Inflation Handbook

TABLE OF CONTENTS
The Inflation Survival Handbook ................................................................................................................. 2 Reading Money Mischief ............................................................................................................................ 4 Using This Report as a Guide to Money Mischief ......................................................................................... 5 Understanding Money and Its Uses: Currency Basics ................................................................................... 5 Why Uncle Sam Doesnt Want You to Know Inflation Exists.......................................................................... 8 How the Government Enables Bad Banking .............................................................................................. 10 Wall Street Is Just an Address in Manhattan .............................................................................................. 11 Americas Dilemma: Inflation or Die .......................................................................................................... 12 A Difficult, But Effective, Way Out ............................................................................................................. 13 A Blueprint for Your Salvation ................................................................................................................... 13 Safe Inflation Play #1: Buy Great Dividend Stocks ...................................................................................... 14 Safe Inflation Play #2: Be a Contrarian at Heart ......................................................................................... 15 Safe Inflation Play #3: Acquire Commodities The Anti-Dollar ................................................................ 16 Safe Inflation Play #4: Ride the Forex Wave ............................................................................................... 19 Safe Inflation Play #5: Protect Your Tax-Deferred Retirement Accounts....................................................... 22 Safe Inflation Play #6: Manage Your Real Estate Holdings........................................................................... 23 Putting Friedmans Genius to Work ........................................................................................................... 24
The Inflation Survival Handbook
Hungarian immigrants who ran a dry goods shop. A gifted scholar, young Milton finished high school at Historians have long debated the concept of the 16 and decided to attend Rutgers University, where great man in history. he would study mathematics. His original goal was to Popularized in the 19th century, it goes something become an actuary, essentially, to work in insurance. like this: Albert Einstein, William Shakespeare, He got his degree at 20. Martin Luther history turns on the actions Then, history intervened. and ideas of a few who reach out and shake the The Great Depression began, and Friedman foundations of order, who advocate deep changes in became convinced that economics was a higher thought, or introduce powerful ideas. calling. In 1933, he went to Columbia University Of course, there is a price for being in the on a fellowship, where he met Rose the woman vanguard: ridicule, attack, and shame. Most people who would become his wife and lifelong intellectual invest their careers in the status quo and then partner, defend that collaborator, investment to Dow Jones Stocks 1928-1935 and cothe hilt, even 450 author. in the face 400 The stock of facts and 350 market evidence to 300 crash of a the contrary. 250 few years Yet, discovery 200 before, the wins out, 150 infamous eventually, 100 Crash of and progress 50 29, had results. 0 metastasized Milton 1928 1929 1930 1931 1392 1933 1394 into a Friedman SOURCE: NYSE national, would blush When the stock market crash of 1929 set in, things were bad enough. But what followed was the Great then global, to hear Depresssion. Stocks briefly recovered after Black Tuesday, then a long decline set in. The Dow did not disaster. recover until well after World War II. himself Incomes compared fell in half, farmers couldnt charge enough to plant, with the great names in literature, science, and trade nearly ceased, and factories halted production. religion. Unemployment in the United States rose to 25 Yet he was no less passionate about a simple idea percent; things were even worse elsewhere in the that, on the face of it, now seems logical to most of world. The poor suffered the most. us: If you print too much money, it loses value. It was the beginning of the toughest decade in Thats common sense, right? modern times, one that left deep scars across the Yet, when Friedman was a young man, the entire national psyche, some of which remain today. array of economic thought revolved around a Out of work, like most young people, Friedman completely opposing view, one that politicians and chanced into a job in Washington, working on the economists cling to even today for comfort in tough problems facing the country. It was a formative times. experience, one that would influence his later work The battle for common sense economics is deeply on monetary policy. He earned a masters degree reflected the life and work of Milton Friedman. from the University of Chicago in 1943, completing He was born July 31, 1912, in Brooklyn, N.Y. At his Ph.D. at Columbia in 1946. the time, New Mexico and Arizona had just become In a series of highly regarded economics works, states. The income tax and the IRS did not exist. Friedman went on to create what would become There was no central bank in the United States. the cornerstone of modern free-market thought. For World War I was still five years away. his work, he received the John Bates Clark Medal His parents were typical new Americans,
2 The Inflation Survival Handbook
(1951), awarded to economists who make significant contributions to the field before the age of 40. The medal is widely regarded as a precursor to the Nobel Prize in Economics, which Friedman won in 1976. Summed up in a paragraph, Friedmans career can seem like a preordained waltz toward recognition and success. But he toiled virtually unknown for decades in defense of an idea that has been regarded with suspicion for many years and still is, even today. In short, that idea is:
Government Distorts Economic Activity And Should Be Minimized
Imagine Friedman in the context of his times. The New Deal is in full force. Millions of young men wander the country, riding freight trains, picking fruit, standing in bread lines. It appears the country has been vanquished, over and done. Like no other time in the republic, Americans have given up on imagining a future. Before the Depression, free-market thought had been common. Global trade once was vibrant. In a flash, it all seemed to end. The economic destruction and chaos of the darkest years of the Depression thus created an opening. Leaders in Washington needed a big idea, and into a perilous intellectual vacuum stepped a British economist whose name today is synonymous with big government, John Maynard Keynes. Keynesianism soon became the central economic philosophy of the U.S. government under Franklin Roosevelt and, in one form or another, nearly every U.S. administration since. The idea is simple enough: Its the governments mission to soften the blow of economic cycles. If demand falls, government has to create it by taxing people and spending the money. In the process, government must pick economic winners and losers. Friedman was not a natural firebrand. If you watch his television specials on economics, produced in the late 1970s and still available on the Internet, he is nearly a caricature of an economist: bespectacled, professorial, soft-spoken, nerdy. In the dark, early days of the Depression, Friedman and his future wife understood the depth of the humiliation people felt. Initially, they supported the mass make-work programs of the New Deal. Yet Friedmans first major publication, co-
authored in 1945 with Wharton Universitys Simon Kuznets, took the then-surprising position (at least to economists) that government licensing of professions, such as medicine, law, and architecture, raises the cost of those services by limiting the number of practitioners. That book served as the basis for a later work, A Theory of the Consumption Function (1957). It was in this study, published well after the Depression had ended, that Friedman sought at last to dismantle Keynesian orthodoxy. The proponents of the Keynesian view believed that, if incomes fall suddenly, as happens in recessions, people immediately spend less. The sharp decline in demand, they reasoned, spells danger to the economy, because it tends to quickly self-reinforce. Less demand (spending), less activity, and rising unemployment are followed by even less demand a downward spiral begins. The answer, for the Keynesians, was to plug the demand hole with tax dollars, and fast. Tax and spend in order to stimulate an economy on the ropes. Friedmans insight, backed by research, was very different. He found that people, in fact, continue to spend, even in recessions, as long as they think that their ability to earn is still intact. Consumption, he argued, really hinges on the notion of permanent income what people believe they might be able to earn over several years rather than transitory income, their current paycheck. Through a long career that followed, in both scientific and popular publications, Freidman made the case for a number of radical ideas, among them ending the draft in favor of an all-volunteer Army and freely floating currency exchange rates (both of which have happened), education vouchers (partly in force, thanks to the charter school movement), and a negative income tax, a version of the flat-tax idea that publisher Steve Forbes has championed for years. Friedmans most famous public policy work, however, related to research on the causes and solutions to the problem of the Great Depression, an event he experienced directly as a young man. What he learned while at work in Washington and through his later research was that government, and the Federal Reserve, are a great source of trouble for the economy.
3
In fact, he felt strongly that the Great Depression itself could have been largely avoided, had Washington and specifically the Federal Reserve simply stayed out of it. He wrote in Two Lucky People, his memoir of life with Rose: The Fed was largely responsible for converting what might have been a garden-variety recession, although perhaps a fairly severe one, into a major catastrophe. Instead of using its powers to offset the depression, it presided over a decline in the quantity of money by one-third from 1929 to 1933 . . . Far from the depression being a failure of the free-enterprise system, it was a tragic failure of government. (Page 233) It seems backward, but over the short term, Friedman believed, an increased supply of money could create jobs and makes an economy grow. Likewise, if money is cut off unnecessarily, it causes an economy to shrink. That was the basis of his early, sharp critique of the Fed: The central bank had kicked the economy while it was down by rapidly decreasing available money. Deflation was inordinately destructive. However, Friedman also understood that, over the long term, an outsized increase in the supply of money causes prices to rise (a sweet illusion of growth) yet has little impact on the real economy. The long-run problem, then, is inflation, which he tackles in Money Mischief. Friedmans answer to inflation was monetarism, strictly controlling the amount of money in line with the actual demand for it resulting from real economic growth. A carefully controlled money supply would, in effect, end inflation forever, he reasoned. It is this contribution, and its relevance to the events of the recent serious U.S. recession, that the rest of this report will cover. Friedman later became a household name, writing with Rose the nonfiction bestseller Free to Choose (1980) to accompany a series he wrote for public television to promote free enterprise. He received the Nobel Prize for work on monetarism and free markets and was an adviser to President Ronald Reagan. Upon retiring from the University of Chicago in 1977, he served as a senior research fellow at Stanfords Hoover Institution.
4
He died on Nov. 16, 2006, in San Francisco, Calif., at the age of 94; Rose died three years later. They are survived by two children, Janet and David.
Reading Money Mischief
You are lucky to be reading Money Mischief now. It is an important work that will open intellectual doors in your life and help you think clearly about the mixed messages coming from the media and Washington about vital issues your family, your life, and your wealth. It also helps that you can read the book along with this report, because it is, after all, an economics treatise. Friedman was very interested in reaching out to ordinary Americans on these subjects, and he wrote several books (notably Free to Choose) specifically to convince non-experts of his views on the free market. However, Money Mischief is different, a mix of monetary history, philosophy, case studies, anecdotes, and yes, a few charts and graphs. What would an economics book be without them? Luckily, there is virtually no math to endure in these pages and, of course, you will not be quizzed at the end. Read and enjoy it at your own speed. It is not a book to read from start to finish or in one sitting. Yet, you can read it, and we encourage you to stick with it for the full reward of Friedmans important message. The initial chapters, The Island of Stone Money and The Mystery of Money, are worth a good, slow read. You might have to read some paragraphs twice to absorb the ideas fully. Dont worry if things dont click right away. This is heavy stuff, even if the writing in these passages is fairly brisk and entertaining. Some of your fundamental assumptions about how the world works will be challenged, and thats a good thing. Friedman means to wake you up from a self-imposed sleep. The few chapters covering the history of gold and silver in monetary politics are probably for history buffs. If you already know the players and the times, you will find these pages very rewarding. Holders and investors in gold and silver, too, will find them helpful in understanding how these assets have fared in history and what role politics can play in their value over time.
