The Next Great Depression

I was provoked by Tito’s recent post with a great cartoon on the economy. Like him I am greatly concerned about where the U.S. Dollar, our economy and country are headed. This post is related to an earlier post that Christopher Blosser and I co-posted on the Austrian School of Economics. Let me state from the beginning that I am neither an economist nor a certified financial planner. My opinions are worth the value of the cyber ink you are now viewing. It seems clear to me though that our economy is heading into a double-dip recession and possible depression, which is actually calling it what it is. I don’t see how the current policies and actions of the Treasury Department and Federal Reserve are helping the common man. The rate of interest for savings is so minimal now and for the foreseeable future that it can be compared to the sand under the ocean, not the raft-boat on top of the waves. Therefore what can we do to not lose and potentially grow our savings?

Many are recommending to invest in precious metals, i.e. owning the actual metal itself or purchasing into Exchange Traded Funds (ETFs), stocks or mutual funds. To be sure precious metals serve as a hedge during times of economic uncertainty and possible hyper-inflation. The future of nearly all commodities besides precious metals look bright as well. Another possible investment (equity) strategy would be to invest in the Asia market.

In these economic tough times I have personally benefited (and will hopefully continue to do so) by following the advice of the following folks via their posts/articles, videos, & books.

Peter Schiff
Jim Rogers
Marc Faber

Charles Goyette
Gerald Celente
Max Keiser

Lew Rockwell
Tom Woods
Mises Institute

The National Inflation Association has produced some helpful videos on the economy in general and recommendations on specific precious metals dealers very worth checking out. Reading the following books might also be something you could consider doing when you have a free moment to gain a clearer view of the big picture on how economics and the economy in general works.

Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics

How an Economy Grows and Why It Crashes

The Politically Incorrect Guide to Capitalism

The Politically Incorrect Guide to the Great Depression and the New Deal

Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse

Judge what all these folks say, make your own determination on what you need to do, and then act prudently.

77 Responses to The Next Great Depression

  • Donna V says:

    I am sorry I did not buy gold 8 years ago, as my brother-in-law did. He is a shrewd businessman so just tonight I asked him for advice. I know very little about the stock market. I am a good little saver, though, and am tired of getting very little return on my savings accounts and IRA’s. My brother-in-law thinks the time for buying gold is past, but advised looking into investing in mines. He also said, “Donna, you really should start reading the boring sections of the WSJ and not just the editorial pages and the book reviews.”

  • I’ll pass on gold. If the economy collapses, people will be trading actual, usable goods, not yellow rocks. But then, I don’t think the economy is going to collapse, either… one boy or another has been crying wolf now and then for decades… why believe Schiff et al.?

    I continue to invest in my target retirement fund, currently 90% stocks and 10% bonds.

  • Art Deco says:

    Some time ago a disgruntled customer of Peter Schiff’s investment counseling service turned over statements on his portfolio to a finance blogger who offered a summary of the results. The man’s investments had lost 70% of their value over a period of a couple of years. (I think at that stage Schiff was recommending people buy into foreign stock markets and buy precious metals as a hedge against inflation).

    Not sure where you developed your affection for Austrian economics.

    If you look at the ratio of public sector debt to domestic product registered during the period running from 1929 to 1941 and then look at what has been done today, what you see is shocking. Either we close those deficits or we default. We have no reason to believe that our political class can manage a program to do the former and the latter is virgin territory for this country.

  • David Jones says:

    Chris – usable goods are commodities. Look at how cotton, sugar and nearly all the Ag commodities are growing. Gold serves as a hedge during tough times b/c it holds its value and normally grows. Silver is the the poor man’s Gold and actually has the greatest potential of growth to reach its normal historic ratio compared to Gold.

    Art Deco – Regarding Schiff, tell me anybody who didn’t take a hard hit in 2008? On your later point, Austrians would agree with you. You must save and invest. Keynesians say borrow and spend. That’s why we are in this mess b/c our leaders are following the latter and not the former.

  • T. Shaw says:

    “Some of it’s magic. Some of it’s tragic . . . ” Jimmy (not Warren) Buffett

    You want asset allocation and diversification: land, business (stocks, etc.) and cash (“safe”) in equal proportions, and diversify within each category. Periodic realignment.

    You cannot time the market.

    Either drink heavily or pray. I don’t drink, any more.

    Keep alert. Why watch your portfolio go down? Some traders look for 20% gains and have loss saving strategergies like sell at 5% or 8% down, no matter what. When you have a big gain in a category – sell and realign allocation.

    I sold 9/30 and hit about 68% gain from my last major buys in April 2009. I’m in cash now. Watch the Dow go to 20,000. Oh, well . . . . You can’t time the market.

