How to Save Your Money and Your Life

By Doug Casey from Casey Research

I think there are only two good reasons for having a significant amount of money: to maintain a high standard of living and to ensure your personal freedom. There are lesser reasons, of course, including: to prove you can do it, to compensate for failings in other things, to impress others, to leave a legacy, to help perpetuate your genes, or maybe because you just can’t think of something better to do with your time.

But I’ll put aside those lesser motives, which I tend to view as psychological foibles. Basically, money gives you the freedom to do what you’d like – when, how, and with whom. Money allows you to have things and do things and can even assist you to be something you want to be. Unfortunately, money is a chimera in today’s world and will wind up savaging billions in the years to come.

As you know, I believe we’re into at least the fourth year of what I call The Greater Depression. A lot of people believe we’re in a recovery now; I think, from a long-term point of view, that is total nonsense. We’re just in the eye of the hurricane and will soon be moving into the other side of the storm. But it will be far more severe than what we saw in 2008 and 2009 and will last quite a while – perhaps for many years, depending on how stupidly the government acts.

Real Reasons for Optimism

There are reasons for optimism, of course, and at least two of them make sense.

The first is that every individual wants to improve his economic status. Many (but by no means all) of them will intuit that the surest way to do so is to produce more than they consume and save the difference. That creates capital, which can be invested in or loaned to productive enterprise. But what if outside forces make that impossible, or at least much harder than it should be?

The second reason for optimism is the development of technology – which is the ability to manipulate the material world to suit our desires. Scientists and engineers develop technology, and that also adds to the supply of capital. The more complex technology becomes, the more outside capital is required. But what if sufficient capital isn’t generated by individuals and businesses to fund further technological advances?

There are no guarantees in life. Throughout the first several hundred thousand years of human existence, very little capital was accumulated – perhaps a few skins or arrowheads passed on to the next generation. And there was very little improvement in technology – it was many millennia between the taming of fire and, say, the invention of the bow. Things very gradually accelerated and improved, in a start-stop-start kind of way – the classical world, followed by the Dark Ages, followed by the medieval world.

Finally, as we entered the industrial world 200 years ago, it looked like we were on an accelerating path to the stars. All of a sudden, life was no longer necessarily so solitary, poor, nasty, brutish, or short. I’m reasonably confident things will continue improving, possibly at an accelerating rate. But only if individuals create more capital than they consume and if enough of that capital is directed towards productive technology.

Real Reasons for Pessimism

Those are the two mainsprings of human progress: capital accumulation and technology. Unfortunately, however, that reality has become obscured by a morass of false and destructive theories, abetted by a world that’s become so complex that it’s too difficult for most people to sort out cause and effect. Furthermore, most people in the developed world have become so accustomed to good times since the end of World War II that they think prosperity is automatic and a permanent feature of the cosmic firmament. So although I’m very optimistic, progress – certainly over the near term – isn’t guaranteed.

These are the main reasons why the standard of living has been artificially high in the advanced world, but don’t confuse them with the two reasons for long-term prosperity.

The first is debt. There’s nothing wrong with debt in itself; lending is one way for the owner of capital to deploy it. But if a society is going to advance, debt should be largely for productive purposes, so that it’s self-liquidating; and most of it would necessarily be short term.

But most of the scores of trillions of debt in the world today are for consumption, not production. And the debt is not only not self-liquidating, it’s compounding. And most of it is long term, with no relation to any specific asset. A lender can reasonably predict the value of a short-term loan, but debt payable in 30 years is impossible to value realistically. All government debt, mortgage debt and consumer debt and almost all student loan debt does nothing but allow borrowers to live off the capital others have accumulated. It turns the debtors into indentured servants for the indefinite future. The entire world has basically overlooked this, along with most other tenets of sound economics.

