As we learned from our series of tips on The Retirement Myth, the Baby Boomers are too many in number and they (we) are living too long. They (we) are taking too good a care of themselves. They (we) are expecting pensions in increasing numbers. The following generation does not have enough numbers to support them.
So, what will pensions providers do? The main pension provider, the government, can easily just create more currency.
By the law of supply and demand, the more of a commodity you have, the less value it has.
Our parents did not all actually have a strategy. They were born into a time that allowed them work, buy a house, pay it off and live off a government and/or private pension.
If we do the same, can we expect the same result?
In a word, no.
We live in a most unusual time, unique in history.
Two principles that will serve you well during this time:
“Who does not learn the lessons of history is doomed to repeat the mistakes of history,” and
“The Warrior is never available. Never is he standing on the street waiting to be clobbered.” –Robert S. deRopp in The Warrior’s Way
Opportunity Knocking…Are You Going To Answer?
“This is the biggest investment opportunity in history.” -Robert Kiyosaki, author of the Rich Dad, Poor Dad series.
This is the largest transfer of wealth ever and those who have knowledge have an unfair advantage. –Paraphrasing from Kiyosaki and his investment advisor, Michael Maloney.
In past wealth transfers, the banks and the wealthy have made out like bandits. This time, the individual investor can become very wealthy if he or she is armed with knowledge and takes action. –Again paraphrasing from Kiyosaki and Maloney.
In a way, this is nothing new.
Investment and economic cycles have been ongoing for millennia. Some call these booms and busts.
We have had countries bury themselves in debt before. In fact, Maloney says this has happened 30 times in the last 100 years to different countries. Examples are Germany in the 1920s, Brazil, Argentina in the 80s and 90s, Russia in 1984 and Zimbabwe in 2009.
It even happened twice to the U.S. Both were war times: the Revolutionary War and the Civil War.
What is different is that, this time, it is happening to all countries in the world simultaneously.
This Has Never Happened Before
“Who does not learn the lessons of history is doomed to repeat the mistakes of history.”
So, a little history is in order.
Note: Please keep this in mind: This is definitely not about fear! It is about recognizing an opportunity.
The Difference Between Money And Currency
Currency is a medium of exchange. Think paper money.
Money meantime has value in and of itself. Think gold as an example.
Money can always be used as currency to buy goods and services. Currency only has value as long as we agree that it does.
“If you have a hard time grasping this, just think about a hundred-dollar bill. Do you think the paper is worth $100?
The answer is, of course, no. That paper simply represents value that is stored somewhere else – or at least used to before our money became currency…In short, our government has the ability to, and has been, creating money at will without anything to back it up.” -Michael Maloney in “Guide to Investing in Gold and Silver.”
If you or I were to create money out of thin air, that would be counterfeiting and would be illegal. When the government does it, it’s perfectly legal…because they say it is.
The Law of Supply and Demand Has Not Been Repealed
As you know, the law of supply and demand states whenever there is more of something it has less value.
(And also when there is less of something, it has more value.)
It is not news to you that the US government has been creating money like crazy. They call it “Quantitative Easing” or QE.
They have had two of these QEs in the last couple of years since the crisis of 2008.
Each time they created $600 Billion out of thin air to prevent the economy from collapsing.
A “fiat” is an order by someone who has the power to enforce it.
When governments create currency out of thin air and circulate it without anything of value backing it up. Gold used to back up the US dollar until August of 1971 when then president Richard Nixon took the dollar off the gold standard.
That event was momentous and changed forever how the world works.
That event has been affecting all of us since…as you will see.
It also created opportunity. This opportunity is, not once in a lifetime, but the biggest opportunity in the history of the world.
What Nixon did was take the entire world off the gold standard. All the currencies of all countries of the world came off the gold standard in one fell swoop.
Another History Lesson: Creating “Money” Out Of Thin Air
The Bretton-Woods Agreement of 1944 pegged all the major currencies of the world against the US dollar. Governments agreed not to let their currencies fluctuate very much against the US dollar. And as the US dollar was partially backed by gold, that meant other major currencies were as well.
Now, with one stroke of the pen, all the world’s currencies became fiat currencies, backed only by thin air. Governments have their own way of describing things though.
They call this thin air: “The good faith and credit of the United States.”
So, What’s The Big Deal?
