predominantly leftist institutions and I am a conservative.  I hate it when those who can’t get their way through legislation force their agenda through court-made law.  This is an usurpation of democracy.  I would hope to be able instead to make cogent arguments for my views and hopefully win in the court of public opinion.

I am now told by a member of the Regent staff that my blog is being read with “great interest and passion”.  This surprises and daunts me.  And I feared that my blogs would be misinterpreted as the rantings of malcontent. But I admit that my recent postings are based upon a narrow experience with just a few from the Regent community: debates with the student PoserorProphet, interactions with full-time Prof. Stackhouse on his blog, and my recent reading of some writings of a summer-school professor, Dr. Diewert.  But this is an admittedly small sample of what Regent College has to offer and I am by no means writing off the school.   So I asked a few people what they thought, including a full-time professor at a theological school with years of experience in administration.  For the most part, they have encouraged me not to back down.  Indeed, I had the impression that as someone outside of academics, I am able to say certain things insiders might wish to say, but for various reasons are not permitted.  E.g., I can openly argue that the diversity created by affirmative action has seriously lowered quality–a position usually only maintained by retired professors who no longer fear repercussions for expressing unpopular opinions.  I can also see why students would be reluctant to criticize the administration or a faculty member, or why fellow professors would hesitate to criticize their colleagues.

I am an alumnus and an historical supporter of Regent College and no lawsuit has entered my head.  I am appalled by the person who suggests taking a lawsuit against Regent.   But I’ve questioned the wisdom of allowing certain anti-capitalist and anarchist tendencies to find a home at Regent because I am wondering aloud in the blogosphere how those who are making the money which supports theological education, through risk taking and hard work, should react when that education evidently promotes views which if implemented would undermine their ability to “thrive”–and this doesn’t apply to Regent College only.  Obviously Regent is a wonderfully diverse place and there must be some differences of opinions, at least I hope that there is.  And one could question why I would chose the public space called “the internet” to try to initiate a discussion.  Well the answer to that is quite simple:  It seems entirely appropriate to me to express the disagreements that I have with the views of Prof. Stackhouse, PoserorProphet or Dr. Dave Diewert, here in the blogosphere, because that is where I became acquainted with their views.

A HELOC Strategy: How to use a home equity line of credit to create investment income

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Jonathan Chevreau of the National Post is one of the best financial columnists in Canada and I admire him because of the practical information that he provides to Canadians wanting to know how to invest their retirements savings.  He now has a column about HELOCs — home equity lines of credit:  Be wary of home-equity lines of credit.  Chevreau writes:

Veteran mortgage broker Michael Maguire has seen too many clients with balances at or close to the limit. Lenders portray HELOCs as assets, but they are debt products, making them potentially dangerous for those not disciplined in handling money. “Most seem to find it too easy to borrow and end up living at their limit,” says Mr. Maguire, of London, Ont.-based Mortgage Wise Financial.

I agree.  One should never use a HELOC to create consumer debt or bad debt (see my post, “Is debt sin?“).  But it is an excellent product for the small business owner.  I know a local businessman  in my neighborhood who bought the commercial unit in which he has his store with a HELOC.  He has a low interest rate (it was prime) and he can pay it off or draw from it depending on the cash flow of his business.  It is has been an extremely useful debt product for his business.

When the credit crisis hit in earnest in the Fall of 2008, we opened up a line of credit, and it has been a major boost to our investments.  I was able to pick up some serious value on the TSX in stocks whose distributions were many percentage points above the interest rate.  This helped me to formulate a strategy for investing.  As a conservative investor, I try to keep my line of credit low, at no more than about one-fifth of the credit limit so that  if the market goes down, there is still sufficient credit to “average down” by picking up larger positions of the same stocks as the prices plummet during a bear market.  Thanks to the HELOC, I’ve now been able to establish a steady income based on these distribution paying stocks (mostly in the Canadian oil and gas sector).