The second is inflation. Like debt, inflation induces people to live above their means, but its consequences are even worse, because they’re indirect and delayed. If the central bank deposited $10,000 in everyone’s bank account next Monday, everyone would think they were wealthier and start consuming more. This would start a business cycle. The business cycle is always the result of currency inflation, no matter how subtle or mild. And it always results in a depression. The longer an inflation goes on, the more ingrained the distortions and misallocations of capital become, and the worse the resulting depression. We’ve had a number of inflationary cycles since the end of the last depression in 1948. I believe we’re now at the end of what might be called a super-cycle, resulting in a super-depression.

The third is the export of dollars. This is unique to the US and is the reason the depression in the US will in some ways be worse than most other places. Since the early ’70s, the dollar has been used the way gold once was – it’s the world’s currency. The problem is that the US has exported about $7 trillion in exchange for good things from around the world. It was a great trade for a while. The foreigners get paper created at essentially zero cost, while Americans live high on the hog with the goodies those dollars buy.

But at some point quite soon, dollars won’t be readily accepted, and smart foreigners will start dumping their dollars, passing the Old Maid card. Ultimately, most of the dollars will come back to the US, to be traded for the title to land and businesses. Americans will find that they traded their birthright for a storage unit full of TVs and assorted tchotchkes. But many foreigners will also be stuck with dollars and suffer a huge loss. It’s actually a game with no winner.

What’s Next

These last three factors have enabled essentially the whole world to live above its means for decades. The process has been actively facilitated by governments everywhere. People like living above their means, and governments prefer to see the masses sated.

The debt and inflation have also financed the growth of the welfare state, making a large percentage of the masses dependent, even while they’ve also resulted in an immense expansion in the size and power of the state over the last 60-odd years. The masses have come to think government is a magical entity that can do almost anything, including kiss the economy and make it better when the going gets tough. The type of people who are drawn to the government are eager to make the state a panacea. So they’ll redouble their efforts in the fiscal and monetary areas I’ve described above, albeit with increasingly disastrous results.

They’ll also become quite aggressive with regulations (on what you can do and say, and where your money can go) and taxes (much higher existing taxes and lots of new ones, like a national VAT and a wealth tax). And since nobody wants to take the blame for problems, they’ll blame things on foreigners. Fortunately, (the US will think) they have a huge military and will employ it promiscuously. So the already bankrupt nations of NATO will dig the hole deeper with some serious – but distracting – new wars.

It’s most unfortunate, but the US and its allies will turn into authoritarian police states. Even more than they are today. Much more, actually. They’ll all be perfectly fascist – private ownership of both consumer goods and the means of production topped by state control of both. Fascism operates free of underlying principles or philosophy; it’s totally the whim of the people in control, and they’ll prove ever more ruthless.

So where does that leave us, as far as accumulating more wealth than the average guy is concerned? I’d say it puts us in a rather troubling position. The general standard of living is going to collapse, as will your personal freedom. And if you’re an upper-middle-class person (I suspect that includes most who are now reading this), you will be considered among the rich who are somehow (this is actually a complex subject worthy of discussion) responsible for the bad times and therefore liable to be eaten. The bottom line is that if you value your money and your freedom, you’ll take action.

There’s much, much more to be said on all this. I’ve said a lot on the topic over the past few years, at some length. But I thought it best to be brief here, for the purpose of emphasis. Essentially, act now, because the world’s combined economic, financial, political, social, and military situation is as good as it will be for many years… and a lot better than it has any right to be.

What To Do

No new advice here, at least as far as veteran readers are concerned. But my suspicion is that very few of you have acted, even if you understand why you should act. Peer pressure (I’m confident that you have few, if any, friends, relatives, or associates who think along these lines) and inertia are powerful forces.

That said, you should do the following.

1. Maintain significant bank and brokerage accounts outside your home country. Consider setting up an offshore asset protection trust. These things aren’t as easy to do as they used to be. But they’ll likely be much less easy in the future.
2. Make sure you have a significant portion of your wealth in precious metals and a significant part of that offshore.
3. Buy some nice foreign real estate, ideally in a place where you wouldn’t mind spending some time.
4. Work on getting official residency in another country, as well as a second citizenship/passport. There’s every advantage to doing so, and no disadvantages. That’s true of all these things.

