Tuesday, November 26, 2013

Gold and Silver, the "Hidden Assets"

Lately I’ve had a few comments about the “New Paradigm,” claiming gold and silver are throwbacks to a long gone era that is no more. Also tossed in for good measure is the idea that we don’t need them anymore, civilization has progressed to credit and debit cards and real money, as such is unnecessary. And then there is the comment that we would run out of real money if our currency had to be backed by gold and silver.

There are two different issues in play here, and this is where the real problem lies hidden. Gold and silver coinage go back thousands of years, and the reason they were so successful, is because government had no control over the metals. They could tax and get payments, but they could not spend more than they took in. The real nemesis to currency is the politician and the financing of their political promises.

From early times, they resorted to clipping the edges of the coins and substituting other metals. In my lifetime our silver coinage was replaced in 1965 with nickel on copper. In 1984 the copper penny became a zinc and copper sandwich; the copper in the penny was worth more than the penny.

When the politicians break the bounds and restrictions that gold and silver impose on their currency, there is no limit to what a government can afford to purchase. And then it’s only a matter of time before people accept inflation as part of life. The neat thing about inflation, are the pay raises. People who started out at $2 an hour in 1970 are now making $12 an hour; success at last! The trouble is, the $2 in 1970 probably bought a lot more than the $12 does today. Plus, the politician doesn’t have to raise taxes; you make more, you pay more—how neat!

Government coinage backed by gold and silver prevents the politicians from printing dollars. The Eurodollar which is not based on gold or silver has a similar problem. These countries can’t print more Euros without the approval of all nations in the Common Wealth. The currency is destined to die unless the politicians can remove the restrictions on printing more Euro’s. Europe’s politicians have promised much and can’t deliver without control of the purse strings.

I have to laugh when people say the government has to print more dollars because there are more people now. All currency does is transfer your work unit into a common unit of measure in our case called a dollar. A farmer grows a thousand bushels of wheat and converts them to dollars and buys what he needs or wants. Everyone who works receives entitlement receipts according to their effort and skill. They could be paid in chickens and pigs. The thing that makes currency work, is that it is more convenient and speeds up commerce to a very high degree. When a government prints “extra” dollars (spend more than they raise in taxes or borrowing), the product purchased is pretty much confiscated from the economy.

Purchasing gold and silver is not going to make anyone rich. It is only a way to preserve your buying power into the future. It pays no interest and is immune to inflation. The reason you would buy it, is because you understand the dynamics of counterfeiting; it’s a tax on everyone using the currency. The real worry with the accelerated printing in many countries, is the necessity to ban gold ownership. The politicians cannot pay the bills and inflate the economy if the citizens refuse to use the currency and buy gold instead.

What we saw happen to the banking system in Cypress is one possible outcome that no one liked; losing 40% of your savings over 100k kind of sucks. Whatever the outcome, as a rule of thumb, an ounce of silver is about one hour’s wages and an ounce of gold is the equivalent of one week’s wages.

The neat thing about owning physical gold and silver, is that some hacker on the internet can’t spend it, the government can’t tax it, transferring it is not a taxable event, and it is invisible if you want to claim government benefits. When's the last time you have seen on a financial application, "How much gold do you have buried in the back yard?"

My gopher knows.

Sunday, November 17, 2013

Our Government Has Destroyed Compound Interest

To quote Albert Einstein, “Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.” But there is one caveat, only as long as the return rate is reasonable. As interest rates approach zero, there is less and less incentive to save for the future.

Banks can’t really function at very low interest rates, most of their borrowers are short term and most of their loans are long term. In the early 1980’s the Savings and Loan industry wrote 30 year loans at 6% and saw all of their short term depositors withdraw their money and put it in the money market funds at 9%. Old Bill Seidman got the S&L’s out of trouble at a cost of several billion to the taxpayer.

It becomes extremely difficult for insurance companies and retirement plans to fulfill promises made to people 20 years ago. Their projected income streams from anticipated rates have dropped drastically. If you examine the rule of 72 where one divides the interest rate into 72, the resulting number is the number of years it takes to double the principle. CalPERS is still claiming an 8.5% return on their investments which would indicate that the funds principle would double every 8.4 years if left untouched. Of course if we assumed a 3% return, that would be 24 years and if we went to 2% figure 36 years. So it isn’t hard to figure out that CalPERS is probably miss stating their returns on equity, hoping that interest rates begin to rise drastically. At the current interest rate returns, their past funding projections made 20 years ago will leave them broke inside of 12 years.