  • Paul D. says:

    There is a very important point here which many investors have ignored at their own peril. Broad macroeconomic theory should not be conflated with personal investing strategy. The markets don’t listen to theory and neither should you when it leads your portfolio to devastating losses.

  • Blackadder says:

    Some time ago a disgruntled customer of Peter Schiff’s investment counseling service turned over statements on his portfolio to a finance blogger who offered a summary of the results The man’s investments had lost 70% of their value over a period of a couple of years. (I think at that stage Schiff was recommending people buy into foreign stock markets and buy precious metals as a hedge against inflation).

    What time period was this? It’s hard for me to think of how you would have lost 70% investing in precious metals and foreign stocks (unless you held 1% Gold and 99% Greece).

  • Art Deco says:

    You must save and invest. Keynesians say borrow and spend. That’s why we are in this mess b/c our leaders are following the latter and not the former

    Proponents of Austrian economics are quite eccentric characters in that field both in their conclusions and methodology. I certainly would not limit my reading to those sources (particularly to votaries of Austrian economics among those who are not economists – e.g. Peter Schiff and Thomas Woods).

    The point of public expenditure and tax cuts during recessions is to stabilize aggregate demand. There are schools of macroeconomics who regard these models as tripe, to be sure. The thing is, Keynesian insights have been applied by politicians in contexts where they were wholly inappropriate (when the economy was producing at near capacity in 1965-69) and without regard to the actual measurable relation between economic phenomena (attempted stimulus through haphazardly conceived public expenditure during the current crisis).

    Art Deco – Regarding Schiff, tell me anybody who didn’t take a hard hit in 2008?

    I think losing 70% of the value of your investments rather exceeds the norm among those not investing with borrowed money. Equity prices declined by about 50%, real estate by about 30%, municipal bonds hardly at all.

    What time period was this?

    From 2007-09. I have quite forgotten the name of this particular finance blogger.

  • I make no claim to particularly deep financial insight, but I would tend to think that:

    a) If one thinks the economy is both going to fall much further, and that when/if it stablizes it will rise in such a different form than today that investing broadly in equities and bonds would not be a successful 20-30 year horizon strategy, then I’m really not sure what one can do. While precious metals hold a certain appeal, it seems to me that they get inflated in value when economic hard times hit, since there are a large number of people convinced the thing to do at such times is to buy precious metals.

    b) If one is investing for the long term (which as a guy in his 30s investing for retirement, I am) the question is more one of what will work in 30-40 years, not what will happen in the next 5-10. In that regard, investing broadly in stocks and bonds would have worked even in the early 30s if one kept it up for the next 30-40 years.

  • David Jones says:

    http://www.lewrockwell.com/schiff/schiff119.html

    Many commentators are celebrating the “best September for the Dow and S&P in 71 years,” rising 7.7% and 8.8% respectively. Well, it was also a pretty great September for soybeans (up 9.5%), rice (up 10%), oil (up 11%), corn (up 12.2%), orange juice (up 13%), cotton (up 17.5%), and sugar (up 19.3%). In fact, the whole CRB is up 8.7%. The Swiss franc is up 4.6%, the euro up 7%, the Aussie dollar up 9%. Gold is at all-time highs, silver at 30-year highs, and copper at 3-year highs.

    In other words, the box of Uncle Ben’s in my kitchen cabinet had a better month than the Dow Jones Industrials. The same could be said for the boxer shorts in my dresser. Could it be that the Dow isn’t rising, but the dollar falling?

  • M.Z. says:

    The article Art was referencing is available here: http://www.ritholtz.com/blog/2009/01/peter-schiff-was-wrong/

    Marc Faber is the only one on your list that I make a point to hear. I don’t follow any of them. If your investable assets are less than half your income, you are better off with a guaranteed return account like CDs or Treasuries or paying off debt. Speculating for the typical person is an expensive hobby, given the time committment, fees, and odds involved.

  • David Jones says:

    M.Z. – To be sure you are correct to say folks should pay off debt. One should work and pay for only what one can afford to buy. If it’s necessary to go into debt then pay it off as soon as possible. Buy a house and car you can reasonably afford. Be very careful with credit cards, etc. The problem with savings and cds now are the near zero interest rates. Considering real inflation your money is not even preserving it’s current value. You’re not saving by putting your money into a savings account or cd. You’re actually losing money. Your savings are the sand at the bottom of the ocean. We’re not talking about capital appreciation or growth. We’re talking about capital preservation. That’s why keeping interest rates low hurts retirees living off savings and discourages savings for everyone else. With equity investments one always assumes risk. The greater risk, the greater opportunity to gain or lose. It depends upon your investment strategy and hopefully your strategy is diversified.

