February 28, 2013

"When your outgo exceeds your income, your upkeep becomes your downfall"

I came across a video titled “Epic debate featuring faceoff  between Peter Schiff and John Mauldin”, which can be viewed here:

The video is of the Cambridge House International panel discussion on “Creating and Preserving Wealth”, moderated by Al Korelin.

The video is roughly half-an-hour in length, and I definitely recommend watching it. If you don’t have thirty minutes to watch this video, perhaps this review will be sufficient for you.

The discussion features economists Grant Williams, John Mauldin, Peter Schiff, and Rick Rule.

The moderator, Al Korelin, begins by referring to the February 18, 2013 edition of Barron’s magazine, which is, for comic relief, pictured here:

Then he begins the discussion by asking Grant Williams “…creating and preserving wealth; what do you have to say about it?”

In response to this vague question, Williams begins by stating that now is a very important time to be preserving wealth, and that we are in “an unstable place”. He noted that governments are going broke all over the world, and they are doing everything they can to stay afloat. He said that the issue lies in the fact that “Governments don’t produce anything; they are merely a confiscatory mechanism to take money away from people who produce it”.

If a business is running a deficit, and has no additional means by which to cut expenses, they must increase their revenues, in order to save themselves from going broke.

If a government is running a deficit, and will not reduce expenditures, then they must also increase their revenues; but, a government cannot reduce its deficit by increasing production to generate revenue (remember, “Governments don’t produce anything”), as a business would have to, to avoid going out of business. But a government will not go out of business until the people no longer have any money to feed the bottomless pit. Margaret Thatcher said “The problem with socialism is that you eventually run out of other people's money.”[1]

While we are not now a socialist nation, it should be recognized we could easily become one if the bottomless pit opens up much wider…

Grant Williams also said that he believes the situation that we have been in since 2008 is not going to get any better, and that people should be investing in “real assets, that cannot be printed by governments”, such as gold, real estate, farms, and things that produce a cash flow.

After Williams, Peter Schiff was the next speaker. He began by establishing the importance of understanding what real wealth is. He said “It’s important for people to really understand - paper money isn’t wealth. It can represent a claim on wealth, but I think right now those claims are very tenuous, especially, you know, when you have a currency war that’s going on.”

He then brought up a sad truth. He said that “The funny thing about a currency war is it’s different from a conventional war, in that the object is to kill yourself.” As the value of the dollar is slipping away, the government is fighting the tide by simply printing more money. But in the end, this is a suicide mission, as Schiff pointed out.

But John Mauldin, one of the other economists on the panel disagrees with this view, and things start to heat up between him and Peter Schiff. Mauldin said that within six months to a year that we would know more about the direction of the dollar, appearing to be on the fence, but then within a minute, he said that because of the vast amount of oil reserves that we are going to start utilizing in the US, that by 2020, we will be shipping oil out, not in, and that we would have a positive trade surplus within “ten, twelve years”.

Then Mauldin continued making his case by declaring “When we stop shipping dollars out of the world and the world is still a dollar economy, and it will be, the value of the dollar is going to become remarkably strong, and the Fed could print trillions of dollars, and the value of the dollar would still be strong…the Fed will be able to print more money than seems rational, and we’ll actually get away with it, which I’m not terribly happy with, but we could see a very strong dollar simply because of the really lucky thing that we’ve got lots of oil.”

If you accept that the definition of inflation is “an increase in the money supply”, then you will find it very hard to understand how huge increases in the money supply could ever result in a “Very strong dollar”. But it seems Mauldin might think the strength of money has nothing to do with the size of the money supply, and that the strength of the dollar in the future will be an inevitable result of all the oil we have, regardless of monetary policies. (This doesn’t make your case for printing lots of money very strong).

Next, Mauldin goes on to say “The equations, the way they work, says [sic] that GDP – we’re getting into wonky stuff – but GDP is equal to consumption, plus savings and investment, plus government spending, plus net exports. When you reduce one of those numbers, you’re going to reduce the GDP.”

Quickly, Peter Schiff replies “But if you reduce the government, the other part can come up and I’d rather have the business investing and spending, than the government just flushing it down the toilet”

Once the excitement died down a little, Rick Rule took his turn to speak and joked that he would actually answer the question regarding “Creating and Preserving Wealth”, rather than use the question as a platform from which to his views about global macro.

Rule did not have much time to speak, but emphasized that “you have to create more wealth than you spend; it’s pretty simple.” He then shared a poem that he said his father taught him: “When your outgo exceeds your income, your upkeep becomes your downfall”. He then went on to speculate that “60-70 percent of the [securities?] market is heading towards its intrinsic value: zero.” Indicating that there are definitely bubbles that need to burst before the economy can ever truly recover. The other part that I found most important of what Rule had to say was “You have to be willing to say no to asymmetric propositions that are not in your favor”, and I think that this is a critical rule, especially to anyone who is alive, and is the reason that free markets work.

Before this post takes longer to read than it would to watch the video, I would like to conclude with a couple of thoughts and observations.

First of all, Peter Schiff believes we are in a currency war, and that the goal of a currency war is to kill yourself. That certainly does not imply an optimistic outlook for the future of the US dollar, for Schiff also said that we were going to win the currency war, “which means if you have dollars, if you earn dollars, you lose.” Regardless of if Schiff is right in this case, the recommendation that all of the panel members made to “invest in real assets that cannot be created or printed by governments” is a surefire way to ensure your wealth (assuming the bottomless pit doesn't try to swallow your real assets too). Clearly individuals should recognize what wealth really is if they want to avoid getting sucked into the bottomless pit along with their paper dollars.

Secondly, it appears that there is a lot of confusion about what the real ‘state of the economy’ is. It seems that the Austrians are quite worried about the prosperity of the future, while most other economists like John Mauldin, and apparently much of the public seem to believe that the power of the printing press can overcome any foe that comes its way (or we can make all sorts of claims about what our monetary policy should be, but believe it to be inconsequential because we have oil reserves). It seems to me that reasonable economists believe that sound money, savings and investment must be the foundation of a strong economy, but other economists seem to be born out of a system of belief that says you can get something for nothing!

Fiat lux = Let there be light (and there was, and it was good)
Fiat money = Let there be money (and there was, but without value since 1972™).

In my opinion, if you believe that our economy can keep growing while government debt continues to grow (while having to take away from the growth of the private sector since it comes from nowhere else), and that if this can somehow be magically facilitated via the use of a printing press,then you are either living in denial, or Candyland!

You will never be able to get something for nothing. 

[1] http://www.goodreads.com/quotes/138248-the-problem-with-socialism-is-that-you-eventually-run-out

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