What are we left with? Retirement plans that won’t even be able to pay back what the retirees put into them and a national debt payment that will consume all of our income taxes paid-- just to cover the interest.
The real issue with very low interest rates, is that there is no incentive to save money for retirement, especially if there is inflation. In fact low interest rates will probably stimulate the average person to consume beyond their means and pay the money back with inflated dollars later.

One peculiar thing is that gold and silver are no longer just commodities. The person who chooses to possess gold and silver coins, is not losing much in interest. Short term bank deposits are paying ½ of 1 percent a year—the interest on 50k for a year won’t even buy lunch.

The stock market seems to be the last game in town to play right now. Where else can you put your money and make a dollar? Of course, at one time a dollar would buy 4 packs of cigarettes but I digress. There doesn’t seem to be any risk, the DOW continues to surge higher. Everybody is going to get rich, Oh goodie, I can hardly wait!

Compound interest was a tool used by private citizens to enhance their retirement years. The present interest rates sound very depressing to people about to retire, but let’s play the government game. Reduce your registered cash in the bank. Keep it in a safety deposit box and have a couple of co-owners (like your kids) who can empty it out if you check out early. File for disability before you retire, it increases your Social Security benefits. If you “deplete” your savings, you probably qualify for SSI in California. If you’re married and can get better benefits being single, claim being single, the bureaucrats only want proof of a marriage license if you want spousal benefits. It’s no crime to “think” that your husband is dead and you don’t know who the new guy in the house is. That’s an extra $40 of food stamps a month right there.

Right now, even Suzi Orman is suggesting ways seniors invest more aggressively for retirement. They need to take more risk to avoid losing their principle. I tend to agree with her, but I think the logic is flawed. The government is our biggest risk. This Ponzi scheme cannot continue forever.

I’m suggesting that silver and gold need to be considered as options in any retirement plan, and I am not selling a newsletter. I believe that silver is a better buy right now and I like it because 1000 ounces is kind of heavy about 70 lbs., so it is rather awkward to steal. But gold and platinum are other options of purchase.

The thing I like, is that the government can’t print gold and silver, so if they need more money, they can print it (debauch the currency) or tax your earnings or tax your home, but precious metals are invisible.

So here we are with a very realistic bit of theory from Einstein about compound interest. It kind of makes you wonder, who’s in charge? We know who gets to pay the bills.

Sunday, November 10, 2013

The Economist, the Modern Fortune Teller

Newsrooms everywhere are consulting economists to get insight into the economy. Sounds logical, but is it realistic? The study of economics is not a science. It can be grouped in with other college classes like Fine Arts and Psychology. There is a quasi-science part to it that is similar to fire department forensics where the cause of a fire is determined after the fact. Economics is basically the study of theoretical models and by using them, try to determine what may be in store for us in the future by studying history. What it boils down to, an economist can explain what happened to the economy in the past using models and defend their argument. That is the only real part about economics, it explains the, who, what, why, when and where of past events.

The words “economy” and “economist” seem intertwined and they are not. The economy is the “here and now of how life is treating us.” Today’s economist is trying to figure out how to predict successful financial pursuits and avoid the black holes that are out there; and if he was any good at it, he would be fantastically rich.

When Congress decides to curb coal burning or the addition of alcohol to our gasoline, an economist can explain why China is buying our coal and why beef prices are rising. Notice however, economists do not have any real insight into the future. It is a little like a chess game, neither player is going to move into danger intentionally, the errors will be made from a lack of foresight into what other unknown items may be in play.

Our economy is in a state of flux, moving and connecting in different ways and changing imperceptibly to where it is barely noticed. The people in charge, Congress, collectively as a group, have an economic IQ of zero. They are all dependent on local groups in their State getting them reelected. So keeping the economy going, involves very little if any economic theory. A Congressman’s job is to spend your tax dollars and give his voters the most bang for their buck.

The real issue for the reader is to realize that there are three different outlets for information on economic theory that will be important to your future; the government, the news sources, and blogs. I severely question government sources, for one reason, governments always paper over bad news for the simple reason, the public reacts negatively to bad news. As for the news sources, there is a time lag, they only print what has already happened. The third group, blogs also have issues, you can shop for a point of view that agrees with your own.