    Chris – What’s the ticket symbol of your targeted retirement fund? Let’s make a comparison if you’ll allow me.

  • David Jones says:
  • Dale Price says:

    Speculating for the typical person is an expensive hobby, given the time committment, fees, and odds involved.

    As a business writer once said: “The market can stay irrational a lot longer than you can stay solvent.”

  • Art Deco says:

    Civilization survives every crisis except the last one.

    Just to point out that Argentina suffered a contraction in real output of 19% over five years (1999-2004) and the United States suffered one of 27% over 3.5 years (1929-33) and civilization has yet to evaporate. The contraction suffered in this country between the 2d quarter of 2008 and the 2d quarter of 2009 was 3.9%. Of course, buttressing the financial system has relied crucially on the full faith and credit of the United States Government, which our political class is in the process of trashing.

  • Moe says:

    “You have to take out a seven (7) year CD before you make a reasonable return for allowing a bank to borrow your own money…”

    David,
    Agreed, it’s abysmal. I recently had a rather unpleasant dream about heinous-looking, squirming moth larvae gnawing away at my clothes. I was still grossed out upon awakening, but on further thought, I contrasted this dream to my recent worries about the lack/loss of return in my IRA. I still fret about my financial situation, but have been able to put it in a better perspective after reflection on Matthew 6:19-20.

  • M.Z. says:

    I don’t have an issue with debt per se. Those that have been through gentrification know the benefits of having fixed expenses over variable expenses. Those that have experienced significant depreciation in their home’s value know the benefits of variable expenses over fixed. Loans are just a tool that give you the freedom to choose between the two.

    You’re not saving by putting your money into a savings account or cd. You’re actually losing money.

    Theoretically you are losing purchasing power, not money. They aren’t the same thing although they can feel similar. The cost of housing is somewhere around where it was five years ago. That isn’t inflationary. Fuel prices are 1/3 off their 2008 peak. Food prices are higher, but a lot of that can be attributable to Ethanol mandates. Over the past year, dried milk prices have fallen to the point where the government’s price floor has been hit, resulting in gov’t purchases. Retail prices of beef, pork, and chicken are down year over year. Prices of turkey, veal, and lamb are up. (http://www.retail-lmic.info/CD/StandardReports/BLSTable3.htm ) Needless to say, I am not having fears of inflation right now. Add into that high UE, and you aren’t likely to see rising wages anytime soon.

    Getting back on point, the savings in CDs and whatnot are still real and still guaranteed. There is no saving in the stock market.

  • David Jones says:

    I am not predicting, nor advocating for, the end of the world. Like Tito though I am worried about our economic future. To be concerned for the sake of our families is to be prudent. Allow me to give you a local example.

    I live in the best school district in my small city. Houses which go up for sale normally sell quickly. This last year I have had 3-4 houses on my small block alone have great difficulty selling and many have set vacant for far too long. Now granted this is part of the housing bubble, but our economic fundamentals are more deeply troubled than just bad housing loans. Just look around your city? Are you seeing what I am seeing? Do you have relatives or friends who are having problems trying to find employment and are doing all the right things?

    How can the average man, the common man, prosper in these times if not just preserve what he has?

    I might add this where the Distributists have something to teach us as well. Maybe these economic tough times will help us focus on what is proximate, what is local. Those that can depend on their families, their neighbors and local communities will persevere. And having a gun and some idle 1 oz Silver Eagle bullion coins might be helpful as well…

  • On CDs and savings accounts (plus other low interest but stable things such as money market funds) — it’s probably best to see these as stable holding places for money you may need in the near future. Money that you don’t need within the next 10+ years is better off in stock or bond funds.

    The trick then, since you know you won’t be tapping your long term savings any time soon, is simply not to worry yourself much about what’s happening with your long term savings. If the funds you’ve invested in are sufficiently broad, they will do well in the long term in any situation short of the destruction of the modern economy — something some people like to predict, but which if it happens will give you more to worry about than your 401k.

    Or at least, that’s my approach. I look at the value of my 401k about once year and adjust how it’s invested, but aside from that, I studiously ignore its fluctuations as something I really shouldn’t be wasting worry on.

  • Art Deco says:

    When a full blown Keynesian economist and near Socialist, Robert Reich, is admitting the fact of a double-dip recession you know we’re in deep trouble…

    A “double dip” recession is not a ‘fact’ but a projection based on leading indicators, nor was it a fact when Prof. Reich was writing in June. It is hardly a consensual projection among economists. Mr. Reich is, by the way, a law professor who also produces economic journalism. He is not an economist.

