At the end of January, Mervyn King, Britain’s chief central banker, made what some referred to as a remarkable statement when he apologized to British savers who are now being penalized by what King called the “rebalancing” of the global economy [Translation: we have to inflate away debts because we can’t possibly allow too-big-to- fail institutions to, you know, fail.] In King’s statement we finally have an admission from a central banker that little, average, savers- “the widows and orphans” if you will- are being sacrificed on the altar of the specious assumption that the world will end without bank bailouts and low interest rates. Of course King’s apology was not contrite- he did not appear to be in favor of changing course. I suppose what King is really saying is something many of us have suspected. Namely, in this world of endless insurance for banking risk, in the era of the “Nanny State,” and in an era where the vast majority of Americans have less than 100,000 dollars in savings, those weird people who thought ahead and planned for a day when maybe, just maybe, the government would not be there to help them, are, in fact, an endangered species. Irrelevant, not needed. Savers are a throwback to the barbaric days when families provided for each other, where neighbors provided for neighbors, where people on the frontier had guns, and when gold and silver were thought of as real money. Practically the Stone Age as far as people like King are concerned.
I was surprised King even bothered to make any sort of apology to savers. Rather he should have said that we are all living in the utopia long dreamed of by central planners. The utopia of complete reliance upon the "System." You don’t need to rely upon your hard efforts to provide your future- the governments and their syndicates of corporations and bankers will do that for you. Your job as a little person is to obediently take the ration of whatever your overlords give you, be quiet, and don’t worry too much about private property. However- make sure you CONSUME! You are a consumer after all, not a citizen, individual, or- God forbid- a saver. Saving for what? It will just be confiscated by this thing called inflation- so don’t bother trying. Or, if you must save, make sure you let it ride on the roulette wheel called “the markets” (also owned by the banking syndicate). The morality of exchange? Why would anyone be concerned about the morality of governments defining fiat paper as money- who are you to question the creditworthiness of banks, states, or corporations. Governments never lie about what their indebtedness is, or whether or not debt can get paid back!
Since I spend a lot of time trying to educate the next generation, I know a thing to two about how well this corporate/banking syndicate has brainwashed the average person-- even the average person who thinks they are educated and critical about the world in which they live. Young people who are concerned about global climate change, American imperialism, resource scarcity, or any number of other “political” issues don’t generally have much of a clue regarding why their monetary system is far from perfect. What does it matter if the Federal Reserve prints our currency? Why would you want competing currency systems, or more local control over money? Wouldn't our world return to being barbaric, poor, or half-starved if there were some way to allow for people to use gold and silver in the currency? Perhaps those of us wishing for a different monetary order are delusional. Perhaps our world would collapse if the banks went under, who knows. Perhaps I don’t realize just how dependent I am on the dollar and should shut up about daring to criticize it.
DOW 12,000 Comrade, Prost!
Another way to read King’s speech is as a cryptic tip to savers to embrace inflation and invest accordingly. You could almost read his speech as an advertisement for the stock market, if you believe that the stock market actually protects you against currency debasement and price inflation for basic necessities. And I guess for now western central bankers will get away with this. But of course we are already seeing the direct, real time challenge of the bankers’ cavalier attitude to inflation playing out in the Middle East, as well as in Asia, where there have also been reports of food riots. The concerns you may hear about the ability of Asian central bankers to raise rates on the rest of us, and to effectively take away the punch bowl of loose global credit are not unfounded. It is just that they are premature. For all of the talk about how this global fiat currency regime is novel and has allowed for unheard of amounts of debts to be racked up- those debts are owed to certain entities (like the Chinese) and please don’t be so sure that they are just going to sit back and allow the United States to inflate away those debts. Mr. Bernanke may seem invincible now, but he is not the only central banker in the world, and the consensus that seems to be behind him among those elites may one day fracture. I highly doubt that all elite global banking types are going to just sit by and watch their world burn in a hyperinflationary holocaust. But, then again, no one can predict the future.
Savers, the Stock Market, and Value Investing
If you have spent the last 18 months riding the incredible wave in the S&P or other stock indices-- congratulations. Although I was not there with you, and could hardly bring myself to invest in anything other than gold, silver, and mining stocks over the same 18 months (which wasn’t that bad of an idea I might add), I still want to congratulate you, the S&P index holder. I am a good sport who got it wrong on the direction of the markets. It has been impressive for me to watch this latest round of [insert brand of barbecue fire accelerant here] hit the American equity markets.
The reality of geopolitical shocks linked to inflation, in addition to the concerns of sovereign debt default and the ability of a western banking cartel to encourage a “risk on” trade, should make people think about what kind of value the stock market represents, however. It should also encourage genuine reflection on what the stock market has (and has not) provided to savers in the past. Many Americans are living off the after-glow of a relatively strong dollar in the 90s. It may be hard for Americans to learn how horrible most stock markets have been across time and space because the U.S. stock market has ridden the amazing ride provided by the assent of the United State as a world power from 1800 to 2000. Americans don’t seem to understand that strengthening currencies, like rising stock markets, are actually quite rare when one takes a much longer view, across times and continents. For example, Niall Ferguson and Robert Shiller have published data revealing that the stock markets of most of Europe (even Great Britain) all went basically nowhere from 1870 to 1960. In the case of Germany, German stock market investors not only lost everything in World War II (which seems understandable given the state of the country), but the broader German stock market was also a poor protector against the hyperinflation of 1921-24, as its real value was at least cut in half during the period in question. Moreover, too few investors today expect healthy companies to pay out strong dividends in the 6 to 8 % category- the way they once did. In fact, most stock market investors in the last two centuries expected a larger share of their returns to come from dividends, not capital appreciation. An interesting, perhaps sobering point when one considers that the dividend yield on the S&P 500 is now down to 1.9%.