Starting with Chapter 8, The Cause and Cure of Inflation, we return to the subject at hand for all investors today. We highly recommend a careful read of this chapter and of Chapter 10, Monetary Policy in a Fiat World. The intervening chapter on the experiences of Chile and Israel will serve students of the emerging markets vis--vis currency and inflation, but the interested reader can apply those case studies to the larger subject if they wish.
Using this Report as a Guide to Money Mischief
In the next few pages, we will introduce some of the context you need as an investor to profit from reading the book. We do not encourage you to skip the book. What follows is not a version of the book or the Cliffs Notes to help you avoid reading. However, even savvy investors can find daunting a plunge into the unfriendly world of economics. We hope that, by reading the rest of this report, you will be able to quickly process some of the big ideas Friedman has to offer and turn them immediately to your own advantage. The report is written, purposely, in a commonsense style and aims to sketch the outline of Friedmans message in Money Mischief. Once you grasp these introductory concepts, you should have the tools you need to digest the impact of Friedmans important work quickly and fully. Good reading! Note: Page numbers in this text following direct quotes from Friedman are as they appear in the first edition of Money Mischief, published in 1994 (Harcourt Brace & Co.).
Understanding Money and Its Uses: Currency Basics
What is money? It was a question that always tickled Friedman, but its a fairly common insight. If you have ever traveled abroad, you know the giggles that foreign paper money can incite among youngsters after you get home. Who are the strange people on these bills? Why are the bills red or purple, and not green? And the numbers make no sense . . . 10,000 on a single bill?
This must be a lot of money, they conclude. Of course, kids have no idea of past inflation in some countries, nor exchange rates. They do not realize that the 10,000 denomination note is usually worth much less than one U.S. dollar. Governments, including our own, combat the essential silliness of bank notes by printing them on high-quality paper; by using serious images of sober, solid-looking buildings with Greek columns and the dour faces of a previous centurys political heroes. They festoon bills with signatures of responsible current authority figures, dates, and serial numbers. Try this: Hold a few U.S. coins in your hand a dime, a nickel, a quarter and you automatically understand that what you have is change for a single dollar. Hold foreign coins and the reverse happens: The metal in your fingers feels more real to you than the strange and colorful foreign bills in your pocket. Friedman innately understood this effect, and he explains it in detail in Money Mischief. Several chapters relate to the fascinating early history of American money, including the fractious struggle to settle value based on a single metal, then the controversial conversion to paper bills. Interestingly, for many years, U.S. dollars could be exchanged for either silver or gold at a rigid, weight-based ratio. The government was young, and few Americans in the far-flung Western territories accepted the notion of a national currency issued by some East Coast bank. Whether the country eventually backed its dollar with a gold-only or silver-only standard (gold won the race) was determined more by politicians bent on pleasing competing mining interests than on the needs of the U.S. Mint. Political careers for decades rose and fell on the issue, a quaint notion today, when neither metal is of concern to us as dollar holders. Thats because the United States hasnt backed its paper money with gold reserves since President Richard Nixon took America off the gold standard in 1972. We hold many tons of it in our vaults, yes, but its there as just another exchange tool, like the euros or yen we own. As Friedman points out, metal is not magic. Anything could be money. In the book, he relates the tale of the Yap Islanders, a people in Micronesia in the Pacific who once used
5
as their medium of exchange enormous limestone wheels mined on another island 400 miles away. Called fei, the stones ranged from a foot to 12 feet in diameter, with holes in the center to make it easier to use a pole to lift and move them. They were, of course, impractical and utterly useless, but because of the effort it took to mine, create, and move them, the stones truly represented wealth to the islanders. Regarding gold as money, Friedman writes: The Yap Islanders regarded as a concrete manifestation of their wealth stones quarried and shaped on a distant island and brought to their own. For a century or more, the civilized world regarded as a concrete manifestation of its wealth a metal (gold) dug from deep in the ground, refined at great labor, transported great distances, and buried again in elaborate vaults deep in the ground. Is the one practice really more rational than the other? (Page 7) A fixed exchange rate based on gold metal, common in the past century, has given way to a broad consensus around the world to rely on a floating exchange rate. In practice, this means that dollars (or yen, or euros, and so forth) are worth only what the worlds foreign exchange traders vote they are worth every second of the day by choosing to hold or to circulate your paper money. This gave rise to the multitrillion-dollar global foreign exchange (forex) market, which is discussed in detail later in this report. The salient point for the moment is that, although the worlds central banks do buy and sell gold and keep some of it in vaults deep underground, for them gold is really just another means to pay for additional currencies they might need. Gold is not the basis of any moneys value, at least not anymore, although many countries hold large amounts of it just the same. The United States keeps enough gold to equal nearly 74 percent of its foreign exchange reserves, for instance. As Friedman points out, there used to be the words will promise to pay on the back of the U.S. fivedollar note. Did that mean that the government would give you something tangible for the paper? No, it meant that if you had gone to the Federal Reserve bank and asked the teller to redeem the promise, the teller would have given you five identical pieces of paper having the number 1 in place of the number 5. (Page 9)
6
Gold reserves aside, its not as if even the money we have is money. Of the trillions of dollars that exist, only about $878 billion exists as cash you could hold in your hand, according to the Federal Reserve. Thats just the bottom of an inverted pyramid known as the U.S. money supply. Add to the physical currency the massive numbers on spreadsheets in banks and stored electronically in bank checking accounts. Then add savings accounts, money market funds, and consumer-owned certificates of deposit. The Fed no longer counts foreign-held dollars and very large corporate time deposits, arguing that they dont affect the U.S. economy, to the protest of some economists and elected officials. But even if you draw the line at the previous level, known as the M2 money supply, youre talking about $8.8 trillion in existence as of March 2011, about 10 times over the number of paper dollars you might recognize as cash money you could spend. Of course, the Federal Reserve recently created a large portion of this enormous amount in that entirely electronic form. By clicking a mouse at the U.S. central bank, the Federal Reserve has conjured up enormous sums in order to turn around and immediately purchase U.S. Treasury bonds. At last count, the Feds total assets had hit $2.55 trillion, of which a staggering $1.24 trillion was just Treasurys, followed by nearly $950 billion in mortgage-backed securities and a comparatively paltry $143 billion in federal agency debt. By creating the money electronically and buying up Treasurys, the Fed has kept interest rates artificially low in hopes of stimulating the economy by making money cheap for borrowers. Trillions more are sitting in special Federal Reserve accounts, where banks could easily take the money out and lend it. They dont only because the Fed pays them a meager interest rate, and because they have no one better to lend it out to, at least not yet. As Friedman jokingly notes in the introduction to Money Mischief, Who knows what will be the future incarnations of money? Computer bytes? If only he were alive today to see what technology and the Fed have wrought! Dont, however, confuse technology with intelligence. Decisions such as increasing and decreasing the money supply are made by people, not
review of the history of inflation sets off alarm bells. supercomputers in a bunker somewhere. And people There have been dozens of hyperinflationary make mistakes. As history shows us, central bankers episodes in history. Dynastic China pioneered seem to make the same mistakes over and over again. government-backed, or fiat, currency and suffered As Friedman writes: inflationary bouts over the centuries as its monarchs Non-economists find it almost impossible to used paper to finance wars. believe that 12 people out of 19 none of whom In the worst of the modern cases, prices doubled in have been elected by the public sitting around a days, even hours. In the early 1920s, Germany issued table in a magnificent Greek temple on Constitution marks in denominations as high as 50,000, then had Avenue in Washington have the awesome legal power to print a 100-trillion mark note only a year later. to double or to halve the total quantity of money in During Brazils years of hyperinflation, its unit of the country. (Page 18) currency was worth just one-trillionth of a U.S. cent. U.S. Federal Reserve Chairman Ben Bernanke Greece, South cites Friedman Korea, Israel, himself when Historys Worst Hyperinflations Mexico, Peru, making the case 250% Taiwan, Poland for the Feds it just keeps outsized debt 200% happening. purchases. In Most recently, a 2004 speech, 150% the Internet when Bernanke has played host was still a 100% to images of Federal Reserve Zimbabwean governor, he 50% bills in the liberally quoted 0% laughably high Friedman. 1946 2008 1994 1923 1944 1949 denomination Speaking at of 100 trillion. Washington and Hungary Zimbabwe Yugoslavia Germany Greece Taiwan (ROC) In January 2009, Lee University SOURCE: Cato Journal hyperinflation in Lexington, How bad could it get? The worst hyperinflations in history led to inflation that could be won, and the Va., Bernanke counted in triple digits per day. While people often cite Germany and Zimbabwe, the worst ever was in Hungary, were prices rose by 207 percent daily. Zimbabwean reached a simple government conclusion, gave up on printing money and told people to use based on Friedmans early work: Creating money U.S. dollars and other foreign money instead, in to prop up the economy might seem crazy, but our recognition of an already common practice. only real experience with the matter showed us It would be humorous, if not for the millions of conclusively that doing nothing was far, far worse. poor people in a basket-case of a nation who survive Perhaps the most important lesson of all is that on international food aid, or the thousands who die price stability should be a key objective of monetary from preventable diseases as their government breaks policy. By allowing persistent declines in the money under the economic strain. supply and in the price level, the Federal Reserve Again, Friedman saw it all coming, and he sums of the late 1920s and 1930s greatly destabilized the it up so clearly in a few simple statements: Having U.S. economy and, through the workings of the gold a widely accepted medium of exchange is of critical standard, the economies of many other nations as importance for any functioning complex society. No well, Bernanke said. money can serve that function unless its nominal Perhaps Bernankes heart is in the right place. quantity is limited. (Page 42) Who wants to relive the Great Depression, after all? Its important here to understand just two easy As a student of the period and a devotee of economics terms: nominal and real. Friedman, one would think that the Fed chairman Nominal means numbers, as in 1, 2, 3 . . . and would have things well in hand. Yet even a casual
Daily Inflation Rate