There are some serious risks:  (1) Most of these distribution paying stocks began to lower their payouts almost the moment I started using the HELOC because of the drop in commodity prices.  But then their share prices plummeted too as direct result.  Consequently, I was able to pick up even more shares at unbelievably low prices and to keep the income well above the interest payments.   (2) The interest rates could climb.  But from the time I started this strategy until today, interest rates have gone down and stayed at historical lows.  In anticipation of interest rate hikes, I regularly pay down the line of credit as fast as possible.  When it’s at zero for a while, then my risk appetite increases again.  (3) The share prices of my stocks could plummet.  But by using only a fraction of the HELOC, I pick up more positions as the market goes down.  So when the prices went down it actually helped me even though it created initial unrealized losses.   Eventually, from March 2009 until today, we’ve been in a relentless bull market–so that with a couple of exceptions, everything has gone up, up, up.  (4) Since your home is the collateral for this debt product, one has to be restrained in using it for fear of becoming homeless as result of bankruptcy.  This is another reason for using only a fraction of the credit limit.  (5) My stock portfolio is not diversified.  It is therefore highly susceptible to the volatility in the commodities market.  This choice is made because some Canadian equities in the oil and gas sector pay well, especially in the income trust sector.  Many of these will convert to dividend paying stocks in January 2011 because of rule changes and this may result in a lower yield.

Since this strategy aims at establishing an income, I’ve only done a very minimal amount of trading (i.e., “buy low, sell high”).  It is therefore a strategy of investing which is much closer to what is called “value investing” than “day trading”.  Here is a list of companies that I’ve established long positions:  erf.un, cpg, nae.un, pmt.un, day.un, bnp.un.  Those which are weighted heavily in natural gas have done less well than those which concentrate on oil.  But fortunately, the gas-weighted companies like pmt.un and erf.un have hedges that have made it possible for them to maintain their distributions at a high rate in proportion to their share price.

If there is a lesson in this for those who aspire to be righteous investors, it is to first establish equity:  the bank will not lend at the lowest interests rate without the security of some form of collateral, which usually means home equity.  This means for many years making the sacrifice of not spending money on every whim in order to pay down the house mortgage as soon as possible.

Here are some numbers to give an example of how the above strategy can work:

Using a HELOC, $31,200 spent on CPG (TSX) would buy 800 shares $39.00 per share.  The interest in the first month at 3.25% (current TD Canada Trust HELOC rate) would be $84.50; the dividend from 800 shares of CPG at .23 per share is $184:  Thus, the net in the first month is $99.50 or .32 % of the total capital put at risk.

On PoserorProphet’s advice

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PoserorProphet challenged me yesterday:

It ain’t easy, eh, Peter? You might discover a new and more joyful life if you sold everything you have and gave the money to the poor (not something I usually suggest but it seems appropriate to what I’ve seen of you). Just a thought.

This challenge is evidently based upon the story of the rich young ruler (Mark 10.17-30 and parallels). I suppose that PoserorProphet is right, and I would be happier and certainly more care-free if I sold everything and gave it to the poor:

Nah, there ain’t nobody in this whole wide world
Gonna tell me how to spend my time
I’m just a good-lovin’ ramblin’ man
Say, buddy, can ya spare me a dime?

Yeah, I don’t care when the sun goes down
Where I lay my weary head
Green, green valley or rocky road
It’s there I’m gonna make my bed

(Barry McGuire and Randy Sparks, “Green, Green”)

I just have a couple questions about the application of this advice to my life:

(1) After selling everything I have, may I just leech off my wife?  I am more than happy to do that.  Or must she also sell everything she has too?  If that’s the case then:

(2) If we both sell everything we have and give it to the poor, what are we supposed to live on  here in Canada? Do you want us to go on welfare? Should we live in government housing. You see as an investor and my wife as a business woman, selling everything we would mean unemployment. Or after selling her third of the business, should my wife return to her brothers and beg for her job back and work a salaried position? Why would that make her more joyful? Tell me what shall life be like after selling everything and giving it to the poor?