Well, as the Austrian economic school tells us, there has never, ever in history been a fiat currency that has survived.
Eventually, All Fiat Currencies Collapse
Only this time, it is different.
In all previous events, there has been a place to go for safety.
If you were in Germany in the 1920s, you could have transferred your assets to the US dollar and found an island of safety.
Same thing in Brazil and Argentina, if you were able to get your money out in time.
I have a vivid memory of the Russian ruble collapse of the 90s. There was a picture in the newspaper of an old babuschka, an old woman in the streets of Moscow in the middle of winter trying to sell a winter coat to raise enough money to buy food for that night’s dinner. Hyper-inflation had taken hold and her pension of a few hundred rubles a month was not keeping up.
When I visited St. Petersburg, then Leningrad, in 1982, the ruble was valued at one ruble to one US dollar. The old babuschka may have been receiving a few hundred rubles a month in state pension, enough to get by in the 80s.
But when the ruble devalued and you needed a few thousand rubles to buy one US dollar, prices for food and necessities went through the roof. Now, a few hundred rubles bought you nothing. You needed thousands to buy anything.
Think of hyper-inflation as inflation on steroids.
Now, remember, this is not about fear.
This Is About Recognizing Opportunity
If history is a guide, then all currencies can see that kind of meltdown and pension incomes will be devastated. But, the opportunity is also large.
What is it? Most folks think of inflation as rising prices for goods and services.
And it is true that prices rise with inflation, but…
Inflation Actually A Tax!
Remember the Law of Supply and Demand?
When the government creates more currency and puts it out into the market place, that means all the existing currency is devalued.
However, when the government created it and spent it, they got to spend it at full value. Only after it hits the street does this extra currency cause a devaluing of the currency.
So, the government just taxed you and I, by stealth, under the radar.
Inflation Is a Stealth Tax on You And I
All right, so that can make a guy a little steamed to know that the government has been taking lots of extra taxes over the years by creating inflation and, in effect, ripping money out of our wallets and purses.
But does that mean we are all going to have hyper-inflation? That’s a bit of a stretch, isn’t it? We are not Zimbabwe, for crying out loud.
The First Hyper-Inflation: More History
For 4,500 years gold has been the predominant currency. The first minting of gold coins was in Lydia in 680 B.C.
But gold really became a star in Athens, one of the great civilizations of all time. And Athens fell.
See if any of this sounds familiar.
Athens got involved in a longer and costlier war than they anticipated.
After 22 years, they decided to debase their money. They mixed in 50% copper into their gold coins.
“This marks the first time there was an official government currency that was not gold or silver, but rather a mixture of gold or silver and copper.” -Maloney
Within two years their currency became worth less.
“Anyone who had held on to the pure gold and silver coins saw their purchasing power increase dramatically.” –Maloney
A similar event happened in Rome.
Emperor Diocletian debased the Roman currency in the same way. Result? A pound of gold was worth 50,000 denari in the year 301 A.D. By mid century gold was worth 2.12 billion denari.
The price of gold rose 42,000 times in half a century.
Ordinary folks went back to bartering.
Perspective For Today
In the 30s, the price of gold was $35 US. If it rose 42,000 times, “…the price today would be just under $1.5 million per ounce.” –Maloney
A new car, says Maloney, would cost about $85 million.
During Financial Upheaval, Wealth is Not Destroyed. It is Merely Transferred.
“Here is the important lesson: During financial upheaval, a bubble popping, a market crash, a depression, or a currency crisis such as this one, wealth is not destroyed. It is merely transferred. During the Weimar hyperinflation, gold and silver didn’t just win, but smashed their opponents into the ground, by delivering yet another devastating blow to fiat currency. Thus, those who held on to real money, instead of currency, reaped the rewards many time over.” –Maloney
This pattern is the same throughout history.
● The country starts out with good currency backed by gold and or silver.
● The temptation for the state is just too great: they eventually debase the currency by diluting the amount of backing. As in Greece and Rome, this can be minting coins with more of the cheaper metals such as copper. It can also in more recent times, mean just printing paper currency and not having any backing at all.
● As inflation gets more and more severe, the people lose faith in the currency.
● At this point, we get a massive move out of the currency and into precious metals and other physical assets.
● The currency collapses and those who had enough foresight to accumulate gold and silver are the recipients of the wealth transfer. (Remember, wealth is not destroyed, simply transferred.)