The free lunch of unconventional investing
But just because stock market indexes are no guarantee of success does not mean that some equities can’t provide better returns than bank deposits or short-term government debt. Being nimble, strategic, in a word- smart is the name of the game. Easier said than done, I understand, but not impossible. Investing in the world brought to you by men like Mervyn King means being realistic, as well. What are the industries that can provide pricing power even in a depression? What are industries that are less dependent upon endless consumer credit? What are the companies that will likely always be able to pay dividends, or pay the interest on their bonds? Are there annuities or other safe investments in other countries with currencies not quite as scary as the U.S. dollar? What can I realistically expect from a financial advisor, and how can I educate myself to know the right question to ask that advisor? I imagine being a financial advisor is not that different from being a doctor—having a proactive, engaged patient plays an important part in providing a more effective cure.
Investing in a world of bailouts means trying to find the Homestake Minings, the Coca Colas, or the International Papers of the present day (all stocks that did from well to outstanding between 1930 and 1935). It means questioning the adage that diversification really is the way to go. Obviously, you don’t want to be sitting in cash, but be very careful about investment advisors who are just basically selling you index funds dressed up as original or unique or exclusive plays. On the other hand, being a saver with an account stuck in a CD or bank deposit at 1% (or less) just won’t cut it, even if we all need liquidity and something to let us sleep well at night. Savers have tough choices ahead, and they should learn to think in different of unconventional ways. So as a saver looking for alternatives, I would also recommend gravitating toward investments that nearly every advisor cautions against, doesn’t pay attention to, or tries to scare you away from with tales of how risky they are. I’m not talking about Munis, stocks, or real estate- I’m talking about precious metals.
Gold and (especially) silver still represent value
Too few people seem to be able to connect the dots that the “debts” created by central planners will alternatively be inflated away or destroyed as this credit bubble deflates. I don’t care what anyone says about a precious metals bubble- only a fraction of the wealth in this country is legitimately held in physical gold or silver. Quite frankly, gold and silver are still a joke to the majority of Americans. A good example of the joke that is precious metals came recently from the ability of one guy with a mere 10 million dollars to bring the price of gold down 20 dollars in a day when his leveraged paper bet blew up. This speculator was allowed to control over 800 million dollars of gold futures with his 10 million dollars! Yes, you read that correctly. And you wonder why all those gold and silver bugs are so angry about the way gold and silver are priced in New York? These markets are either played like a roulette wheel for bored rich people, or they are dumped on by corrupt entities who arrogantly defy the free market. Gold and silver are too small to count anyway, they will tell you.
Gold and silver are “uninsured” by the system, after all. Never mind that deposed Tunisians were rumored to have taken tons of gold out of the country- gold is just for Tunisia and other poor little countries with thoroughly corrupt financial markets and a bought-and-paid-for political class. Not the United States. If Americans have any savings, these savings are “insured.” We have our insured bank deposits, our insured municipal bonds, and a kind of “insured” stock market since Ben Bernanke admitted that he is trying to use the Fed to jawbone the S&P higher. Oh, and lest I forget, Quantitative Easing is intended to insure that US Treasury prices don’t drop. Its just candy cane and lollipops for everyone it seems! DOW 12,000, whippee! Boy I wish I could have this kind of faith that we can all win with investments, that we can all be first, and that I don’t have to worry about mere financial concerns because the government is there to save me.
Given this mindless backdrop, I bet there are some people who run from gold and silver precisely because they are not insured, state-sanctioned investments. In talking with people about my love for gold and silver, I have learned a lot about the group-think around me, and how willing people are to buy the party line fed them about the precious metals “bubble” (never mind that silver has yet to make a nominal high, let alone a real one!) Who wants to go up against the powerful banking cartel? Who wants to assume that the fractional reserve basis of the American banking state might be in danger of ending? Isn’t it true that most people are bought off and are perfectly happy being that way? Is that true of you, dear reader? Perhaps you too feel it a patriotic duty not to embrace precious metals investing? We’ll see how you feel about that when you realize that state-sanctioned investment vehicles might not save you against inflation.
The only possible free lunch in money management is learning how best to play the attempts of western central bankers like Mervyn King to inflate debts away, while understanding that at some point in the not-so-distant future the party will come to an end. Nothing was solved two years ago, and while I am all in favor of stock market profits, oftentimes the stock market disconnects from reality. Governments lie, bankers lie, salespeople lie, sometimes even your counterparty in a trade lies. Gold and silver tell the truth. And these days, truth may be the rarest commodity of all.