  • David Jones says:

    I am a simple person when it comes to finances. Maybe others are like me. Savings are an immediate fall-back, a safety-net. They must be available to serve an immediate need and unexpected cost. Locking savings into a 7 year cd is not savings, it’s an investment with a guaranteed return. Personally like Chris & others alluded to in their comments, if you’re investing more than 5 years out it’s worth looking into equity investments and doing dollar cost averaging. You can absorb the downturns in the market and take advantage of them. One only hopes its up by the time you need those funds, i.e. during your retirement era, etc. That’s why targeted retirements funds are worth checking into. They are more risky and volatile early on and grow conservative as the fund matures. It’s just tough to be a retiree in these days. You don’t want to risk your nest-egg, but you’re not making hardly any off of it either.

  • David Jones says:

    The question for me is how can an average person keep his head above water? If you assume a normal 3% inflation rate you need to earn at least that much or more in interest to just cut even. As discussed neither savings or cds are paying anywhere close to that. Neither are money market accounts therefore what can we do to preserve our savings? The answer could very well be bond funds. They provide on average between 6-8% interest with monthly dividends and depending on the type of bond fund most have minimal risk. Consider this option. What do you think?

  • Blackadder says:

    If you assume a normal 3% inflation rate you need to earn at least that much or more in interest to just cut even. As discussed neither savings or cds are paying anywhere close to that.

    I think the reason interest on savings and cds hasn’t been close to 3% is that inflation hasn’t been close to 3% and isn’t expected to be soon.

  • Moe says:

    David,
    Yield on bonds is very low right now and if interest rates start to rise, they will not be minimal risk. Please consider CDs for your nest egg if you anticipate needing it in the near future or just keep your money in the bank if you are not investing for the long term. Good luck and God bless.

  • David Jones says:

    Art Deco – you’re good. No problems on this end. I welcome your comments.

    Blackadder – don’t you think they way they officially determine inflation is goofy? By the Fed printing more and more money how can that not cause inflation? If the Dollar is losing value how is that not inflation? Is Celente right in his intro video on his website linked above? They don’t measure the increased cost of common items like food or fuel into calculating inflation? The average Joe out there would argue they are being scr-wed. How accurate is that? I don’t know.

  • T. Shaw says:

    The fundamentals are not there.

    The US $ is free falling vs nearly all currencies. Unemployment is reported 9.6%, but underemployment raises that to 17%. The supply of homes for sale is huge and demand feeble, even with government loan mod programs and new moratoria on foreclosures temporarily keeping bad loan properties off the market. One thing: the worst of the RE thing is in AZ, FL, CA, NV, MI, IL, the other places are moribund, but not shipwrecks like these.

    The people with money (that don’t need to buy) have deflationary expectations for RE, and if they make an offer, it will be low.

    The Fed Funds rate is just above zero%, the Fed monetized (printed dollars) $1.25 trillion in (otherwise) worthless mortgage paper, yet and business activty is not moving. Now, the Fed may monetize (buy with printed money) NYSE/NASD stocks.

    Too much uncertainty: taxes, regulations, mandates, etc. Add that to the housing depression and . . .

  • Art Deco says:

    By the Fed printing more and more money how can that not cause inflation?

    The money multiplier is quite low. The increases in the monetary base have been absorbed by increases in bank reserves while the size of bank loan portfolios have stayed the same. Also, changes in the propensity of people to hold cash balances will modulate the effect of increases in the money supply on prices.

  • Blackadder says:

    They don’t measure the increased cost of common items like food or fuel into calculating inflation?

    Food and fuel are included in the CPI. They aren’t included in core inflation, on the grounds that the prices are so variable that they can lead to misleading spikes and falls.

    Both inflation and core inflation have been low for the last two years. In 2009 core inflation was actually higher (meaning that the price of food and fuel did not rise as much as other prices). Actually the inflation rate in 2009 was negative, meaning that prices, particularly the prices of food and fuel, went down not up.

    If the Dollar is losing value how is that not inflation?

    If you’re talking about the dollar losing value compared to another currency, then that needn’t involve inflation (suppose, for example, that you had 2% deflation in the U.S. and 3% deflation in the Eurozone. The dollar would then be weaker against the Euro, but you wouldn’t have inflation).

    Is Celente right in his intro video on his website linked above?

    I’m afraid I can’t find the video you’re talking about, so I really can’t respond.

  • Blackadder says:

    Also, if I may attempt a little Austrian jujitsu: The amount that a bank gives in interest on a cd or savings account is a market price which should vary with inflation. If inflation is high banks will have to offer a high rate to attract customers; if inflation is low the rate will be lower. So even if you are suspicious of the official inflation numbers, the fact that interest rates for savings accounts and cds are so low suggests that inflation is low too.