In June of 2009, I chatted with someone who worked with a Swiss Foundation in Zimbabwe. I asked him how do people deal with 231 million percent inflation? (Yes, that’s right: 231 million percent!)
He said people would buy bottles of Johnny Walker Red because it held its value. Later they would trade their bottles for food.
Changing the Context: The Silent Crash of the Dow
Remember the distinction between money and currency?
Here is a quote: “He knows the price of everything and value of nothing.”-Oscar Wilde
For example, we are quite familiar with stock market indices, The Dow Jones Industrial Index or Dow for short, as an example.
What is the index quoted in? What is it priced in?
Why, U.S. dollars, right?
So, if we see the index is at 12,000 and two years ago it was 8,000, we are looking at a 33% increase in the Dow.
That would be in nominal dollars.
In other words, that 33% increase is before we factor inflation into the equation.
What if instead we valued the Dow against money instead of currency?
Would it make a difference?
On page 60 of Maloney’s book, “Guide to Investing in Gold and Silver,” we see a chart of the Dow from 1996 to 2008. We note the Dow has gone from about 5,000 to about 12,500. Pretty good.
That’s valuing the Dow against the currency, in this case, the U.S. dollar.
Now, let’s value it against money, i.e. gold.
We see that in 1996, it took about 12.5 ounces of gold to buy one share of the Dow. In 1999, about 45 ounces and in 2008, about 15 ounces.
So, from 1999 to 2008, the Dow actually lost two thirds of its value, priced against real money or gold.
Perhaps even more to the point is how much “stuff” will be able to buy. You know, the things we use every day. After all, we can’t eat gold.
This is where the Dow priced against commodities, agricultural products and oil comes in. These charts are in the book. Have a look.
Let’s take oil.
“If you sold one share of the Dow in early 1999 you could buy 800 barrels of oil. As I write this it only buys 100. Since 1999 the value of the Dow has plummeted 87.5%, measured against oil. But remember, oil doesn’t just end up as gasoline. It is the single most useful commodity there is. It’s used to make medicines, fertilizers, plastics, tar for our roads, and the tires for your car.” –Maloney (my bolding)
Real Inflation Now
All this should indicate that inflation is just a bit higher than the official Consumer Price Index (CPI) that the government publishes.
You may have suspected that the government fools around just a little with the CPI.
How can we tell how much real inflation is?
In the U.S., an organization called Shadow Government Statistics tracks that very thing.
Real Inflation May Be Two And a Half Time Official CPI
ShadowStats.com indicates that real inflation is running at two and half times the official CPI of 2% as of this writing. http://www.shadowstats.com/
Remember again the Law of Supply and Demand. On March 23, 2006, the Federal Reserve in the U.S. stopped publishing the broadest measure of money supply, M3.
Future Inflation May Track M3, Which is Now Inflating at 18%/Year
“Now, hold on to your hat because this one’s going to hurt: Since 2000, the Fed has increased the M3 currency supply by a whopping 112%! Thus, any investment that has returned less than 112% over this time period is underwater. This means that the Dow would have to be above 25,000, not 14,000, to have the same value it had back at the turn of this century. And not it is estimated that M3 is inflating at a rate of about 18% per year and rising. I would expect that prices could follow suit within a couple of years.” –Maloney
We are in a Commodities Cycle
Jim Rogers’ book “Hot Commodities” points out that we are now in an upcycle for commodities generally, which would include the precious metals such as gold and silver.
(Jim Rogers co-founded, with George Soros, the Quantum Fund and retired at the age of 37. The Fund was a pioneer hedge fund. http://en.wikipedia.org/wiki/Jim_Rogers )
Commodities And Financial Assets Are Counter Cyclical
When one is up, the other is down.
There have been 3 major commodity bull markets in the 20th Century, lasting an average of 17 years.
A new one is underway and Rogers forecasts it will run until as late as 2021.
Quotes from what he considers a major academic study on commodities in 2004 from the Yale School of Management’s Center for International Finance, “Facts and Fantasies About Commodity Futures.” He calls it a truly revolutionary document:
“* Since 1959, commodities futures have produced better returns than stocks and outperformed bonds even more. Commodities have also had less risk than stocks and bonds, as well as better returns.