real means value, that is: How many units of money will I need to buy something I want. Friedmans insight was that increasing the (nominal) number of bills that exist did not in any way increase their (real) value over time. In fact, the opposite is more likely. The reality is, fiat currencies always fail. And they fail for simple reasons. Governments overspend recklessly and push off the day of political reckoning by papering over their profligacy. They issue debts upon debts. Then they print additional money to manage the excess. And they hope and pray that hyperinflation can be kept at bay. For reasons we detail in the next section, it almost never works out. Inflation inevitably is swifter and more dangerous than even a careful government can manage. Like a rising river, the surface seems calm and navigable. But just around the corner, terrifying whitewater rages. As Friedman says, the conundrum of money is that theres no reason to believe in it at all just faith. The short answer and the right answer is that private persons accept these pieces of paper because they are confident that others will. The pieces of green paper have value because everybody thinks they have value . . . That fiction is no fragile thing. On the contrary, the value of having a common money is so great that people will stick to the fiction even under extreme provocation. (Page 10) Hyperinflation is nothing less than this extreme provocation at work.
they spend our money, ostensibly on goods and services we need and could not be reasonably raised in the private marketplace. Defense, for instance. Now, however, the government has ended up in nearly every corner of our lives, dominating entire endeavors and crowding out private enterprise. As Friedman proved repeatedly over his career, there really is no reason to believe that a private postal service or a private education sector could not give us better, cheaper services. But we wont find out as long as a publicly financed behemoth runs the show. Its nearly impossible to displace the government once it takes over a sector. The competition is lopsidedly unfair from the start.
Washington Is Lying To Us. Badly.
Why Uncle Sam Doesnt Want You to Know Inflation Exists
One of the fundamental rules of a healthy marriage is honesty. Its for good reason that the traditional marriage vows include these stipulations: for better or for worse, for richer, for poorer, in sickness, and in health. We have learned from long experience that the worst kinds of pressures, the kinds that can destroy an otherwise loving, stable relationship, can spring from out-of-control money troubles. We know that hiding money troubles from our loved ones is no way to go about earning trust and mutual respect. Yet all Americans today have a terrible problem in at least one lifelong relationship: Their elected leaders. See, politicians dont get anywhere in life by being realistic. They tax us and
8
The trouble is, at no point does it behoove our elected officials to give us the straight story on cost. Eager to please every possible voter, Congress repeatedly has lied, bald-faced, about the real financial status of the country. As the country boomed, politicians spent. When the economy teetered, they taxed and patched up the holes, in the typical Keynesian way. Then, despite it all, a capitalist boom inevitably would resurface. Instead of learning the obvious lesson, the politicians spent the windfall away. For instance, one of the regular punchlines in economics circles is the laughably low official inflation rate (Consumer Price Index, or CPI). The government has a way of measuring how fast the dollar is losing its value. Historically speaking, it has been about 3 percent a year at least according to the official version. But it was changed a few years back, and now several shadow versions of the index are running at double the official rate! Why worry about 3 percent vs. 6 percent? Using the financial Rule of 72, we know that things cost roughly double in any given 24-year span. (Try it: 72 divided by 3 gives you 24.) And 3 percent inflation does make sense. About 24 years ago, a new car once cost half as much, right? Eating out, probably the same. But what if inflation were higher, say, 6 percent a year. Then money loses value twice as fast. The car that cost $22,000 today will run you $44,000 in just 12 years! Imagine we get to 10 percent, as some economists
believe will happen soon. In that scenario, prices double in just 7.2 years. And again seven years later. The cheap car costs $88,000 in just under a decade and a half. We dont need hyperinflation to destroy us. Just regular old double-digits will do the trick. Friedman explains in great detail the true danger of a rising money supply when it comes to inflation. As he writes in Money Mischief, it is the nominal supply of dollars that determines value. If there are more of them, the intrinsic, real value declines. People focus on the numbers on their cash as if $100 will mean the currency always will be worth $100 of anything you like. Meanwhile, inflation is eating them alive. As Friedman explains, It is natural for you, as a holder of money, to believe that what matters is the number of dollars you hold your nominal cash balances. But that is only because you take dollar prices for granted, both the prices that determine your income and the prices of things you buy. I believe that on reflection you will agree that what really matters is your real cash balances what the nominal balances will buy. (Page 20) The fundamental argument Friedman makes is that increasing the number of dollars in an economy might increase your income. As inflation rises, you could get a raise to compensate in the short run. And inflation certainly will begin to affect prices, notably sensitive commodity products such as food and energy. Yet the oversupply of dollars inevitably destroys the purchasing power, or value, of money. Having more of it around doesnt create real growth, real jobs, or real income; just the opposite. As noted earlier, critics of the Fed maintain that changes to the way inflation is calculated, dating back to the early Clinton years, have hidden the true rate of inflation from us, the voters. The rate is not 1 percent, as the Fed maintains, but really 6 percent, right now, according to some economists. While the Fed prints up trillions to save the banking system from imploding, there will be no help at all for savers who scrape by on dismal savings rates while food and gas prices rise at a fever pitch from coast to coast. Why would the government do that? In short, to hide the decades of spending and debt overloading
the government balance sheet. The federal debt is at $14.5 trillion essentially equal to the entire U.S. economy. Boston University professor Laurence Kotlikoff calculates that, once you add in entitlement programs such as Medicare and Social Security, the real debt is $202 trillion, more wealth than exists on the entire planet! People sometimes confuse the debt with the deficit. The debt is money we owe back to holders of our Treasury bonds. The deficit is just the amount of federal overspending in a given year. That number, the deficit, is at $1.6 trillion, which while a crazy number, seems manageable next to the debt. Yet the deficit is a crazy number in the absolute. Because we seem to be unable to stop spending in any serious way, the United States must borrow that $1.6 trillion from somewhere, at interest. And we do, then just add it to the growing debt. Wheres the exit? Well, for the politicians, the choices are simple: Fess up to the angry spouse or pretend the debt isnt real and hope it goes away. Lucky for them, inflation makes it easy to pretend. After all, if Congress can meet our expectations of a safe retirement and access to medical care in our old age using inflated dollars, who would be the wiser? Well, you would, for one, when you go to retire and the $2,000 a month from Social Security barely covers the rent (forget groceries and gas), while a visit to the doctor for a routine checkup runs $400 without tests! Politicians today are boxed between raising taxes or cutting services, so they borrow and push the debt into the future, then hope inflation does its magic. Your cost of living increases will be tiny and infrequent, but the REAL cost of living will zoom higher every month, forever. If you cant count on Congress, what about the Fed? Isnt it the Feds job to fix these problems? Not really. In fact, the mandate of the Fed, by law, is dual: maximum sustainable employment and price stability. Now, thats not low prices, just stability. Its the Feds job, one Bernanke takes seriously, to
9
avoid both inflation and deflation, or falling prices. He aims to keep things the same, as long as possible, which means of course that the Fed has consistently failed in this mission since its inception in 1913. The greenback is worth much, much less than it was back when the Federal Reserve was chartered. For instance, something you might buy for a dollar in 1913, after inflation, would cost you more than $22 today. Put another way, a nice lunch for two in a corner restaurant today would have set you back a whole buck back in 1913. And thats using the official numbers. By another calculation, over roughly a lifetime 76 years the dollar has lost 94 percent of its purchasing power. A child born around the same time as Milton Friedman with a dollar in his or hand would be holding about 6 cents today. The money has just melted away in time. How about employment? Thats kind of silly, when you think about it. How does the Fed go about creating even one job outside of its own walls? What lever can it pull that says make jobs the way it can make money in a blink of an eye? None, of course. Rather, the task of the Fed is to lower interest rates when the economy slows in order to encourage lending. Then, if the economy starts to overheat on the increase in credit, it can raise interest rates in order to tamp down inflation. The Fed has a hard enough time doing that even in normal circumstances. During the recent, very deep recession, the government pitched in, borrowing like mad to dole out stimulus spending and tax credits galore. Meanwhile, the Fed stepped on the gas by dropping the benchmark rate to virtually zero, where it has been stuck since the crisis began. Warren Buffett, the billionaire investor, recently pointed out that, between the federal governments borrowing-and-spending spree and the Feds nearzero interest rate policy, the cash spigot has been wide open for months upon months. I dont think people necessarily realize, weve had monetary policy with its foot to the floor for a couple of years. And we needed that to get out of where we were. How long we needed it for is another question, Buffett said in an interview.
10
Nevertheless, the country is still missing 8 million jobs lost since the crisis began. There is little sign that Federal Reserve strategy has achieved anything at all, unless you believe that things could have been dramatically worse. Perhaps they could have and, just as likely, perhaps the medicine already in the system is a massive overdose that will kill the patient just the same. At this point, its impossible to tell. As Friedman patiently explained decades ago, theres nothing magical the Fed can do by creating money that will make the economy grow or create jobs or really achieve anything concrete, other than risk a bout of hyperinflation. If the Feds mandate had been cause commodity prices to go up and tread water on employment, you might say it has worked. But if your bar is price stability and maximum employment, the strategy has fallen far short. The Fed is doing its job, as far as that goes. But its no solution.
How the Government Enables Bad Banking
So where, exactly, did the money go? The politically independent Federal Reserve can be opaque. It provided startling little information even to Congress as to exactly how it was operating during the worst moments of the crisis. Generally, the argument from Bernanke and his colleagues has been that, if they named names, there would have been immediate and disastrous runs on some of the pillars of Wall Street. As frightening as that sounds, things have improved since then, in part thanks to the Treasurys unprecedented takeover of the banks themselves, via their traded shares. Essentially, the taxpayers wrote a check to Wall Street and hoped it wouldnt get cashed too fast. As the crisis ebbed, Treasury sold off those bank shares to private investors. It made money on some sales and lost money on others. (Debate has raged about whether the program made money for taxpayers, but it did achieve its mission: to give banks immediate transfusions of cash at the height of the crisis.) Lehman Brothers and Bear Stearns ceased to exist, Goldman Sachs found a savior in Warren Buffett, Merrill Lynch ran into the arms of Bank of America, and several regional banks, such as Wachovia, were
bought by healthier rivals. Since then, the Fed has focused on trying to prop up the whole credit structure using two tools: the interest rate and debt purchases. The interest rate tool doesnt help banks directly. It does make money cheaper and this generally is passed on to consumers in the form of lower interest rates. In essence, banks can get money for next to nothing and lend it out to say, mortgage borrowers, at higher, market-based rates. Through the crisis, a virtually zero benchmark rate at the Fed has meant 30-year mortgage rates under 5 percent for months on end, a generational low. The purpose has been to help borrowers to refinance or get new credit and to give banks income by promoting consumer borrowing, which had ground to a halt in the panic of late 2008. The debt purchases have been more controversial. Known as quantitative easing, the move requires the Fed to buy Treasury bonds already on the open market from a small group of elite banks that deal exclusively in debt that they buy from the government. In purchasing the bonds, the Fed doesnt send money to the banks but instead puts it in an account in that banks name at the Fed. It pays the bank the prevalent short-term interest rate on the money in that account, and the bank can keep it there or lend it out. It is, after all, right there in the banks own account at the Fed and meant to be used for lending. However, with the enormous amount of slack in the economy from the recession, few banks have an incentive to risk new lending. Its easier and smarter for banks just to collect the interest from the Fed and shore up their own damaged balance sheets for now. The Fed has thus created roughly $2 trillion in new money, although the central bank argues that the money does not yet circulate anywhere. Thus, the Fed believes that it can undo the stimulus by ceasing or slowing its buying of Treasury bonds. Under this scenario, a healed financial system kicks in and the Fed will divest itself of the massive amounts of Treasury debt on its own balance sheet by selling the debt back to banks, thus sucking up the billions and billions of dollars in the banks accounts at the Fed before the money can be lent out and, potentially, spark inflation. Several inflation hawks at the Fed have made