  • American Knight says:

    The market is running up through the election. Then, in anticipation of a massive increase in the capital gains and income tax rates investors will harvest their gains and the market will begin to drop. . .drop . . drop . . .

    Socialist legislation, high unemployment, a central bank that is adding bits and bytes to the monetary base at a ridiculous rate and a currency that has been backed by nothing other than the arrogance of a broke government with a lot of guns since 1971 and you have a recipe for a huge disaster.

    It may be one we can’t survive – the time for the USA as it is currently structured in this sick progressive/socialist/collectivist deformity with a eugenicist outlook and neo-pagan culture, is very short.

    We need to right this ship and soon. Stocks, bonds, ETFs, IRAs, etc. will be worthless. Trade-worthy commodities are the only insurance, not precious metals, unless you think you have some place to go with a decent economy and you can use your gold and silver to get started.

    For those who think the economy will continue with some prudent corrections, consider that the only real accounts left are those in the general accounts of life insurance companies ($6.3 trillion). For the rest guns, ammo, MREs, canned food, freeze dried food, cigarettes, alcohol, gasoline, clean water, etc. will be the only useful things to own.

    Is the USA gonna get wiped out? Are we going to recover and become a prosperous, moral Constitutional Republic again? Dunno – I suspect something in between, but things are going to change and change dramatically. We voted for change and I hope we don’t get the change we’ve been promised because only eugenicists, Fabians, homosexualists and socialists want it – oh, wait, those are all the same.

    We shall reap what we have been sowing and it ain’t pretty.

  • David Jones says:

    Blackadder – click on the hyperlink for Gerald Celente above. It’s the first video that automatically pops on. Watch it. It’s highlights from his various guest appearances on various shows. He talks about inflation in one of those clips.

    American Knight – keep preaching brother!

    In all seriousness guys I hope I am wrong. I hope this ship gets turned around. It’s hard to have some historical perspective on this for me. I was born in the early 70s and don’t remember that decade of inflation very well. Most memories are from the good times in the 80s and beyond.

    Is America past its prime? Is China, India & the Pacific Rim the next giants? Are we now Britain? Is NAFTA & CAFTA our greatest hope? Some type of regional trading bloc to deal with the E.U., but especially the Pac Rim?

    Jim Rogers and Marc Faber live in Asia for a reason… Maybe we should be teaching our kids Chinese..

  • Blackadder says:

    David,

    I watched the Celente video. His criticism of the inflation numbers is that food and fuel aren’t included in core inflation. But food and fuel are included in the CPI.

  • David,

    VTTHX.

    Since 1926 (i.e. including the Great Depression and the Great Recession we are [were?] in), the stock market has returned an average annual nominal yield of 9.9%. If you’re talking about investing for 10+ years (as you and others have noted), then it seems like a no brainer, unless you think that our system is going to completely collapse, in which case (as I already noted) gold will be of little practical value.

    Short term savings is a dicey thing, as others have noted, because of low interest rates. But it’s not like gold is a safe investment: http://goldprice.org/30-year-gold-price-history.html. What if you bought gold in the spring of ’80, trying to get it on its way up, and you held it because it was “safe”?

  • Art Deco says:

    Ach. [Since I am not on moderation, here is a 4th attempt].

    When a full blown Keynesian economist and near Socialist, Robert Reich, is admitting the fact of a double-dip recession you know we’re in deep trouble

    1. We are not in a recession at this moment and have not been for the last 15 months or so. At this point, a ‘double dip’ recession would be a projection derived from leading indicators. That we will have a second contraction is a possibility but by no means a consensus among economists. This is Douglas Holtz-Eakin (former director of the Congressional Budget Office) on the subject:

    This report is another strike against fear of a double-dip recession, but shows no indication of robust growth. The economy continues to grow but at an unacceptably slow pace and unemployment will remain stubbornly high. It is no surprise. The fact that there is no robust expansion in sight speaks volumes for the need of a new approach to economic policy in Washington.

    2. Mr. Reich is a lapsed law professor who has composed a body of economic journalism. He is not an economist.

    3. Why would a Keynesian be expected in these circumstances to offer a more optimistic prognosis than anyone else? (Consider Dr. Krugman’s rants over the last three years).

  • David Jones says:

    Chris,

    Thanks for responding. Hopefully this will serve as a learning opportunity for all. First, let me state I think a targeted retirement fund are a good thing to look into and I personally invest in one (URTRX). No one, at least not me, is suggesting you put your entire nest egg or savings into precious metals. I don’t know why you’re a precious medals hater though.