(3) Who is going to support our church, our priest and his family, when our contribution to the church is lacking. Surely some others will rise up, but wouldn’t you (Poser) require that they also sell everything they have?

(4) What of the numerous Christian ministries in theological education, evangelism, and benevolence that we have supported over the years? We will have to end our continued support for such ministries. That’s ok, as long as others step up, but then wouldn’t you tell those people too that they must sell everything they have and give it to the poor.

(5) Just exactly which poor are we supposed to give it to? The homeless? The almost homeless? The working poor? The poor in Spirit? The poor in Africa?

(6) Will the poor use the money in a responsible fashion? Let’s say I just go to downtown Toronto and hand some poor homeless person a $100,000 cheque? How would that change his life? Would it help him or would the money just be squandered within a matter of days or months? Would he just go buy blow and blow his brains away? Or would it actually change him so that he could become like I am now so that you would have to tell him too to sell all he has and give it to the poor? Then wouldn’t it just be better if I keep the money rather than putting him into the situation of you having to tell him to sell everything?

(7) What should I tell my employees? I suppose the 25 employees Cathy has would carry on after she sold her business to her brothers. But what if Cathy’s contribution to work is what holds the thing together and the business ends up bankrupt without her sound fiscal management. What will happen to those 25 employees, their wives, children and their other dependents? What of the Wycliffe student I promised a year long job too? What about my housekeeper? What are they supposed to do? I suppose they are certainly industrious and could find other employers, but wouldn’t you tell those employers too to sell everything they have and give it to the poor?  And once there are no rich people left, who is going to employ the people looking for work? Sean Hannity has a refrain:  “No poor person ever gave me a job.”

(8) What about the other people that depend on me? If we sold everything we have, there would be another family besides us that would be homeless, and then what should I tell them? Sorry, PoserorProphet called me to sell everything I have and you can come with me and live on the streets of Toronto too or in some homeless shelter (where ever it is that you are calling us to live).

(9) What about the volunteer work that we do for our church?  We use our home as the base of operations. So we should just tell the church, sorry we can’t do that work anymore because we don’t have computers and the other equipment that we need to do those ministries?  But we are more than happy to come and eat your food.  Can you please pick us up from the shelter and give us a ride?

Craig Carter wrote this just two days ago:

Liberal Christians seem awfully confident that you can be half socialist and not go too far and lose all liberty. Maybe they depend on conservatives to keep them from going all the way – sort of like teenagers depending on parents to say no when they want something harmful. Instead of thinking for themselves they just rely on parents doing the agonizing and deciding where to draw the line.

I urge you to grow up a little bit and think about this flippant advice. Your current crop of professors don’t seem willing to give you this admonition (correct me if I’m wrong); either that or you’re not listening to them.  Your counsel lacks wisdom.  I know that you aren’t really open to taking me seriously because you think that I am hilarious.  But what would be the personal ramifications to each “rich” person, their families, and their other dependents?  What would be the effects upon their churches and the other ministries that they support, if they followed your advice?  What would be the economic consequences on a macro scale if all the rich people in the world took your ill-conceived and juvenile advice?  What if every responsible person took your advice?  What would happen to all those who depend on them to be responsible and to work hard?  “And the last state of that man is worse than the first.”

I know it was what Jesus commanded the rich young ruler.  But Jesus was a prophet, not a poser, and he knew that man and the ramifications of his selling everything.  Unlike this new generation of socialist and radical Christians, Jesus did not give this same advice to every rich person he encountered.  And how do you know that it wasn’t just a test, like the requirement that Abraham sacrifice Isaac?  Is it not enough for God to know that Abraham was willing to sacrifice his son?  So had the rich young ruler showed his willingness, maybe Jesus would have said that he’d passed the test and would have permitted him to remain rich provided that he live for the advancement of the Kingdom of God instead of for his own personal kingdom.  The vast majority of rich Christians in the early church were not required to sell everything but admonished to remain generous and supportive of the mission of the church, to be hospitable and to provide for widows and orphans.  I.e., not too much different from what my wife and I endeavor to do, with the little money that the governments permit us to keep after taxes.  And actually, we could retire now and go live well in some tropical country.  But we still feel called to work so as to have something to give (Eph. 4.28).