noises in the press about starting down the road of mopping up all this cash, but Bernanke has insisted in staying the course. He believes that DEFLATION is still a distinct risk. He is playing out Friedmans critique of the Fed to the ultimate degree, outlasting even the most skeptical of doubters. The problem in all of this is that the banks are not necessarily good actors. They certainly werent before the crisis, when they helped pump up the housing bubble with no-questions-asked liars loans to borrowers who simply wrote their income on a piece of paper and went house shopping. They werent when they aided and abetted Wall Street in the packaging of hundreds of thousands of these loans into unfathomable mortgage-backed securities, which they helped market and sell to pension funds, retirement plan providers, counties, schools, hospital districts, and even foreign governments. Thats because banks arent living in the blackand-white days of Its a Wonderful Life, where the George Baileys of banking yesteryear knew your name and worried about your well-being. Banks are companies like any other, and their fundamental purpose is to post a profit and make their stock values go up. The pressure to increase earnings has not diminished with the crisis. No amount of shame from the bailouts and press coverage has altered the way bank CEOs think about the world.
Wall Street Is Just an Address in Manhattan
Frankly, their main concern in the months since the crisis began has been to maintain profit margins (a reasonable goal) and to defend the industry from any kind of increased oversight, including the drive to end too big to fail, the implicit guarantee that taxpayers will pull them back from the brink in the future, if necessary. So, in banks today, you have two very volatile ingredients freely mixing in a single container: enormous access to credit via the Fed and relatively weak regulation. The chances that the banks will get richer still in the eventual recovery is nearly assured. The chances that you, the saver and taxpayer, will be forced at some point to again absorb their mistakes is as high as it ever was.
11
People often confuse the idea of banks and Wall Street in their minds, and with good reason. The biggest commercial banks in the country all reside in the famed Manhattan financial district. Yet its important to grasp that, for investors, Wall Street isnt about the big banks doing IPOs. Rather, its about the personal relationships investors have with the stock broker or the planner who advises them about their own retirement savings. There are honest brokers in the world. And some money managers actually do know what they are talking about. Occasionally, they share important insights with ordinary folks like you and me. The trouble is, the basic fuel of Wall Street as an enterprise is still commissions and rising stock prices. Bonuses are paid out on the volume of business, and the driver of much activity in the financial world hinges on cashing out stock options. If stock prices dont go up, the investment banks cannot prosper and pay their managers the multimillion dollar windfalls that are so appalling to the rest of the country. The money wheel froze up for a month or so as the crisis unfurled, but by no means will it ever stop. It cant, and expecting the incentives that drive the financial industry to change is, well, unrealistic.
Americas Dilemma: Inflate or Die
So what happens next? You can almost see the machinery lining up to crush the economy again. The government is tying itself in knots trying to make even the most superficial cuts in discretionary spending never mind even touching the massive entitlement programs that really drive our debt problem in the future, Social Security and Medicare. Meanwhile, the Fed has stuck to an unprecedented strategy of flooding the system with literally trillions of unwanted and unnecessary dollars, the very fuel of hyperinflation. As Friedman famously explains, Inflation is always and everywhere a monetary phenomenon. (Page 49) It doesnt happen any other way. More money means more inflation; less money means less inflation. Control the money supply and inflation does not exist. The simplicity of the concept leads too many to discount or ignore it, at their peril.
12
The dilemma for America now is the rear view mirror effect of monetary policy. Nobody really knows how much impact the current supply of money will have on prices to come. The Fed often telegraphs changes months in advance by first talking loudly in the press about coming rate hikes or cuts. Even when the changes come, they come in slow, predictable steps. Look at any chart of the Feds benchmark rate over 10 or 20 years. You will notice the stair-step pattern. Once the Fed starts raising or lowering rates, expect it to plod along on that path for a year or more until it hits some plateau and then settles in for a long, flat rest. So far during this crisis, however, no such unified message has come from Bernankes Fed. Its been more like chaos. Meanwhile, pressure on prices from the cash in the pipeline is very likely to build, although we wont really see it staring us in the face for some time to come. As Friedman explains: The effect on prices, like that on income and output, is distributed over time, but it comes 12 or 18 months later, so that the total delay between a change in monetary growth and a change in the rate of inflation averages something like two years. That is why it is a long row to hoe to stop an inflation after it has been allowed to start. It cannot be stopped overnight. (Page 48) In fact, Friedman goes on, even the expectation of inflation is a risk. As both lenders and borrowers come to anticipate inflation, lenders demand, and borrowers are willing to offer, higher nominal rates to offset inflation. That is why interest rates are highest in countries that have had the most rapid growth in the quantity of money and also in prices countries like Brazil, Argentina, Chile, Israel, South Korea. (Page 50) In summary, Friedman entertains two notions about monetary policy, short and long term. They can seem to be in conflict, but they really do complement each other perfectly. The first is the lesson of the Great Depression. That is, a Fed that does nothing or chokes off money supply in a very large downdraft risks a meltdown. Doing nothing is truly not an option. Second is the lesson of hyperinflation. If the Fed and the government stay on their current course of spending and printing money, they risk triggering an even deeper crisis and subsequent
conflagration. The dollar literally could be destroyed. The Fed could lose control of the interest rate as foreign bond holders sell off in a panic. The greenback might cease to be the global reserve currency and devalue sharply in just a few months. Asset prices fall and living standards collapse. The jig is up.
A Difficult, But Effective, Way Out
There is a third way, of which Friedman is a proponent. As he says, the obvious choice for an alcoholic is to stop drinking. However, getting off the bottle leads to fierce withdrawal pains. Similarly, an economy drunk on money must cut itself off. The resulting pain, the morning after that drunks know as a hangover, can be dreadful, but it does not last. Friedman explains, The initial side effects of a slower rate of monetary growth are painful: lower economic growth and temporarily higher unemployment without, for a time, much reduction in inflation. The benefits begin to appear after only one or two years or so, in the form of lower inflation, a healthier economy, (and) the potential for rapid noninflationary growth. (Page 215) We do not need to draw complex mathematical models to show how this works. Most people over 40 today have seen it with their own eyes. As Friedman notes, the United States faced a similar scenario at the end of the Carter years. As Ronald Reagan took office, he was smart enough to support the ideas of then-Fed Chairman Paul Volcker, who backed a quick and painful hike in interest rates to stop inflation cold. Annualized inflation was running nearly 15 percent in the spring of 1980, Reagans first months in office. Using the Rule of 72, prices were doubling in less than five years! Friedman writes, The Federal Reserve stepped hard on the monetary brakes. The result was a severe recession and then a sharp decline in inflation. In late 1982, the Fed changed course and increased monetary growth. The economy picked up shortly afterward and embarked on its longest post-World War II expansion. The bad effects came first, the good ones later. (Page 215) It seems clear that choices will be made, even if by inaction, over the coming months and years.
So many political shoes have yet to drop, and the Fed still is in utterly uncharted waters. For investors, sitting in cash might well be retirement suicide, if inflation gets out of control. With the Fed still pulling major levers behind the scenes, chances are good we will see extreme volatility for stocks, rather than a long, predictable march higher that investors enjoyed during the 1980s and 1990s. We may yet experience a sea change in the dollars role in the world, with significant repercussions for dollar holders. And commodities will continue in their role as the anti-dollar, for better or worse.
A Blueprint for Your Salvation
As obvious and as necessary as it might seem, preparing for serious inflation is not an easy choice to make. Its far easier to presume that the authorities have things under control. Of course, investors in those nutty dot-com stocks probably thought the government was watching out for them, protecting them from fraudsters and the generalized mania that surrounding anything tech in 1999. And they were wrong. Most people thought that the government was on their side in the matter of housing. Surely it was illegal for banks to lend so much money to people so clearly incapable of investing in two, three, four houses at a time, with no proof of income? The fight with the banks over housing is still going on, but the horse is way, way out of the barn for most people. They have lost their homes or soon will. Bond investors today probably believe that they are as safe as lambs. What could go wrong with government debt, after all? Once the crash is apparent and interest rates zoom higher, however, there will be no way out for them or anyone else holding U.S. Treasurys at such low yields. Investors who hold long bonds will see their principal back eventually, but anyone who must sell to survive or panics into selling suffers a huge haircut on price. The patient few who do collect in the distant future will get dramatically devalued dollars in return an unsettling Pyrrhic victory.
13
Were talking about literally trillions of dollars sunk into long-term U.S. bonds for which there will be no natural market in short order. Just like the McMansions on every corner in Southern California. Just like those dot-bomb securities that werent so secure after all. But the biggest risk, by far, is holding cash. Dollars will be everywhere, a flood of them that nobody wants. As Friedman warned, you are about to get handed quite a lot of dollars in number (nominal value), but their (real) value will plummet. The rest of this survival guide is all about alternatives to cash, and you will need them, sooner than you think. So lets get started.
Safe Inflation Play #1: Buy Great Dividend Stocks
Blue-chip dividend stocks are usually the advice you hear stockbrokers give to widows and orphans. Big, safe, unextraordinary companies are extremely unlikely to grow earnings by much, but they are also unlikely to flame out in tough times. That brings you capital protection. Meanwhile, these dividend-payers churn out cash payments like clockwork to shareholders. Buy stocks might sound a little crazy, considering the huge decline in the market during the recent credit crisis. But investing in just any stocks, or worse, in a broad index of the market, is not the point. You should invest in stocks, the companies and brands you have known for years, as long as you buy them for the income, and not necessarily growth. Here are some facts about dividends stocks you might not know, facts that can help protect you from rising inflation: Real growth: Stocks go up, and stocks go down. Its the way of the world. But dividends are yours to keep and invest forever. Dividend guru and Wharton professor Jeremy Siegel did a study of the Dow since the beginning of the last century. Through boom and bust, war and peace, good times and bad, the facts kept showing up in the numbers, clear as day: Since 1900, no less than 97 percent of the gain in the Dow Jones Industrial Average has been income from dividends. Not from price appreciation, but from dividends.
14
