Onebornfree’s Financial Safety Reports- a free report from Financial Safety Educational Services.Examining the psychology behind dangerous investment beliefs+assumptions common to most individuals; that endanger their wealth and long term savings, short term speculations, and their financial safety, security and privacy.
[Financial Safety Services commentary: more accurately economics is a science, however, it is strictly a social science, not a physical science like chemistry or physics, as the Austrian economist Ludwig Von Mises clearly and succinctly explained in his classic "The Ultimate Foundation of Economic Science". I personally feel that for savers, investors and speculators, the most important ramification of this particular realization is that because economics was not, is not and can never be included in the "hard science" category along with physics and chemistry, it can in no way be a reliably predictive "science", as are those "hard sciences". Which means that the social science of economics can in no way accurately, consistently predict the economic future, as many economists, and many "investment advisors" would have you believe it can. This great article by Bill Bonner goes a long way towards explaining, in simple, none-technical terms for you, the realities of this economic "science". Regards, Onebornfree & Financial Safety Services.] FINANCIAL SAFETY SERVICES DISCLAIMER
Bill Bonner "On Monday and Tuesday, we visited our youngest son, Edward, a sophomore at the University of Vermont. His roommate joined us for dinner. “Okay, let me explain it to you,” we said. The roommate was wondering if he should switch his major to economics. “Economics is a phony science. The more you study it, the more you think you know… and the less you really know about how an economy actually functions. “I’ll explain why in just a few sentences. “If you are a real scientist, you start with things you can know… and you can build on them. “Water boils at 212 degrees Fahrenheit at sea level, for example. The molecules heat up… then suddenly change from liquid to gas… and the pot boils. Right? Happens every time. You can count on it. And with this knowledge, you can build a steam engine. “So, the simpleminded economist comes along and says, ‘Hey, an economy is like a pot of water! You heat it up… you get more activity… and GDP grows.’ “The analogy holds up superficially. You heat up the economy by putting some fire under it. If you’re a central banker, you lower interest rates. If you’re a politician, you increase the deficit. “You know there’s a risk of overheating… or causing a bubble. But you think you understand how it works. You think you can predict and control the outcome because you’re a scientist who uses mathematical models, just like a real engineer. Nobody Knows Anything “But the problem is you don’t know anything. You don’t know if an economy really is like water. You don’t know where sea level is. For all you know, you’re high in the Alps. And you don’t know whether the fuel you’re using adds to the fire… or subtracts from it. QE, for example, may help heat up the economy. Or it may not. No one knows for sure. “And get this. All those little molecules, you know – those individuals in the great economic pool? As soon as they catch on to what you’re doing, they will change their behavior. That’s the big difference between water and people. Water does the same thing no matter what you say or what you think. People don’t. “We talk about the economy being like water. Well, try to imagine the contrary. Imagine water as though it was like a real economy. Imagine that the water knew you were going to bring it to a boil. Then instead of turning into vapor at 212 degrees, it might boil at 100 degrees or 170 degrees or 50 degrees in anticipation. “And then, after you’ve brought it to a boil a few times, the water gets sick of being manipulated like this… and it boils off if it even suspects you’re thinking of warming it up.” The kid started to fidget and look away. He was afraid he had run into some cranky old nut job who was going to keep talking all morning. “Well, I guess I’ll stick with engineering.” “Good idea.” Regards, Bill Original article source
After making a comment in the comments section of Jim Fetzer's podcast where he [Fetzer] interviewed Canadian radio host Jason Erb concerning his views/explanations regarding the subject of Austrian Economic theory, a subject I have personally studied for 20 or more years [ I'm a slow learner! :-) ], and whose insights I try to consistently apply with my own Financial Safety Service clientele , Mr Erb asked me to come on his own "Faux Capitalist" radio show to make my points.
My interview [9pm EDT Sept. 15th 2013] with Jason , went well, I believe .
We talked Austrian economic theory, what it is, what it is not [in my opinion], why it can never really be "controlled opposition to benefit the powers that be" etc. etc., plus the usefulness of the central idea of Austrian theory and its broader implications/applications to other areas of an individuals life, for example with regard to financial safety, and also to conspiracy theory and politics in general.
Excerpt: "You're cheap. You're so cheap that your clothes went out of style in the Roosevelt administration. Teddy Roosevelt's administration. Cheap. When someone asks you for three cheers, you only give two.