    If a person invested in Gold or Silver bullion in the last year you could now sell at a large profit. That’s a fact. Consider if you have more than 100 oz of Silver how much growth you have achieved? Compare that to what you have earned in your savings account.

    http://www.coininfo.com/charts/

    http://en.wikipedia.org/wiki/Gold_as_an_investment

    http://en.wikipedia.org/wiki/Silver_as_an_investment

    The inflation adjusted price of Gold should be $2300-2400. Silver’s historic ration to Gold is 15-18:1. Both have a huge potential of growth. To reach the price they should be it still has much room to grow. The fundamentals of the precious medals market are solid, especially for bullion. There is no bubble even when considering precious metal stocks.

    Now let’s make a non-biased comparison. VTTX vs. USAGX.

    VTTHX
    http://www.google.com/finance?q=vtthx

    USAGX (Morningstar #1 rated fund in its category for the last 10 years, #2 in the last 5 years)
    http://www.google.com/finance?client=ob&q=MUTF:USAGX

    Stop being such a Gold hater, not to mention, both Gold & Sliver have been the real standard for monetary systems world-wide for thousands of years. Fiat currencies and Central Banks always collapse time after time after time…

  • Art Deco says:

    David Jones, with reference to your comments on 8 October at 10:18 am.:

    1. We are not in a recession at this moment and have not been for the last 15 months or so. At this point, a ‘double dip’ recession would be a projection derived from leading indicators. That we will have a second contraction is a possibility but by no means a consensus among economists. This is Douglas Holtz-Eakin (former director of the Congressional Budget Office) on the subject:

    This report is another strike against fear of a double-dip recession, but shows no indication of robust growth. The economy continues to grow but at an unacceptably slow pace and unemployment will remain stubbornly high. It is no surprise. The fact that there is no robust expansion in sight speaks volumes for the need of a new approach to economic policy in Washington.

    2. Mr. Reich is a lapsed law professor who has composed a body of economic journalism. He is not an economist.

    3. Why would a Keynesian be expected in these circumstances to offer a more optimistic prognosis than anyone else? (Consider Dr. Krugman’s rants over the last three years).

  • M.Z. says:

    Since 1926 is composed of only 8 contiguous 10-year periods. Presently we are below the 2000 peak. If you are going to say “but dollar cost averaging”, remember that you will be dollar cost averaging when you pull your money out. There are of course over problems with this raw statistic. One of them is that bankrupt companies disappear. The other is that new companies magically appear even though they are the product of the addition of new money. To put this in more understandable terms, it is like the guy who buys a house for $100,000, does a $20,000 bathroom remodel, and replaces the roof for $12,000 claiming he made a $25,000 profit when he sold for $125,000. When you study the stock market, you find most of the gains and losses occur over short periods that are not terribly easy to predict.

    Short term savings is a dicey thing
    It is the safest thing in the world. Really. Understand that stock and bond markets can go up and they can most certainly go down, even in the presence of inflation. If you are that worried about inflation, invest in TIPS.

  • Art Deco says:

    Fiat currencies and Central Banks always collapse time after time after time

    Many years ago I took a course in monetary economics from Sir Alan Walters, who was alternating between stints of college teaching in the U.S. and a position as a counselor to Margaret Thatcher. He was a prominent monetarist of that era. His concise description of advocates of a gold standard: “I think they’re crackers”.

  • Art Deco says:

    Equity prices are ultimately derivative of corporate earnings. The distribution of national income between wages, rent, interest, and profit does vary over time but tends to regress to certain long-term averages. Price-earnings ratios in equity markets also tend to regress to certain long-term means (~15 to 1). There are people who can and do beat the market over time, but for the rest of us the best strategy may just to put your savings in a basket of instruments the composition of which varies according to your age and pay careful attention to the fees being extracted by fund managers. (Since you are fond of Austrians, I will recall the rule-of-thumb S.H. Hanke gave his daughters: the proportion of your savings in equities should be a percentage equal to 100 less your chronological age. The rest should be in bonds, money market, etc.)

  • American Knight says:

    Equities are securities (rights) to ownership title only; otherwise, calling them securities is a misnomer – they are actually ‘riskies’ – not much secure about them.

    To use a rule of thumb about how much in equities and how much in debt instruments is fairly foolish and certainly not in keeping with a spirit of stewardship.

    Bonds are debts. In the current environment to whom do you think it is safe to lend your money? The US government? Broke. State governments? Broke. Municipalities? Broke. Banks? Broke. Corporations? The precedent set by the government bailout (takeover) of GM is unsettling. I would suggest being a lender of your own money in this environment is crazy and lending someone else’s money is just usury.

    The stock market is for investors. You only invest your excess money, not your operating funds, savings or tithing.