Secret growth: Boring, huh? However, what stockbrokers often fail to tell you about boring old widow stocks is that dividend-paying companies offer hidden growth, too. The biggest and best of them raise their dividends with great regularity and brag about how many consecutive years that they have done so. That extra kick means your income rises, too, over time. Foreign gains, too: Like the idea of emerging market stocks? You could go buy an exchangetraded fund that represents the Indian exchange, or dabble in China and Russia. Careful, though, because those markets can be wild rides. If you buy the biggest and bluest of the U.S. firms, however, you already get a big slice of that foreign pie. CocaCola, for instance, makes about half of its income outside the United States. And every penny it makes abroad comes home eventually. When it does, earnings shoot higher, because the foreign income gets translated back into devalued dollars. Companies call these windfalls exchange rate gains. And gains mean more dividend cash paid out to you. Reinvesting power: If you need income, few strategies are better than a handful of powerful U.S. dividend-payers sending you a check every three months. But if you can invest (and Vanguard Founder John Bogle says retirees absolutely should buy stock, even late in the game), the fastest and simplest way to grow your pot is by reinvesting every cent you can. Compounding from reinvested dividends, whether you buy the same company or another strong dividend payer, is how billionaires like Warren Buffett have ended up rolling in cash. Which, of course, they immediately reinvest. Getting into dividend stocks need not be a huge hassle. You can buy them directly, one by one, or buy a simple mutual fund or exchange-traded fund of many dividend stocks together. Another is to consider a stock advisory service or newsletter that specializes in picking the key stocks at the best prices. Still another is automatic investing via DRIPs, which let you bypass brokers and purchase straight from firms, automatically, and usually at a discount. However you do it, the most important information you need by far is knowing when a stock is at its best price so that you can buy as much as possible while its cheap.
Then, just forget about that piece of your portfolio until the first check comes in to reinvest. You never need to time the market or fear a downturn. Like Buffett says, downturns are good news. It means you can buy more of your favorite dividendpayers. Here are some resources to get started with dividend stocks: iShares Dow Jones U.S. Select Dividend ETF (DVY) Tracks the Dow Jones U.S. Select Dividend Index, a group of 100 of the highest dividend-yielding securities, excluding real estate investment trusts, in the Dow Jones U.S. Index. PowerShares Dividend Achievers ETF (PFM) Seeks results that correspond to the price and yield of the Broad Dividend Achievers Index, a group of dividend-paying companies that have increased their annual dividend for 10 or more consecutive fiscal years. Vanguard Dividend Appreciation ETF (VIG) Exchange-traded share class of Vanguard Dividend Appreciation Index Fund, which employs a passive management or indexing investment approach designed to track the performance of the Dividend Achievers Select Index by holding each stock in approximately the same proportion as its weighting in that index. High-Yield Dividend Achievers ETF (PEY) Seeks results that correspond to the price and yield of the Mergent Dividend Achievers 50 Index, 50 stocks selected principally on the basis of dividend yield and consistent growth in dividends. SPDR S&P Dividend ETF (SDY) Seeks to replicate the S&P High Yield Dividend Aristocrats Index, the 50 highest dividend-yielding constituents of the stocks of the S&P Composite 1500 Index that have increased dividends every year for at least 25 years. Large-Cap Dividend (DLN) Tracks price and yield performance of the Wisdom Tree Large Cap Dividend Index, a fundamentally weighted index that measures the performance of the large-capitalization segment of the United States dividend-paying market. The index consists of the 300 largest companies ranked by market capitalization from the Wisdom Tree Dividend Index. T. Rowe Price Equity Income(PRFDX) Seeks to provide substantial dividend income
and long-term capital growth. The fund normally invests at least 80 percent of assets in common stocks, with 65 percent in the common stocks of well-established companies paying above-average dividends. It invests most assets in U.S. common stocks and also may purchase other securities, including foreign stocks, futures, and options.
Safe Inflation Play #2: Be a Contrarian at Heart
What does it take to be a contrarian? It is equal parts courage and patience. The courage part comes in buying assets that absolutely nobody wants. Not in buying junk, but in buying great stocks at absolutely amazing prices. Sounds impossible, yet millions of investors had that chance just a couple of years ago. Ford sold for less than $2. General Electric for $7. Bank of America for $4. Somebody bought them at those fire-sale prices. Why not you? As Warren Buffett says, Be fearful when others are greedy, and greedy when others are fearful. The tough times are hard to predict, but everyone knows what things look like when the ax falls hard. In 1987, the Dow fell 22 percent in a day. In the early 1970s bear market, stocks slipped by 45 percent in just under two years. The most recent market crash wiped out trillions in wealth in just a few months, only to rebound dramatically over the next two years. It can and will happen again. The patron saint of contrarians, Baron Rothschild, made his biggest fortune buying in the panic after Waterloo in Napoleons time. His oft-quoted quip: Buy when theres blood in the streets, even if the blood is your own. Wars are awful, but as long and as bloody as they can be, they do end. The late, great contrarian investor John Templeton, founder of the Templeton Funds, was out buying European stocks at a time when Americans wouldnt touch them. As World War II started in Europe, in 1939, young Templeton borrowed money to buy 100 shares each of 104 companies selling at $1 dollar per share or less. No less than 34 of them were already in bankruptcy. Of those, just four turned out to be worthless. He turned large profits on the others. The rest is history.
15
Templeton often would buy when things were at their worst, investing in nations, industries, and companies at rock-bottom, the moment he called points of maximum pessimism. It made him a billionaire and led to the creation of the Templeton Growth Fund. Sir John sold it off in 1992 to the Franklin Group. At the time, it was calculated that each $10,000 invested in his fund in 1954 had grown, with dividends reinvested, to $2 million by the time he exited. But what about patience? Well, that is the hardest part by far. Nobody likes to think he might be missing a good deal. As stocks and other assets push higher and higher, the urge to buy even at high prices can be overwhelming. Theres even a school of thought that revolves around buying as stocks rise, called momentum investing. But this way is far trickier than the contrarian approach. For one, you have to make sure you arent the momentum that someone else hopes to ride and then cash out on. As the poker players say, if you look around the room and cant figure out who is the patsy, its you. And it takes cash. Now, holding cash is a mistake, of course, in inflationary times. But its absolutely vital to build cash when stocks run high, usually by collecting fat dividends or by selling the occasional big gainer, and then go all in when you get your chance. As high-risk as that sounds, consider this simple fact: If you buy the right stocks at the right price, you might never need to even think about selling them, because their dividends will grow your position forever. Thats risk-free wealth! Here are three well-known contrarian mutual funds that focus on buying out-of-favor stocks: Dodge and Cox Stock (DODGX) This fund seeks long-term growth of principal and income. It invests primarily in a broadly diversified portfolio of common stocks, up to 80 percent of total assets in common stocks, including those securities of foreign issuers included in the S&P 500. Janus Contrarian Fund (JACNX) This funds objective is long-term capital growth. It invests at least 80 percent of net assets in equities.
16
Its manager emphasizes investments in companies with attractive prices and free cash flow. Vanguard Capital Value (VCVLX) Seeking maximum long-term total return, the fund invests in stocks considered undervalued and out of favor with investors and currently trading at prices that are below what the stocks are worth compared with potential earnings, asset values, or dividends.
Safe Inflation Play #3: Acquire Commodities The Anti-Dollar
If you believe that the dollar is headed lower over time, a key strategy to protect your wealth should be holding commodities. Think about the stuff you need, every day, just to get by: gas for your car, clothes on your back, food to eat, light and heat in your home. All of those things depend heavily on materials that trade every day in huge, liquid markets. Oil, copper, cotton, coffee, grains, and beef, even precious metals like gold and silver have practical uses in industry and get consumed. More importantly, they are priced in dollars. As the dollar slips in value, the producers and sellers of commodities demand more of those dollars to make up for the loss against their own currencies. Dollar down, commodities up, as the traders know. Commodities guru Jim Rogers, a billionaire who made his money trading these hard assets, believes that far more people should be looking away from stocks and into goods instead. What you have to do is you have to find things that will protect your assets, real assets: silver, rice, natural gas something that will hold its value in an inflationary time, he recently said. He went on: If the world economy gets better, commodities are going to make a fortune. If the world economy does not get better, commodities is the place to be because they are going to print more money, and thats how you protect yourself. It can be daunting to get started on commodities, but, fortunately, there are a variety of ways to get exposure, including physical asset funds, futures, options, and commodity funds. Its impractical in the extreme to own most commodities in the physical sense.
Owning Commodities
the performance of the price of gold $1,600 bullion, less its expenses and fees. $1,400 The assets of the $1,200 Claymore Gold ETF $1,000 consist primarily of physical gold $800 bullion, which the $600 Claymore Gold $400 ETF purchases and holds in accordance $200 with its investment $0 objective, strategy, 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 policies, and SOURCE: World Gold Council restrictions, as well as any forward Gold has been a tear, and its not just a recent phenomenon. As government spending has accelerated, the gold price moved higher and higher when priced in dollars. Dollars, meanwhile, have slipped farther contracts relating and farther behind the metal. to the currency hedge of the hedged common units, cash, and permitted gold The cost of moving and warehousing certificates, if any. enough copper or oil to matter quickly outweighs SPDR Gold Trust (GLD) profitability, although that hasnt stopped a handful SPDR Gold Trusts objective is to reflect the of funds from applying to create physically backed performance of the price of gold bullion. The trust commodity vehicles for their wealthier customers. holds gold and, from time to time, issues SPDR The exception for ordinary investors is certain Gold Shares in baskets in exchange for deposits precious metals. of gold and distributes gold in connection with Gold and silver bullion and coins can be redemption of baskets. A basket equals a block of purchased directly from dealers and stored in a bank 100,000 shares. The trust is sponsored by World vault or in a secure home safe. Gold Trust Services LLC. The Bank of New York Likewise, certain precious metals funds audit their is the trustee. HSBC Bank USA serves as the holdings and provide periodic documentation as to custodian of the trusts gold. the location and quantity of the assets backing their iShares Gold Trust (IAU) shares. Tellingly, billionaire hedge fund managers iShares Gold Trust seeks to correspond generally such as John Paulson and George Soros use some of to the day-to-day movement of the price of gold these very funds to make their own metal purchases. bullion. The objective of the trust is for the value Some of the better known of the physically backed to reflect, at any given time, the price of gold precious metals funds include: owned by the trust at that time, less the expenses Central Fund of Canada (CEF) and Central and liabilities of the trust. It is backed by physical Gold Trust (GTU) gold, identified on the custodians books as Central Fund of Canada Limited is a specialized property of the trust and held by the custodian investment holding company that invests primarily in vaults in the vicinity of New York, Toronto, in long-term holdings of allocated, segregated, and London, and other locations. unencumbered gold and silver bullion and does iShares Silver Trust Fund (SLV) not speculate in gold and silver prices. The Class The purpose of the trust is to own silver A shares of Central Fund are backed 98 percent by transferred to the trust in exchange for shares gold and silver bullion, according to the fund. issued by iShares. The objective is for the value to Claymore Gold Bullion ETF (TSX: CGL) reflect, at any given time, the price of silver owned, The Claymore Gold Bullion ETF seeks to replicate
Gold Price in U.S. Dollars
17