So when you look at the price of gold and notice that it's nearly 35% off its record high, you're intrigued. Is it cheap enough to buy yet? "
Excerpt: "Consider: Investors who bought gold at its January 1980 peak of $875 an ounce are today still below water in inflation-adjusted terms. They even were showing a loss two years ago when gold was trading for more than $1,900. "
Fig. 2: Gold Price in $US, Daily 1968-2013
The Bald Truth
Of course the bald [yet un-admitted] truth is that neither of them know where the price of gold will be next week, next month, or next year, and neither does anyone else!
I don't care if the person claiming to know the future for gold is a famous investment advisor, an economist [regardless of "school"], a central bank spokesperson , an astrologer, or a government bureaucrat.
None of them have, or can have prescient knowledge of how the sum total of the subjective and changing valuations of literally billions of individuals will effect the value of anything relative to anything else tomorrow, next week, next year, or 10 years from now.
And the situation is no better for stocks, bonds or any other class of investment asset either!
A Scam
The truth is that the whole "prescient investment advisor" profession is a scam.
For fundamental reasons that I am not going to bother to try to explain "for free" in a blog post, the economic future is, and must remain, almost entirely unknown and unknowable
If you believe you have found an advisor who has predicted the future successfully, be warned, more than likely, as soon as you start to follow his/her advice, they will lose their magic touch, whether they claim to be a gold guru, a stock market guru, a bond guru, a "technical analysis guy", a "fundamental analysis guy", a tea-leaf reader, or whatever.
Both of the articles linked to above are "mainstream", and not "gold bug" or "hard money" biased. Of the two, Mr Hulbert probably has a higher credibility within the investment community purely by reason of his investment review newsletter " The Hulbert Financial Digest" which has tracked the performance of over 160 investment newsletters since 1980.
However, as far as I can see, and somewhat ironically, Mr Waggoner of the ultra-mainstream USA Today gives far sounder advice- he at least tells the reader to hold 10% of their long-term portfolio in gold bullion, while Mr Hulbert reveals his complete misunderstanding of why gold bullion is a necessary part of a long term savings plan by advising you to "hedge against inflation" by "Investing in the U.S. Treasury’s inflation-protected bonds, or TIPS,".
A " Goldbug" Speaks
And just to be "fair and balanced", here is a link to an article by a "gold bug" :
Excerpt: "Gold may well go plunging down but will ultimately come back up and go well beyond previous levels. $2000? $4000? $6000?.."
[Hint: this writer, no differently from the other two linked above, and no differently from anyone, anywhere in the world, has no prescient abilities that would enable him to be able to accurately forecast the future price behavior of gold in the general market either! ]
The Bottom Line:
The key to an effective long term financial safety strategy and to investment wisdom is to be found in the acceptance of the following realizations/facts of life:
1] No one class of asset [e.g. precious metals, bonds, cash, stocks, real estate orwhatever] increases in value in every historically recorded economic scenario[ i.e. inflation, deflation, stagnation, good times/general prosperity ], meaning all of them will rapidly decline in relative value under certain specific economic conditions , and all will increase in relative value under certain specific economic conditions. [And even then, sometimes they will fool us all by temporarily increasing in value when according to the existing economic environment, they should be decreasing in value, or by temporarily increasing in value in an economic environment within which, historically, they have always decreased in value :-0 !]
2] No investment advisor, fund manager, economist, bureaucrat, astrologer, central banker, "successful investor" , or anyone else, can reliably and consistently predict future economic events and general conditions.
Fig. 1: Federal Reserve monetary base [M.B.] growth 1959-2013 [Click on image to enlarge]
N.B.This article is in no way to be considered as an endorsement of either the Federal Reserve System [which this year celebrates the 100th. year of its existence] nor of any of its previous or current members . To view the long term [1913-2000] effects of the Federal Reserves existence on the value of the $U.S. , see Fig. 8 at the close of this article: "$US Price Inflation Under The Federal Reserve System [1913-2000].
Article Explanation:
The graphs shown above and below are my attempt to graphically illustrate how much the monetary base, [i.e. the narrowest measure of the Federal Reserve's money supply measures, known a "MB" in financial circles ], has expanded under the various Federal Reserve Board of Governors Chairmen who preceded Mr. Ben Bernanke, who took his chairman position in 2006 , and to try to put into some sort of broad perspective for the interested person, investor or speculator, the visible results of Mr Bernanke's chairmanship to date; by demonstrating just how much the Federal Reserve's monetary policy under Mr Bernanke's leadership has differed from [even] the amazing excesses of all of his predecessors, at least as far as can be construed for the period examined [ from 1959 through 2013].