Discipleship vs. Seminary: the medium is the message

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Discipleship and school are two different media for learning.  If we take the model of Jesus and his disciples and contrast it with theological seminary, we can see significant differences that may help us to address the malaise with which many experience seminary education.  The premise of this post is that the medium is the message.  This phrase, which was coined by the Canadian scholar Marshal McLuhan, means that the vehicle of the message is not irrelevant because it superimposes its own biases on the message’s content.

Seminary is curriculum-oriented and knowledge-based. Every seminary program has a set of core courses and electives which are designed to give the student knowledge related to their desired field.  Students spend the better part of three years increasing their knowledge.  No proximity to teachers is necessary, because it is the teacher’s knowledge which is being passed on.  A student may easily attain the professor’s knowledge through reading a book or from attending a lecture.  Students must write tests and papers in order to demonstrate adequate mastery of the material, i.e., to show that they know the curriculum.  The character of the professor is practically irrelevant, because it’s not about passing on habits but knowledge.  Discipleship is incarnational and relationship oriented.  Jesus is the Word incarnate who represents God on earth and shows what God is like to a world estranged from him.  Jesus called disciples to imitate him.  In order for this incarnational ministry to happen, Jesus called his disciples to be with him and learn to do the things that he did.  Discipleship training focuses on the character of the disciple. Direct contact with the teacher is indispensable.

Seminary is individualistic. Apart from a few discussion oriented seminar classes and group projects, which are rare, seminary learning takes place in isolation.  The student is alone in the large lecture hall as he listens to the professor’s monologues.  Question and answer time is limited.  The professors and students have little leisure time to sit and discuss the material.  Students receive assignments of reading books and research papers which are largely done in complete isolation.  Discipleship is community oriented. Jesus was with his disciples for three years.  They followed him as he taught the people and challenged the religious leaders of his day. Even when Jesus sent them out on a mission, he sent them two by two, so that they would not be alone.  Much of the learning takes place during meals and other intimate occasions.  Even the application process, “Master, where are you staying” (John 1.38) suggests that the potential disciples were asking, “Teacher, how can we spend time with you?”

Seminary is focused on diplomas.  The goal of seminary education is the reception of the prize, the MDiv degree, which will become the key to opening doors to church ministries.  The MDiv is not, however, an interchangeable degree, because every denomination has its own requirements and may require the student to take further courses in their own church’s seminary in order to qualify for ministry.  Unfortunately, the number of students with diplomas often exceeds the number of open positions.  So it is not uncommon for graduates to languish never actually attaining their goals despite jumping through the necessary hoops.  Discipleship is focused on mission. When Jesus finished three years with his disciples, he sent them once again on a mission that had the world as its focus (Acts 1.8).  The purpose of all the training was not the attaining of the title, “apostle”, but the construction of the church.  No one will ultimately languish in unemployment because the church’s mission has not yet been accomplished.

Seminary focuses mainly on theoretical learning. The seminary seldom teaches anything hands-on.  To be sure, MDiv students must go through an internship or practicum.  But this is church-based training that usually has little connection with the seminary, as it is farmed out to local churches.  Very rarely the students are exposed to a real situation, such as when Michael Green took Regent students on evangelistic missions to Victoria, UBC campus, and Penticton (I participated in both all three of these).  Many educational programs have similar emphasis on theoretical learning.  I was once surprised to meet a petroleum engineer who claimed that he never studied at University.  And yet today, four years of theoretical learning with no hands on experience is required for entry-level engineering jobs, and the graduate really begins to learn how to be an engineer in his first job.  The same is true of seminary.  The focus of the training is on the theory and the students remained oddly disconnected from the task.  Discipleship’s main learning method is supervised doing. Discipleship is an apprenticeship, where the apprentice first watches the master, then he practices the craft in front of the master, and finally he learns to work independently of the master’s watchful eye.  In the gospels, we see the disciples watching Jesus, doing and being sent out to do; and then finally at the end of three years (a fairly standard period for an apprenticeship in many trades), we see that Jesus departs and leaves it to his disciples to do the work.  To be sure, Jesus also taught theory, but this was in the context of doing.  So for example, he first taught the crowd but then fed them, using the disciples to distribute the loaves and fishes—the practical and theoretical were integrated in the training process.