less expenses and liabilities. ETFS Physical Silver Shares (SIVR) Holds silver bullion and issues shares in exchange for deposits of silver and distributes silver in connection with the redemption of baskets. The objective is to reflect the performance of the price of silver, less expenses and liabilities. ETFS Physical Precious Metal Basket Shares(GLTR) Shares reflect the performance of the price of physical gold, silver, platinum, and palladium in the proportions held by the trust less expenses. Designed for investors who want a cost-effective and convenient way to invest in a basket of bullion with minimal credit risk, according to the funds prospectus.
Trading the Commodities Futures Market
A futures market is simply the way that sellers of a commodity lock in a price for production they expect to deliver at some point in the future (thus the name). When a farmer plants his cotton or wheat crop, or a mining company begins to drill, it promises to sell a portion of that output to buyers at an agreed price. The transaction could be a few weeks or many months away, but the money is paid to the producer now. Thats hedging, and it lets the seller lock in cash to plant more or drill more, no matter where demand might be in the coming year. The buyer now has a contract, and he or she can hold it and take delivery of the goods. But, more likely, another buyer will come along and bid on it. Thus the price of this contract rises and falls, based on what the aggregate of all market participants think will happen to future demand. Perhaps supplies of copper tighten, turning the right to buy at a lower price into a guaranteed win. Maybe bad weather ruins a cotton crop, and textile mills bid up whats left in warehouses. Lots of things can happen, but speculators most often close their positions well in advance of delivery. The market has worked its magic, and the good is delivered in the end to a real buyer at the most accurate price possible, thanks to all the intervening buying and selling. Along the way, a shrewd trader can profit. Heres a checklist of things to know before you
18
begin trading commodity futures: A responsible broker will ask you, in advance, questions about your risk tolerance, income, and net worth. You should be provided with extensive disclosures about the risk and will be asked to sign documents saying that you read and understood them. Formalities aside, the first step toward trading is to set up an account with an initial margin, or deposit, for the account to trade. You will be asked to put in a minimum amount according to exchange rules and your brokers policies. You can buy and sell commodities on your own, if your brokerage allows those trades. Or you can empower a broker to conduct trades on your behalf, although that person must be licensed to trade futures. Beware: If your trades lose enough, you could get whats known as a margin call. Simply put, your broker will inform you when your account balance falls below a certain level. You will be expected to replenish the account. Know in advance what your firm expects.
Trading Futures Options
A form of leverage, options allow investors to buy and sell not the commodity or the contract but simply the right to buy it at a specific price, called the strike price. Your options trade is a bet on the direction of the price, not an obligation to complete a purchase. There are several terms to understand in options trading. A call is a bet that prices will move higher. A put is the opposite, on the belief that prices for a commodity are set to decline. Each option has a premium, which is the cost for making the bet. Options are dated and expire frequently, usually within a few months. If your bet expires in 60 days and exceeds your call or put, you can close the contract ahead of expiration and profit. If you do not, the contract expires and you miss the opportunity. Here is a list of top brokers in the commodities and futures trading business. Most offer software you can download and use to practice trading in advance of executing actual trades. Interactive Brokers (www.InteractiveBrokers. com)(877) 442-2757 Think Or Swim (www.ThinkOrSwim.com) (866) 839-1100
Lightspeed Trading (www.LightspeedTrading.com) (888) 577-3123 OptionsXpress (www.OptionsXpress.com) (888) 280-8020 TD Ameritrade (www.TDAmeritrade.com) (800) 454-9272 Master Trader (www.MasterTrader.com) (800) 424-3934 Charles Schwab (www.Schwab.com) (866) 855-9102 Speed Trader (www.SpeedTrader.com) (800) 874-3039 First Trade (www.FirstTrade.com) (800) 869-8800
Commodities Exchange-Traded Funds, Exchange-Traded Notes, Mutual Funds
It isnt necessary, of course, to trade or to use futures, although trading does offer more leverage. Nevertheless, if you have a strong thesis regarding a given commodity (or just fear for the dollar), you can take a position in that commodity, a basket of related commodities (say, grains or metals), or buy a fund holding a large cohort of mixed commodities. This can be done easily and cheaply via exchangetraded funds (ETF), exchange-traded notes (ETN), and, of course, mutual funds. While liquid and easy to trade, funds also have fees and sales charges. Heres how they break down: Commodity ETFs track the price of either a single commodity or a basket of related commodities (metals, foods, energy, etc.) by buying and holding the physical asset or through futures. These are often leveraged as well and can double or triple long or short the price of the asset using that leverage. Commodity ETNs are a kind of debt security tied to the prices of commodities. Commodity producer ETFs track companies that operate primarily in the commodity space, such as mining, timber, or food companies. Producer funds buy stocks of companies leveraged to commodities, rather than commodities themselves, for instance, shares in gold-mining companies instead of gold bullion. That can be a great strategy, but its important to understand the difference, because many factors can affect a companys stock price besides the commodity in which it deals. There are hundreds of commodity and commodity
producer funds to choose from. Here is a short list of broad potential investment vehicles that follow moves in commodity prices. GreenHaven Continuous Commodity (GCC) Reflects the performance of the Continuous Commodity Index, a broad-based commodity index consisting of 17 commodities. The funds managing owner is GreenHaven Commodity Services. PowerShares DB Commodity Index Tracking Fund (DBC) Designed to track the Deutsche Bank Liquid Commodity Index-Optimum Yield Excess Return. The fund is managed by DB Commodity Services. ProShares Ultra DJ-UBS Commodity (UCD) Seeks a return of 200 percent of the return of the Dow Jones-UBS Commodity Index for a single day. ProShare Capital Management is the trust sponsor, commodity pool operator, and commodity trading adviser.
Safe Inflation Play #4: Ride the Forex Wave
Another way to shield yourself from a decline in the value of the dollar is to own currencies other than the dollar. As Warren Buffett himself noted in a 2003 article he wrote for Fortune magazine, he did not invest a dime in foreign currencies for most of his life. That changed in 2002, when his holding company, Berkshire Hathaway, made its first foray into the foreign exchange (forex) world, a nearly $4 trillion daily market. Buffett wrote, Since then, Berkshire has made significant investments in and today holds several currencies. I wont give you particulars; in fact, it is largely irrelevant which currencies they are. What does matter is the underlying point: To hold other currencies is to believe that the dollar will decline. There really isnt a more eloquent case to be made for buying foreign currencies. As people leave their dollars for greener pastures, they will by necessity have to buy some other currency, asset, or gold in its place. In that sense, the currency market is by far the largest and most liquid choice, traded around the clock in dozens of markets, online, and via multiple vehicles, including funds. The purpose of foreign exchange is to set currency values for international trade settlement. But a by19
product of that need is the massive liquidity involved in moving large sums of money back and forth across borders. Sometimes, a broad differential in interest rates and currency values allows traders to borrow in a low-yielding currency and invest in a high-yield currency, known as a carry trade. Currency trades are done in pairs, which means you buy a currency using another currency as payment. You can learn about trading currencies directly through various forex services using software on your computer and trade using free practice accounts in advance.
Major Currency Pairs
The major pairs are the euro-U.S. dollar pair, the U.S. dollar-yen, the British pound-U.S. dollar, the U.S. dollar-Swiss franc, the U.S. dollar-Canadian dollar, the U.S. dollar-Australian dollar, and the U.S. dollar-New Zealand dollar. These account for 85 percent of all forex trading. The euro-dollar pair is the least surprising combination, as the two currencies account for most foreign-held reserves. They are the basic stock of international trade, weighted most heavily to the dollar, which is about 55 percent of global reserves. (The pound sterling is the other major reserve.) The Swiss franc benefits in part from the countrys long tradition as the banker of the worlds wealthy and for its conservative monetary standards. The yen is traded in part because Japan was the No. 2 economy in the world for many years, and because of the carry trade, which led investors to borrow yen cheaply in Japan where rates were low to invest in U.S. bonds, which were rock-solid but for years paid a higher rate relative to Japanese bonds. The remainder of the major currency-pair countries benefit in large part from being a significant U.S. trading partner (Canada) or for being export-driven economies with healthy banking systems (Canada, Australia, and New Zealand). Heres how a trade works. A trader might go long the euro, so he or she uses dollars to buy them (the pair on a trading station or software would be EUR/ USD). In this case, the euro is the base currency and the second is the quote currency. The price is expressed as a decimalized fraction, like you might expect when exchanging dollars in
20
an airport changing house. So, 1.1562 would mean it takes almost $1.16 to buy a euro at the current price. Bid/Ask Spread Like with stocks, there are buyers and sellers. The buyers make bids, the sellers make asks. So, you are trying to buy low (bid) but sell high (ask). The spread is the gap between these prices. Pips While stocks move in decimalized points that represent dollars and cents, currencies move at a much smaller scale, called pips. Pips are measured to four decimals, so a 10-pip move would be from 1.1562 to 1.1572. Forex Leverage You can leverage your trading by putting down a small amount, called a margin deposit, normally 1 percent of the amount you are trading. Some brokers will let you trade with as little as 0.25 percent, which is a margin of 400-to-1. Its highrisk, high-reward trading and best undertaken only after you have some training and real-world experience. With leverage, one bad trade can wipe out your account and result in a margin call. There are a lot of very good forex brokers out there. We encourage you to find the broker who best fits your investment needs. Consider the following factors when deciding on a forex service provider: The brokers customer service team. Online resources provided by the brokerage firm. Account minimums. Availability of a demonstration account. Ability to trade all types of currency besides the most common pairs. (For example, can you trade the Australian dollar vs. the New Zealand dollar, AUD/NZD?). Trading fees. Here are some well-known forex brokers to consider. Forex Capital Markets (www.FXCM.com) (888) 503-6739 Deutsche Bank FOREX (www.DBFX.com) (888) 363-3239 Oanda (www.oanda.com) (416) 593-9436 Citibank FOREX (www.citifxpro.com) (877) 265-7781
Playing the Forex Market
Easy Ways to Own Foreign Currencies
Of course, theres nothing simple about active trading of any asset, and it takes time to train and learn the basics and to learn how to minimize risk. However, you can buy protection against a declining dollar in a number of other, more pedestrian ways, and even make money in the process, not simply forestall losses. One is to buy currency exposure through funds. For instance, some funds simply hold certificates of deposit or bonds in other currencies. If the dollar strengthens, it might eat away the return on the underlying foreign investment. But, if you believe the dollar is headed south, you would get the return and the bump up as the foreign currency appreciates on the dollars fall in value. Here are some ways to use funds to play a declining dollar. The market is full of these kinds of offerings, so talk to your financial adviser for more: Currency Shares Australian Dollar Trust (FXA) The trust issues shares in blocks of 50,000 (a basket) in exchange for deposits of Australian dollars and distributes Australian dollars in connection with the redemption of baskets. The investment objective is to reflect the price of Australian dollars, plus accrued interest, if any, less expenses. Wisdom Tree Dreyfus Brazilian Real Fund (BZF) The fund seeks to achieve total returns reflective of both money market rates in Brazil available to foreign investors and changes in value of the Brazilian real relative to the U.S. dollar. Although this fund invests in very short-term, investmentgrade instruments, it is not a money market fund and it is not the objective of the fund to maintain a constant share price. PowerShares DB US Dollar Index Bearish Fund (UDN) Establishes short positions in certain futures contracts with a view to tracking the changes, whether positive or negative, in the level of the Deutsche Bank Short U.S. Dollar Index (USDX) Futures Index-Excess Return. The index provides a general indication of the international value of the U.S. dollar relative to six world currencies: the USDX-euro, yen, British pound, Canadian dollar, Swedish krona, and Swiss franc. (If you want the opposite trade, consider the PowerShares DB US