    In this day you should be looking at hard assets and if you desire some paper savings, consider the general account of a solid life insurance company. It wouldn’t hurt to get a big, fat fixed mortgage either – so long as the payments are manageable.

    Our economy is going to change dramatically and very soon. Looking at performance based on any prior ten year period and projecting out over the next ten years is insane. It won’t happen that way. We will either collapse and be absorbed into a regional socialist economy, or worse a global one; or, we will take corrective action based on prudence, principle and freedom (a jarring effect at minimum); or, we will continue on this path and chaos will ensue. Nothing is going to remain the same. The foolish assumptions of the past will be revealed for their hollow promises.

    The Great Depression occurred in 1921, the Greater Depression began in 1929 and lasted over a decade and a half. The Greatest Depression, the one we are in right now, has only begun to yield its fruits and they are rotten, rotten, rotten. Many of us will not survive this one. These things have two results: Either prudence and endurance through the difficulties, or war.

    St. Matthew, ora pro nobis.

  • T. Shaw says:

    Chris B and AK:

    Gold is an inflation hedge and (like guns and ammo) a doomsady play. When the US trillion bill (will have Michelle Antoinette’s face on it) is circulated, that ounce gold coin will be pretty portable.

    Why do you think the first campaign promise FDR broke was by exec order to confiscate all gold held by we tthe people? I don’t know.

    In the early 1990′s I began buying gold as a diversification play, a little at a time – hree ounce coins b/c over $1,000 was not subject to sales tax. My cost basis is less than $400 an ounce and less than 2% of my net worth.

    I intend to leave each son 52 ounce coins, a “traditional” working man’s weekly salary. Too high to buy right now.

  • David Jones says:

    I suggest we all go into Day Trading. Each member of Team American Catholic become an expert in a different commodity.

    Jones – Gold & Silver
    Burgwald – Coal
    Art Deco – Sugar
    TShaw – Copper
    Blackadder – Cotton
    American Knight – Ammo, Grain & Aluminum

  • I can’t afford cable like you, Jones. I’m a Ramsey *listener*, not watcher. And a ressourcementer like yourself should be able to embrace truth wherever it’s found. ;-)

    T. Shaw, my understanding is that over the last century plus, gold has “underperformed” inflation… not sure how it’s a hedge against it then.

  • American Knight says:

    CPI is not a measure of inflation, it is a poor measure of the effect of inflation – rising prices. In reality it is merely a propaganda statistic to make us think inflation is low and steady and keep SSI and government salaries/pensions COLA adjustments low.

    Gold is not an inflation hedge – there is no inflation hedge except for having a properly checked people’s House and State’s Senate regulate the unit of money, keep the money supply fixed, avoid debt except when absolutely necessary and then pay it down immediately. Gold is a portable and convenient money and will be useful when we get out of this socialist/progressive nightmare or if you can find a foreign country that is not plugged into the same deceitful system.

    As I have said before if you are looking for a safe place to store wealth until we get through this storm and you hope and expect that we will come out with a Constitutional Republic on the other side look at the general accounts of life insurance companies.

    Dave Ramsey is a financial moron. Watching, listening or reading his musings will only get you robbed of all of your wealth – he has no idea what he’s talking about. he may be well intentioned, but he is incompetent.

    We are not entering an economic depression, we are in the first stages of THE depression and the only way out is by returning to our founding principles, sound money, a moral culture and God. If you keep playing the monopoly game with funny money – you will lose everything. But, have no fear, for where thy treasure is, there will thy heart be also.

  • Art Deco says:

    David Jones,

    Explain to me this:

    1. We have a stratum of people who work in salaried positions, or in consultancy which require a certificate or license, or in small businesses that they own and run. What gives you or Casey the idea that the division of labor in our society will be so reconstituted as to eliminate this stratum of people?

    2. Can you point to an example of any society that has a bi-modal income distribution (such as you find in certain occupational groups – e.g. lawyers)?

    3. Is that middling stratum abnormally invested in the sort of instruments that a most vulnerable to inflation (e.g. bonds, annuities and insurance policies derived from bonds, &c.)?

  • David Jones says:

    Art Deco – I thought the Casey interview an interesting one b/c it’s directly related to the content of the post and comments contained therein… I don’t necessarily agree with him on all matters. Make your point(s) regarding your questions above.

  • Art Deco says:

    He does not address any of my points. He offers a string of assertions to his interviewer and if there is one subsidiary argument or factual point in support, I missed it. This is not worth anyone else wasting their time to read.

  • David Jones says:

    Quotes from the above Ron Paul article
    “The Fed has been wreaking havoc and devaluing our monetary unit steadily since 1913, and greatly accelerating it since the collapse of the Bretton Woods agreement in the 1970s. This severing of the dollar’s last tenuous link with gold allowed the Fed to create as much new money as it pleased, and it has taken full advantage of this opportunity.