* During the 1970s, commodities futures outperformed stocks; during the 1980s, the exact opposite was true – evidence of the “negative correlation” between stocks and commodities that many of us had noticed. Bull markets in commodities are accompanied by bear markets in stocks, and vice versa.
*The returns on commodities futures in the study were ‘positively correlated’ with inflation. Higher commodity prices were the leading wave of high prices in general (i.e., inflation), and that’s why commodity returns do better in inflationary times, while stocks and bonds perform poorly.
…*While investing in commodities companies is one rational way to play a commodity bull market, it is not necessarily the best way. The returns of commodities futures examined in the study were ‘triple’ the returns for stocks in companies that produced those same commodities.”
Here is Rogers in 2007, prior to the Quatitative Easing post 2008 crisis:
Here he is in March 2011:
Ten-term Republican Congressman Ron Paul also speaks about this topic:
“This is so huge that nobody can quite comprehend it. It is into the many, many trillions of dollars. All we know for certain is that it’s not workable and it will fall apart.
I always tell the elderly, ‘You are always going to get a check. We are always going to send you a check for your Social Security, and it’s always going to go up. But we will always fudge on what the real rate of inflation is…so your real income is going to stay flat or go down. You’re always going to get a check, but the question is: “What’s it going to buy? If electricity doubles and your check doesn’t double, you’re going to suffer.’
I think this country is going to get much, much poorer and the entitlements will finally have to end because just printing the money and running up the deficit or expecting foreigners to continue to loan us the money is not going to last. It’s just a dream and it’s very, very serious.”
-Ron Paul, quoted in “Guide to Investing in Gold and Silver.” (my bolding)
“You need a plan!
The more I study, the more I am absolutely convinced that there is no better place to be for this portion of the cycle than in precious metals.” –Maloney
Given this information, what is the “action plan?”
Much depends on you. But this is always for sure: It is wiser to invest with a plan.
“The secret to your financial success is inside yourself. If you become a critical thinker who takes no Wall Street ‘fact’ on faith, and you invest with patient confidence, you can take steady advantage of even the worst bear markets. By developing discipline and your courage, you can refuse to let other people’s mood swings govern your financial destiny. In the end, how your investments behave is much less important that how you behave.” Benjamin Graham
You can order the book from my website. Highest recommendation, just click on the Amazon icon. http://joyenergyandhealth.com/
If you are in retirement and relying on pensions, then please refer to tips 97-101 on The Myth of Retirement. It may be wise to consider developing an independent source of income.
In every crisis, there is also an opportunity. And not just for investing, but for providing a service that uses your unique skills and talents. This allows self-expression, a critical part in self-worth. Providing a service that has value can create income and, just as importantly create confidence knowing that whatever life throws at us, we can deal with.
Tip # 107 Are We All Addicted and Brainwashed?
How to Upgrade Addictions to Preferences and How to Address Unconscious Programming.
Thanks for reading.
Till next time, Happy Trails to You,
Much Joy, Energy, Health and Love,
P.S. Don’t be a hog: Share this information. That is, if you find my “mental meanderings” useful.
If so, send your friends to my site: http://joyenergyandhealth.com/
P.S. #2 Also, don’t be a stranger. Email me or visit on Facebook and share your experiences with this course.
(Facebook name: Matti Anttila. http://www.facebook.com/ )
P.S. #3 These tips may not all be appropriate for you. Use your favourite decision making technique to decide. See tip # 3 for my favourite.
P.S. #4 Thank you. It is an honour and a privilege to explore this adventure with you.
Any and all information provided here is not a substitute for the advice of a licensed medical practitioner. Individuals are advised not to self-medicate in the presence of significant illness. Always consult with your licensed medical practitioner first before undertaking anything…be it supplements, exercise programs or other protocols. The information on this website is not intended to diagnose, treat, cure or prevent any disease. Do not construe the information provided here as authoritative health advice…or authoritative advice of any sort. All information provided or referred-to on this website is for informational purposes only. It is not intended to be health, medical, financial, accounting or tax advice, nor should it be relied upon as such. Matti Anttila is not a licensed financial planner, doctor or health practitioner. If you're not inclined to Do-It-Yourself then please, before you Do-It-To-Yourself, obtain professional advice.
/* Style Definitions */
mso-padding-alt:0in 5.4pt 0in 5.4pt;
font-family:”Times New Roman”;