Dollar Index Bullish Fund, UUP.) iShares MSCI Canada Index (EWC) Seeks to provide investment results that correspond generally to the price and yield performance of publicly traded securities in the aggregate in the Canadian market, as measured by the MSCI Canada Index. The index is capitalization-weighted and aims to capture 85 percent of the publicly available total market capitalization. iShares MSCI Australia Index Fund (EWA) Seeks to provide investment results that correspond generally to the price and yield performance of publicly traded securities in the aggregate in the Australian market, as measured by the MSCI Australia Index. The index is a capitalization-weighted index that aims to capture 85 percent of the publicly available total market capitalization. Pacific Investment Management Co. (Pimco) Foreign Bond Fund (PFUIX) Seeks maximum total return, consistent with preservation of capital and prudent investment management. The fund invests at least 80 percent of assets in fixed-income instruments that are economically tied to non-U.S. countries, representing at least three foreign countries, which may be represented by forwards or derivatives such as options, future contracts, or swap agreements. DFA Selectively Hedged Global Fixed Income Portfolio (DFSHX) Seeks to maximize total returns. The fund normally invests in a universe of U.S. and foreign debt securities maturing in two years or less. These debt securities may include U.S. government securities, high-quality U.S. corporate securities and fixed-income instruments of foreign governments, foreign corporations, and supranational organizations. Foreign Currency Bank Accounts (EverBank) If fund fees and trading risk are a concern, you can keep things simple with a straight foreign currency bank account. EverBank in Jacksonville, Fla., offers certificates of deposit (CDs) in single currencies and basket CDs of multiple currencies, as well as normal bank savings accounts in at least 20 foreign currencies. For example, a three-month Brazilian real CD recently paid 6 percent and an Australian dollar CD
21
at 12 months was at 3.63 percent, stunning returns compared to U.S. dollar CDs these days. You can open an IRA in a foreign currency account at the bank, so you get U.S. tax deferral and earn interest all the while protecting yourself from a dollar decline. These are foreign-currency accounts, but they are insured by the FDIC just the same as at any bank, up to $250,000 per depositor, per account ownership category. If you like the idea of owning commodities, EverBank also markets commodity-themed basket CDs, which combine foreign-currency assets of specific countries to achieve exposure to the commodities that drive their exports. They pay a base interest rate (they are CDs, after all), but these also act as a proxy currency bet against the U.S. dollar. Here are a few examples from EverBank: Global Power Shift Basket CD Equal parts Australian dollar, Brazilian real, Canadian dollar, and Norwegian krone Commodity Basket CD Australian dollar, Canadian dollar, New Zealand dollar, and South African rand Ultra Resource Basket CD Australian dollar, Canadian dollar, Hong Kong dollar, New Zealand dollar, Norwegian krone, and Singapore dollar New World Energy Basket CD Australian dollar, Canadian dollar, and Norwegian krone World Energy Basket CD Australian dollar, British pound, Canadian dollar, and Norwegian krone Petrol Basket CD British pound, Mexican peso, and Norwegian krone You can learn more about EverBank products and download product fact sheets at www.EverBank.com or call the World Markets division at (800) 926-4922. The general inquiry e-mail address for these products is worldmarkets@everbank.com
Safe Inflation Play #5: Protect Your Tax-Deferred Retirement Accounts
Most American retirees with a nest egg to protect have been dutifully stuffing cash into a personal IRA, a 401(k) or 403(b) through work, or a combination of these. And thats great, because funds placed in these
22
kinds of accounts generally grow tax-deferred for years. Nevertheless, the tax bill you pay now is likely to look silly compared with the tax bills Americans will have to pay in the near future. People dont seem to recognize, or are unwilling to face, a simple fact: An IRA is not a pension. It will not last until your death, unless you have been very aggressive about planning, and it will not rise to match inflation unless it somehow grows faster than inflation even as you spend down the principal. Taking a huge risk in your retirement years was probably not on your list of things to do. Generally, older Americans have relied on taxexempt bonds issued by municipalities or by the Treasury to earn an income. That wont really work in a hyperinflationary world, because the dollar will fall in value faster than rates will rise to cover the losses. Remember the Rule of 72: At 10 percent inflation, prices double in less than about seven years. Then they double again, unless government acts to stop it from spiraling out of control. Individual circumstances can vary, but one clear alternative is to open a Roth IRA now and fund it. You can contribute to a Roth after taxes, so theres no tax break today. But, once the money is safely inside the Roth, it cannot be taxed again. There are, of course, plenty of phaseouts and limits in the IRS code, but generally you get the following advantages: After age 59, in certain circumstances, money can be taken out tax and penalty free. You can borrow against it and take up to $10,000 to buy a home, with some restrictions. Money put into a Roth can be on top of the maximum 401(k) and IRA limits, and assets can be passed to heirs. Unlike an IRA, there are no requirements to withdraw money based on age. The government wont be taxing it, so it is not concerned about forcing you to take distributions as income. Not being forced to withdraw money is a huge advantage in a heavy tax, high-inflation environment. Building up a nice fat Roth balance before you retire will allow you to grow the base by reinvesting dividends and by making annual contributions. At some point, your normal, tax-deferred retirement plans will require distributions, and these will be taxed and likely spent. Not a Roth.
That compelling logic, so powerful during Instead, Roth money keeps compounding in the background, building up your nest egg for future the housing boom of a few years ago, can seem spending or, if it happens, to pass on to your heirs antiquated now that Americans are digging out from as a form a huge bust. of radically Yet the The Real Value of a Dollar simplified estate contrarian $25 2010 = $22.04 planning. instinct should Most of be kicking in $20 the funds and about now. certificates Mortgage $15 of deposit rates are rock mentioned bottom, and $5 1913 = $1 in this report people are easily can be $0 running away purchased from housing 1913 1923 1933 1943 1953 1963 1973 1983 1993 2003 inside a typical as fast as they SOURCE: Cleveland Fed How Much You Need to Buy $1 in Goods Roth or regular can. Its pretty IRA, so you can close to blood What does inflation do to your savings? It erases it, effectively, even in normal times. As you can see from the chart, what you could buy with $1 in 1913 the year the Federal Reserve began would cost you more $22 get dollar risk in the streets by the end of 2010. protection in for real estate addition to a in nearly every tax shelter and estate planning, all on the cheap. metro area. Congress recently relaxed income requirements What could go wrong? that had prevented higher earners from converting Well, plenty in an inflationary environment. For IRAs into Roth accounts. The taxes are due in the one, real estate speculation is always risky. year you convert, yes, but if you have the cash flow to The pros know that the target is not to turn a cover those taxes you can defer quite a lot of money quick buck but to get into a home at break-even the into the future tax free. first few years, then let renters pay the bills until Financial planning experts suggest doing so in the property appreciates enough to turn it over and tranches over several years to lessen the tax blow, begin again. because it is added on top of current income when The fly in the ointment will be interest rates. calculating your annual tax bill. Always talk to a Putting down a low down payment is one form of tax adviser or planner before converting retirement leverage, but investors have relied on adjustable rate accounts. The actual tax impact in any year can be mortgages to stretch those down payments over two, affected by many personal and familial factors. three, four properties or more. By taking an adjustable rate, and by making a tiny Safe Inflation Play #6: Manage down payment, speculators were able to double or triple down where they saw an opportunity. Your Real Estate Holdings Yet because of the bust, the days of 3 percent down Real estate can be a great leveraged investment. payments are gone, probably forever. Congress is A small down payment is all you need to own likely to wind down federal lending giants Fannie an asset many times over the worth of your initial Mae and Freddie Mac, and the private mortgage capital. market is less likely to allow buyers to take Purchased at the right price, its very hard to lose. investment-style risks. If the home rises in value over a few years, you could You can expect larger down payments, higher sell it and pull back out the down payment and the rates, shorter terms, and generally stricter credit appreciation. requirements all around for decades to come. There are not many ways to double your cash or If you own a home now and have an adjustable better with as little risk, considering that the asset mortgage, its time to refinance. itself is a home and unlikely to fall to a zero value.
The Inflation Survival Handbook 23
The chances are virtually zero that mortgage rates will go much lower than the generational low of less than 5 percent we see now. As the economy recovers, you can expect the interest rate to rise naturally as investors shift out of fixed income and back into risk assets, mainly stocks. But the bigger problem will be if the Federal Reserve loses control of rates entirely, such as would happen in the headlong flight out of the dollar as a global reserve currency. The Fed has tamped down rates for months on end by sucking up Treasury debt using money it printed just for that purpose. Once that ends, the private market takes over. Will there be significant demand for new Treasury debt? Perhaps, but not at the low single-digit rates fostered by the Feds unusual presence in the market. As investors begin to demand higher compensation for U.S. credit risk the direct result of our massive deficits and long-term debt you can expect to see mortgage rates move higher. If you have an adjustable rate mortgage, refinance to a fixed-rate loan soon. Pay off any adjustable or consumer debt you have, like consumer loans, adjustable car loans, and credit card debts. If you own real estate properties, consider new contracts that include a clause to allow for inflation adjustments. Just like your other income investments, it will need to keep pace with inflation or you risk losing money.
Putting Friedmans Genius to Work
The next few years will be harrowing for anyone who is unprepared. The solutions to the credit crisis were effective in the sense that they prevented, perhaps, a much larger meltdown. But the Federal Reserves extraordinary measures and the governments massive stimulus sprees did
absolutely nothing to resolve the core problems. We bought time, and we paid a high price for a small window of eerie calm. No one can say for sure exactly how the aftermath of these decisions will pay out, but some broad themes are already unmistakable: A free-spending government plugs a hole in the economic dike with dollars. A central bank bent on pushing up stock prices to simulate a recovery. Corporations interested in cutting and saving more than borrowing and growing. Breakdowns in political decision-making at the expense of government credibility abroad. A public exhausted by low employment and on the ropes, with outstanding debts galore. Volatility across nearly every traditional asset class. None of this bodes well for us. Understanding the facts of the matter does not, however, mean giving up or resigning ones fate to the poor decisions of others, even if they are the countrys political and financial elite. Friedman put it this way: Inflation is always and everywhere a monetary phenomenon. That proposition has been known by some scholars and men of affairs for hundreds, if not thousands, of years. Yet it has not prevented governmental authorities from yielding to the temptation to mulct [extract money from] their subjects by debasing their money taxation without representation while vigorously denying that they are doing anything of the kind and attributing the resulting inflation to all sorts of other devils incarnate. (Page 262) Remember, when official, admitted inflation roars to 5 percent, then 8 percent, then well past 10 percent or higher, your elected officials will blame rising prices on labor, on business, on the banks, on speculators in short, on everyone but their own rush to overspend and then overprint to cover it up.
24