Of the three, blog reports seem to be able to connect the dots that involve economic theory. If I use the Real Estate bubble as an example, I was considered dead wrong for 6 years and friends I knew avoided that topic with me. It’s very hard to be wrong for 6 years only to be proven right later.

So let’s boil it down to its essence. Economists as a whole, pretty much agree that the present government deficit spending cannot continue for much longer; it is a bubble. Printing money, whether done by a counterfeiter or the US government produce the same result. Product was consumed with no work effort. Congress has no real conceptual view of economic theory relative to butter or guns; all they want are satisfied voters.

So when you see some Economist being interviewed on TV, think to my example of a forensic arson investigator being asked about the future fires he may be investigating. He is an expert only on the fires that have happened that he has examined.

Remember the joke about three economists in one room with 5 different opinions? It’s not the 5 opinions that bother me, it’s the one that the media chooses to print— the nation is starved for good news and good news sells. Fortune tellers are a dime a dozen and they have a knack for telling you what you want to hear, it puts bread on their table.

Below is something that has nothing to do with the above, but having a picture or two in the blog adds a little color

While cleaning my desk, I found an old 1928 one dollar bill and thought I might share this old silver certificate with you and match it up with a newly printed note.

The newly printed dollars make no reference to being backed by silver or gold. I guess the "In God we Trust" on the back of the "newer" dollars was added as a hope and a prayer that all of this doesn't go up in smoke.

Sunday, November 03, 2013

Entitlements the Unwritten Bill of Rights

I hear time and time again that health care is no longer affordable. I don’t see it. Go back 100 years to 1913 did anyone complain about health care being unaffordable? What has changed over that time are the amount of different services that are now available that weren’t back then. The real truth to the matter is that today’s patient wants all of the services available but doesn’t have the means to pay for them all. You kind of have the ability to pay, if you are willing to do without something else that you usually consume. We are not discussing health care insurance, only the cost of general health care treatment.

Have you ever taken a pet to the vet for treatment? You get an itemized list of procedures that can be performed and the cost before anything is done. You choose the amount you are willing to spend first, pay it and the vet does what is requested of him. It is considered inhumane for our health institutions not to treat a patient because of a person’s lack of funds. You can see how such a philosophy preached as a business model would have a veterinary clinic facing bankruptcy their opening week.

Then we have 40 million people on food stamps and some Congress man stands up and says a family of 4 can’t feed themselves on a food stamp budget of $668 a month. So if we eliminate food stamps to 40 million people, will we have 40 million funerals in the following year from starvation? I think not. There might be a hell of a drop in cigarette, alcohol, drugs, cable TV and cell phone consumption. These food stamp allotment quota settings are kind of like a bill of entitlements to the poor. Have kids don’t get married and you are entitled to a bigger share. Dad can come home on the weekend and be with the kids if he isn’t starting another family on the other side of town.

Then on top of that the government claims the health insurance companies are gouging us and making huge profits. There wasn’t one peep about auto insurance premium prices being too high. And no one complains about the millions of people driving with no car insurance. When the health insurance companies go out of business, you’ll realize how bad a government plan can be run when there is no financial accountability (they don’t have to make a profit).

The real issues with government programs are not about affordability, it’s all about entitlements. Those that can afford to pay, will pay more and get less; those that can’t afford to pay, will get something for nothing.

I’d like to point out that my prediction that the health insurance companies would drop individual policies back in October 28, 2012 is now happening nationwide. An insurance company can’t make money insuring people with a preexisting condition.

I predict that Obamacare has less than 6 months before it is considered a hot potato by even the Democrats. We have created a Medicare monster of free health care entitlements for the poor and those gaming the system while at the same time this new tax will enrage the young voters of this nation. From the time I was 20 until the time I was 55 and got company health insurance, I probably spent about $800 on doctors, and most of it was for eye glass prescriptions. So I had 100K left over to spend on other goodies during those 25 years.

The real issue is, nobody in government is paid to think, if they were, they’d be out of a job. 40 million people on food stamps is beyond being absurd, and a health care system that is free to everyone pleading poverty? Has anyone figured out who is paying the bills? Maybe it’s about time we tarred and feathered a Congressman or two. Of course if we told them it was part of their Congressional health care plan, they'd probably all want the procedure performed.

I'm going to miss the Aflac duck commercials