Reflexions on how to invest in an inflationary environment using leverage

The clear winners during the Weimar inflation were debtors.  This according to historian Adam Fergusson, author of When Money Dies (pdf link).  Indeed, it pays to owe money during inflation and even 2% inflation is theft–stealing from anyone who has lent money.

I have said in previous posts that the only reason that home owners win is because they enjoy a cheap debt product, a mortgage, and that as time passes, inflation reduces the value of the mortgage, while it appears in nominal dollar terms that their house has increased in value.  But if measured in something more stable, like gold, real estate hasn’t really improved in value over the course of the last 100 years.  It is just the dollar that has fizzled out.

Thus, I conclude that leverage that is under control and manageable, is the best weapon against inflation.  What is leverage that is under control?  (1) Keep debt to equity near or below 1:1; (2) Use debt to  purchase of a cash-flow producing investment, such as a dividend paying stock or rental housing, which in covers the interest payments and creates income;  (3) Avoid consumer debt.

In any case, here is the video in which Adam Fergusson explains how debtors win:  they pay off mortgages with “postage stamps” (i.e., eventually, the cost of postage stamps is similar to the total mortgage debt).

Hat tip:  Zero Hedge

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Peter Schiff is a mensch II: Interviewing OWS

Peter Schiff tries to explain that high-wage earners are often the people who provide jobs and if you tax them at too high a rate, they are likely to just stop working hard and stop risking their capital, and people whom they employ will lose their jobs.  It is a compelling narrative if you are an employer, as are both my wife and I.  Craig Carter says something similar (If You are Thankful for Your Job, Hug a Billionaire):

Every time I hear the “Tax the 1%” meme, I feel personally threatened. I feel as though someone is out to destroy the economy and create the kind of conditions in which I could, potentially, lose my job. The war against the rich is really a war against the middle class and it is based on emotional manipulation, rather than reason. The people who are involved in it may be sincere, but they are much too gullible.

Maybe economics should be a compulsory subject in high school and maybe we ought to start purging socialists out of our universities so that free market principles once again dominate the curriculum. OWS and liberal/socialist propaganda is getting out of hand and people are getting hurt.

I don’t think Peter Schiff would argue with Dr. Carter on that point.

Hat tip:  Monty Pelerin

How monetary policy works: Quantitative easing explained

Monty Pelerin (h.t. Barry Riholz) offers this morning the following video at his blog to explain Quantitative Easing:

Yet I have called into question the usefulness of the metaphor of printing, since central banks create most of the money in our world today through electronic transfers, i.e., they do not print at all, but it becomes oh so much money on debit cards and bank balances.   I.e., no wheel barrows are needed, because banks can create a trillion dollars of money, and it takes up no space.  It much more like the Corner Gas reality as I pointed out in my post “A Canadian explanation of global monetary policy“.

Yeah, but are YOU open to dialogue (Poserorprophet, Dan Oudshoorn)

Dan Oudshoorn, one of the leading radicals that was critical of Tyndale Seminary and University College for having a fund raising event featuring U.S. President George W. Bush, claims that Tyndale has stifled dialogue with dissenters, such as their accusation that the Tyndale president Gary Nelson censored professors–after a meeting with Nelson, Oudshoorn wrote:

When pressed on the ways in which it appears as though Tyndale is muzzling professors who present an opinion that is more critical of the ways in which the administration has handled this process (i.e. the puzzling redaction of the Christian Week article written by Arthur Boers, compared with the remarks made by Carter and Masson), Gary was adamant that he would never muzzle any professor and that he is a very firm believer in academic freedom. Instead, Gary presented a fairly compelling narrative as to why the article was redacted but I don’t want to get into the details of that, or the details that I have heard from another reliable source that provides a somewhat different narrative (which I mention for the record because, in this case, I don’t want to appear as though I have taken a stand one way or another).

[snip]

So, we see claims of transparency yet a refusal to speak with us, which was only broken down due to the threat of ongoing pressure (NB: I’m not claiming that this means that Gary does not value transparency; the conclusion I’m drawing is that he is in an institutional position that is situated amongst the elites in such a way as to have certain blind-spots about what transparency does or does not mean).

Yet try commenting on Oudshoorn’s blog.  I did once when he mentioned me by name, and he summarily erased my comment, though he has come here and commented so far without censorship.  So I conclude that his intention is to insist on dialogue on our turf but won’t permit it when he is in control.  This is typical of the radical Left, which insists on the freedom to say what they want but then will attempt every sort of speech code to stifle what they don’t like.

PROOF:  At a recent blog post of Oudshoorn’s, I made the following comment that he later erased: Continue reading

You keep using that word IV: fiat

Economics has become a pseudo-science and one of the reasons why the education bubble is real and will result in the demise of the university system.  It will collapse under its own weight of stupidity.  Here I am a university-trained PhD telling you that much of what goes on in academics is just a bunch of  fantasies created in the mind of the scholars.  In my own field it consists of such scholarly imaginations as Q, the Secret Gospel of Mark, or the anti-Semitic source theory of the Pentateuch (JEPD [pdf]).

So it is not at all surprising to me to learn that the same foolishness inhabits other fields of study, including economics.  So now a certain Prof. Willem Buiter has produced a blog post entitled, “Gold – a six thousand year-old bubble“.  Rather than just simply admit that gold has intrinsic value because of its rareness and unique properties, Prof. Buiter, that colossus of economic brilliance, concludes that mankind throughout recorded history has kept gold in a bubble.  In my view, wisdom would dictate that 6000 years as a currency would make gold the most secure form of money known to man.  But alas, then Prof. Buiter writes these lines:

Gold has become a fiat commodity or a fiat commodity currency, just as the US $, the euro, the pound sterling and the yen … [snip] are fiat paper currencies. (From Financial Times Blog, [snip because of 30 word limit imposed by Financial Times])

The term fiat actually refers to currencies with nothing, such as gold or silver, backing them.  Such currencies are predestined for failure as the temptation to make too much of it seems to derive from human nature.  On the other hand, gold has intrinsic value, so it requires no backing.  To call gold a “fiat” anything is as stupid as Nouriel Roubini saying that gold has no intrinsic value.  These economists don’t even understand what the terms “fiat” or “intrinisic” mean.  This is disgusting and pathetic and it is no wonder that the world is in such economic chaos with such dunderheads running the show.

For the correct definition of fiat currency, see Investopedia.

And now for the video clip, which I dedicate to Prof. Buiter :