    In 1971, Gross Domestic Product (GDP) was $1.29 trillion. Today it is $14.6 trillion, nominally. But adjusted for all the inflating the Fed has been doing, it is only $2.73 trillion, which constitutes only a 1% real increase per year! So with all this extra money going around, we may appear nominally wealthier, but the reality is, we have barely moved at all. This is unfortunate especially for the prudent, conscientious savers, whose nest eggs are constantly being devalued…”

  • In 1971, Gross Domestic Product (GDP) was $1.29 trillion. Today it is $14.6 trillion, nominally. But adjusted for all the inflating the Fed has been doing, it is only $2.73 trillion, which constitutes only a 1% real increase per year! So with all this extra money going around, we may appear nominally wealthier, but the reality is, we have barely moved at all. This is unfortunate especially for the prudent, conscientious savers, whose nest eggs are constantly being devalued

    This would seem to suggest a belief on the speakers part that if we had not had inflation, we would have experienced greater real economic growth, but this is not necessarily the case.

    Nor does inflation necessarily hurt savers, unless these are the sort of savers who keep cash in matresses, as both interest rates and security prices include inflation in their pricing.

    I suppose one can aesthetically object to the idea that not all of the increase in one’s savings are “real”, but so long as one’s buying power is the same, I’m not clear how this becomes a major issue. Also, it leaves aside what a ticklish issue talking abouot “real” values over time would be. One must, in such a circumstance, pick the value of certain goods or services to hold constant in order to establish what a “real” value is. However, the difficulty of producing various goods and services is constantly changing, and so any decision to hold a given thing or group of things constant will to some extent distort one’s conclusions.

    This is why I don’t necessarily see why people get worked up about the kind of modest inflation targeting which the Fed has been working towards over the last 30 years or so.

  • Art Deco says:

    In 1971, Gross Domestic Product (GDP) was $1.29 trillion. Today it is $14.6 trillion, nominally. But adjusted for all the inflating the Fed has been doing, it is only $2.73 trillion, which constitutes only a 1% real increase per year!

    I think the precise figure for growth in per capita income over the last generation is 1.4% per year. Over the period running from 1929 to 1980, it was about 2% per year. Stanley Engerman has offered an estimate for the colonial period of growth in per capita income of 0.6% per year.

    Compound interest, sir. An annual growth rate of 1.4% per year means a doubling time of fifty years.

  • David Jones says:

    Is The US Destroying the Middle Class?
    http://the-american-catholic.com/2010/10/11/is-the-us-destroying-the-middle-class/

    The crisis of middle-class America
    http://www.ft.com/cms/s/2/1a8a5cb2-9ab2-11df-87e6-00144feab49a.html

    “The slow economic strangulation of… millions of other middle-class Americans started long before the Great Recession, which merely exacerbated the ‘personal recession’ that ordinary Americans had been suffering for years. Dubbed ‘median wage stagnation’ by economists, the annual incomes of the bottom 90 per cent of US families have been essentially flat since 1973 – having risen by only 10 per cent in real terms over the past 37 years. That means most Americans have been treading water for more than a generation. Over the same period the incomes of the top 1 per cent have tripled. In 1973, chief executives were on average paid 26 times the median income. Now the ­multiple is above 300.

    The trend has only been getting stronger. Most economists see the Great Stagnation as a structural problem – meaning it is immune to the business cycle. In the last expansion, which started in January 2002 and ended in December 2007, the median US household income dropped by $2,000 – the first ever instance where most Americans were worse off at the end of a cycle than at the start. Worse is that the long era of stagnating incomes has been accompanied by something profoundly un-American: declining income mobility…”

  • R. Lieb says:

    I invested a large sum of my IRA in a precious metals mutal fund about two years ago (when Obama was elected) becasue I knew that Democrats controlling both Congress and the White House would do nothing for the ecomony. I just recently sold off all my shares becasue the fund I was invested in reached a historic high. I think that after the mid-term elections, when Republicans will likely re-take both houses, investors will regain a level of confidence in the market and the fund will likely drop in value, at which point I will likely re-invest in it. Infation is coming, despite what the Fed says, and I think the banks know this, which is why they have not been lending and are sitting on large sums of cash. Any pre-inflation loans at 3-6% will lose them money after inflation reaches the likely 8-12% or higher that many are predicting.

    On another note about gold, as India and China continue to develop, the demand for gold will continue to rise as their citizens (mostly the women) are able to affort gold jewelry. This factor along with the impending inflation, means that gold will likley continue to rise in the next 4-6 years.

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