Seminary leads to conformity. I asked my wife if she could add something to my list and she suggested this.  Schooling requires that everyone learn the same thing, in a structured setting.  This is difficult of course for squirming boys.  So much of the potential and vivacity of our young people is squandered in making them sit in conformity of the classroom.  The same is true even up to the seminary level; everyone is required to study the same core courses if they want the diploma, even those courses for which they have little interest.  Discipleship helps people learn how their particular gifting fits into the whole. Jesus’ disciples did not all function in the same way.  Judas was a treasurer, though he did a bad job. Peter was apparently groomed for leadership.  In a community it is natural for each person to find their niche and make their contribution because it is organic and living.

Seminary is expensive and runs as a business. Many of the choices that seminaries make are based upon sound business decisions.  Programs and courses may be eliminated because they are not cost effective.  The treatment of employees is related to budgetary considerations.  It also means that seminary admits students into the program that may have shown no demonstrable calling to ministry, because as paying clients the seminary has little choice but to accept them.  The seminary acts as a supplier of theological education and the student as the client.  Discipleship is inexpensive and is closer to the model of the family. Jesus didn’t charge his disciples tuition but rather allowed them to eat the bread bought from the community purse.  So essentially, they were paid to be his disciples.  Jesus taught that God was their Father and that he was their brother.  They were to see themselves as the family of God—it wasn’t a supplier-client relationship.

Conclusion:

It should hopefully be clear now that there are aspects of discipleship training as modeled by Jesus that are clearly superior to seminary learning.  I believe that Ivan Illich was largely correct in his critiques about school (see esp. his classic, Deschooling Society), but our culture is stuck in the mud about school; the outlay of billions of dollars in education at all levels has unsatisfactory results and too little to show for the investments made.  Discipleship as a medium of learning recognizes one essential aspect of learning:  Education is more caught than taught. Having spent four years at Bible college, I was surprised to see so many of my fellow graduates contradict their college teachers and imitate the senior pastor of the first church for which they worked.  So even if the homiletics professor stressed good preparation before preaching, the senior pastor’s study habits instead became foundational for that graduate’s later career.  This is also true of how pastors handle money and a whole host of other issues.  It is as though the information learned during those four years of college went in one ear and out the other.

Furthermore, the seminary teaches not only through the curriculum but through its own actual practice of ministry.  So if the seminary underpays or otherwise abuses its workers, we should not be surprised if churches do the same.  If the professors are aloof, lazy, abusive or arrogant, is anyone surprised when their graduates manifest similar characteristics?  Discipleship training, by the bias of its medium, places far more emphasis on character—doing what the master does, becoming like the master, treating people the way the master does.  So when choosing a master, does the apprentice seek out the least successful of the town’s craftsmen? Do they want to study under the one whom nobody likes because he is ornery or a cheat?  No indeed.  An apprentice will seek out the most successful of masters, just as the disciples sought Jesus by asking him, “Master, where are you staying?”  The disciples will learn to do ministry the way the master does, and hopefully, they will be able to replicate their master’s success.

Further Reading:  John Taylor Gatto, Dumbing us down: The hidden curriculum of compulsory schooling, 1992. Neil Postman, Amusing ourselves to death: Public discourse in the age of show business, 1985.

This post is intended as a response to a comment by Elderj at Wayne Park’s blog.