Inflation Handbook

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Inflation Handbook

Uploaded by

Copyright:

Available Formats

TABLE OF CONTENTS

The Inflation Survival Handbook

The Inflation Survival Handbook

Government Distorts Economic Activity And Should Be Minimized

The Inflation Survival Handbook

Reading Money Mischief

The Inflation Survival Handbook

Using this Report as a Guide to Money Mischief

Understanding Money and Its Uses: Currency Basics

The Inflation Survival Handbook

The Inflation Survival Handbook

Daily Inflation Rate

The Inflation Survival Handbook

Washington Is Lying To Us. Badly.

Why Uncle Sam Doesnt Want You to Know Inflation Exists

The Inflation Survival Handbook

The Inflation Survival Handbook

How the Government Enables Bad Banking

The Inflation Survival Handbook

Wall Street Is Just an Address in Manhattan

The Inflation Survival Handbook

Americas Dilemma: Inflate or Die

The Inflation Survival Handbook

A Difficult, But Effective, Way Out

A Blueprint for Your Salvation

The Inflation Survival Handbook

Safe Inflation Play #1: Buy Great Dividend Stocks

The Inflation Survival Handbook

Safe Inflation Play #2: Be a Contrarian at Heart

The Inflation Survival Handbook

Safe Inflation Play #3: Acquire Commodities The Anti-Dollar

The Inflation Survival Handbook

Gold Price in U.S. Dollars

The Inflation Survival Handbook

Trading the Commodities Futures Market

Trading Futures Options

The Inflation Survival Handbook

Commodities Exchange-Traded Funds, Exchange-Traded Notes, Mutual Funds

Safe Inflation Play #4: Ride the Forex Wave

The Inflation Survival Handbook

Major Currency Pairs

Playing the Forex Market

The Inflation Survival Handbook

Easy Ways to Own Foreign Currencies

The Inflation Survival Handbook

Safe Inflation Play #5: Protect Your Tax-Deferred Retirement Accounts

The Inflation Survival Handbook

Putting Friedmans Genius to Work

The Inflation Survival Handbook

You might also like