As you will see, when examined on an individual basis, almost all of the previous chairmen examined [1959-2006] have had exceedingly unsteady hands on the "steering wheel" called the monetary base.
And yet now, every one of the previous 5 holders of Mr Bernanke's current position that span the period 1959-2006 pale in comparison when viewed within the "big picture" [see Fig. 1 above], and actually appear downright "conservative" by comparison to Mr Bernanke. Outside of Mr Alan Greenspan, not one of them comes close to replicating what has to date occurred under Mr Bernake's chairmanship, especially since the 3rd. quarter of 2008.
Investment/Speculation Implications? : The article closes with a graph depicting the massive loss of purchasing power of the $U.S. from 1913 [when the Federal Reserve came into existence], through the year 2000, and closes with a few observations which may or may not be of interest to the investor or speculator.
Explanation: "Monetary Base" :
The monetary base [MB] is the narrowest measure of the Federal Reserve's monetary measures. The next narrowest is called "M1", and the next narrowest is "M2". The broadest measure of all is called "MZM". The Federal Reserves monetary measures, as well as a lot more financial data, are regularly published and updated here.
For more information on the various definitions of the Federal Reserves money supply measures, please see here.
Explanation: Logarithmic [Log] scale [also called a "Ratio Scale"] .
All of my graphs for this article use what is called a "Logarithmic scale" for the "Y" [or vertical] scale, simply because a logarithmic scale makes it easy to show percentage increases/decreases on the "Y" [vertical] axis, between any two points in time along the horizontal "X" axis of the graph. More information on logarithmic, or ratio scales, can be viewed here.
Explanation: "Monetary Inflation" Is Not "Price Inflation"!:
The title of this article is: "Ben Bernanke, the Great[est] Inflator?" and concerns monetary inflation, not price inflation.
It attempts to graphically illustrate how under Mr Bernanke, the base monetary supply [M.B.] has been to date inflated [i.e. increased] in excess of 275%, a percentage increase for the monetary base that exceeds that of any of his predecessors for the period charted [1959-2013].
By way of direct comparison with Mr Bernanke's tenure, approximate resultant percentage increase figures in the monetary base for each of the 5 Fed chairman [1959-2006] during their own terms are also given below.
Please understand, monetary inflation is not the same phenomenon as price inflation [i.e. a general, steady accelerating increase in the price of most consumer goods, due to a steady to accelerating decrease in the real-world value of each unit of a currency ].
The Complete Time Line History of Federal Reserve Board of Governors Chairmen 1913-2013:
As I have already mentioned,the F.R.E.D published monetary base figures I have used to construct my graphs start in Jan. 1st. 1959, that is, a little under half way through the chairmanship of the 9th chairman, Mr McChesney Martin Jr.
For a complete list that includes the previous 8 who preceeded Mr McChesney Martin Jr. [i.e. from 1913-1951] click here
Fed Chairman 9: William McChesney Martin, Jr. April 2, 1951 –January 31, 1970 :
Mr McChesney Martin has to date been the longest "reigning" chairman of the Federal Reserve Board - his tenure spanned an unprecedented 19 years.
Under this tenure, according to Federal Reserve [F.R.E.D.] on-line records starting 01/01/59, through 01/01/70 , the monetary base steadily increased from around $50 billion to a little over $75 billion- a 50% increase over the course of the last 11 years of Mr W.M. Martin Jr's chairmanship:
Fig. 2 The Monetary Base under W.M. Martin Jr 1959-70 [Click on image to enlarge]
Fed. Chairman 10 Arthur F. Burns February 1, 1970 –January 31,1978:
The monetary base goes from around $75 billion at the start of his term to around $140 billion at its close- a [albeit comparatively smooth -compared to other Fed chairman 1959-2013], roughly 85% increase in the monetary base - which is a roughly 35% greater increase in the monetary base in 8 years than W.M. Martin Jr managed in his own last 11 years. [Way to go, Arthur!] :
Fig.3 The Monetary Base under Arthur F. Burns 1970-1978 [Click on image to enlarge]
Fed Chairman 11: G. William Miller March 8, 1978 –August 6, 1979 :
The short, 16 month only term of the 11th chairman of the Federal Reserve, G. William Miller [March 8, 1978 –August 6, 1979], resulted in a more than 15% increase in the monetary base over 16 months, roughly 10% per year. This may not seem like a lot , but keep in mind, if compounded at an approximate 10% per year rate over a typical 8 year chairperson time period , that 10% annual increase compounded would have resulted in a roughly 110% increase in the monetary base [ in other words Mr Miller's actions were on track to exceed the excesses of his immediate predecessor, A.F. Burns] :
Fig.4 The Monetary Base under G. William Miller 1978-79 [Click on image to enlarge]
Fed Chairman 12: Paul A. Volcker August 6, 1979 – August 11, 1987 :
From 1979 to 1987, under Mr Volker's chairmanship, the monetary base went from around $145 billion in 1979 to over $250 billion by 1987, an approximately 70% increase in the monetary base over 8 years:
Fig.5 The Monetary Base under Paul Volker 1979-1987 [Click on image to enlarge]
Fed Chairman 13 . Alan Greenspan August 11, 1987 –January 31, 2006:
Under Mr Greenspan's term, the monetary base can be seen to have gone from around $250 billion in 1987 to $800 billion in 2006, a roughly 220% increase in the monetary base over a 8 year period.[ A new record for monetary base expansion.]:
Fig.6 The Monetary Base under Alan Greenspan 1987-2006 [Click on image to enlarge]
Fed Chairman14 : Ben Bernanke February 1, 2006 –
Not to be outdone by his immediate predecessor Alan Greenspan [who himself had overseen an approximately 220% increase in the monetary base over 8 years], under the leadership of Mr Bernanke, the monetary base has gone from $800 billion to more than $3000 billion [i.e.$ 3 trillion] , an approximately 275% increase in the monetary base over a 7 year period. A roughly 50% increase over what Mr Greenspan "achieved". What's not to like ? :-(
Fig.7 The Monetary Base under Ben Bernanke 2006-13 [Click on image to enlarge]
N.B. One thing to keep in mind about the above graph [fig. 7], is that a logarithmic scale tends to flatten out/ make less obvious changes in the vertical [y ]axis along the time line of a graph, and yet here, despite the logarithmic scale, we can still see a dramatic almost vertical increase in the monetary base that occurred in the 3rd quarter of 2008, which should drive home to the observer just how dramatic, substantial, and fast this increase occurred. The monetary base in fact doubles [i.e. 100% increase] in the last 6 months of 2008.
$US Price Inflation Under The Federal Reserve System [1913-2000]:
Fig.8 [Click on image to enlarge]
Investment and Speculation Implications of Bernanke's Monetary Inflation Policies - The Economic/Investment Future Remains Uncertain!
Given my own biases and background education in economics and investment philosophy [i.e. a25+ year "hard money" and Austrian economic theory background and [self] education], it would seem natural for me to predict that massive price inflation in the US must surely happen within the next 5 or so years, as indeed many of the investment advisors I have followed for the past 25+ years are now doing.
In The Real World....
However, despite the temptation to follow their lead, I will instead tell you that despite what is revealed in this article, the real-world reality is that the economic future, as always, remains entirely uncertain and mostly unpredictable, whether or not it is an "Austrian" economist [or any other type of economist], a "hard money" investment "guru", a technical or fundamental analyst/stock market "guru", Warren Buffet, your financial planner, the Board of Governors at the Federal Reserve, or "Uncle Tom Cobley and all" doing the predicting.
In fact, as far as Austrian economic theory is concerned, I believe that all "Austrian"/"hard money" economists and investment advisors who are on record as predicting massive inflation [or whatever] in the near future because of what has occurred under Mr. Bernanke's term, have actually misunderstood a key component of Austrian economic theory - but I am not going to address that subject here, nor anywhere else, for free [hint, hint :-) ] ; suffice to say that because of this overlooked key component, the financial/economic future must always remain largely unknowable.
And the above should in no way be construed as me saying that the Federal Reserve is necessary, or is"doing the right thing under the circumstances", or that a stock market boom is now on the cards, or a bond market collapse, or anything else. I repeat, I have no idea what the future may bring [inflation, deflation, fake "good times","stagflation", or whatever], and the plain vanilla truth is that neither does anyone else [despite whatever successful previous prediction record someone might claim to have.]
For more on the implications for investors and speculators and how to profit/protect your precious savings from both unforeseen economic events, and from all investment prophets, advisors, gurus, economic crystal-ball gazers etc. etc., regardless of what the future might hold, please read the Financial Safety Services disclaimer.