One more thing: Don’t worry too much. All countries seem to go through nasty phases. Within the lifetime of most people today, we’ve seen it in big countries such as Russia, Germany and China. And in scores of smaller ones – the list is too long to recount here. The good news is that things almost always get better… eventually.

Fear Risk, Not Volatility

By Jeff Nielson

While watching a little television the other night, I was once again confronted by my biggest pet peeve: investment professionals who confuse risk and volatility.

In this case, the offender was a TV commercial heralding the supposed virtues of an annuity with a “guaranteed rate of return.” The suggestion is that such an arrangement removes risk from the table. The investor is led to think, “If I pay monthly payments of $X now, I am guaranteed future payments of $Y in the future.” But every investment carries risk, and a fixed payout structure doesn’t obviate that risk.

These companies have a financial interest in confusing investors, but the unfortunate byproduct of decades of this sort of marketing is that very few people, and not even most financial journalists, know the difference between risk and volatility. As always, logical analysis starts with definition of terms. Indeed, once we simply note the nature of volatility and risk in explicit terms, the flaws to which I alluded should begin to become self-evident to readers.

While it can be very difficult to quantify risk, defining it is simple. Risk, in the context of investment, is the probability that something you purchased will end up being worth less than what you paid for it when you decide to sell it. We can get more technical by adding in the concept of opportunity costs, but it’s important for everyone to have at least an elementary understanding of risk first.

Volatility, on the other hand, is a concept that is as easy to recognize in the real world as it is to define. Volatility is a purely mathematical concept that refers exclusively to “deviations from the mean.”

If we establish a trend line for the price of any good/investment (often referred to as a “moving average”), volatility refers to the average size of the bounces in price on either side of the trend line. Most importantly, to the long-term investor, volatility is a small factor in assessing risk.

Here we can only point to the gross failure of all of the “experts” (and most of the financial advisors) in the investment community, who regularly and thoroughly confuse these two concepts to the point where the terms are treated as being virtually synonymous. This has resulted in the flawed investment principle that reducing volatility will (and must) reduce risk. Such thinking is deeply misguided, and following it has dire consequences for investors.

Recalling our definition of volatility, we should immediately note why it provides us little insight about risk: because it implies absolutely nothing about the direction of the trend for any particular investment, i.e. up or down. A particular investment can have a volatility of effectively zero, while marching steadily down to a valuation of zero.

The closest and most obvious example of a relentless downward trend with minimal volatility would be the US dollar. This example is useful for many reasons. First, the Federal Reserve has a statutory mandate to “protect the dollar” from risk, i.e. avoid a loss in value. However, in practice, the Federal Reserve has never followed that mandate; instead, it has sought to only minimize volatility.

The result? In the 98 years of the Fed’s existence, the US dollar has steadily lost 98% of its value. The Fed has succeeded in minimizing volatility throughout this long plunge in value; however, it has failed utterly in protecting dollar-holders from risk, or economic losses caused by holding dollars.

Many dollar-holders may still be yawning over this analysis. While no one likes the idea of a 98% loss, when spread over the very long-term, this may not seem like much of a risk. However, when we note that 75% of this decline has occurred just in the last 40 years, this should get their attention. When we further note that this alarming rate of currency-dilution has accelerated significantly just in the last five years, this should be enough to cause all rational dollar-holders to break into a cold sweat.

Meanwhile, clueless media drones still point to the dollar as a “safe haven,” basing this suicidal advice entirely on the fact that the dollar represents (relatively) low volatility – while totally ignoring the absolute risk represented by an accelerating, century-long trend toward zero.

Living in an era of “competitive devaluation,” where all of our governments have promised to race each other in driving the value of their currencies to zero, we finally see the truth about the world of fixed-income investments. Because the banker-paper in which they are denominated is plummeting in value at an unprecedented rate, these investments don’t provide “guaranteed income,” but rather only guaranteed losses.

It is the perfect illustration of the cliché of “the lobster in the pot.” The lobsters (bond-holders) may be entirely comfortable thanks to the slowly rising temperature of the water; however, they’re still going to end up boiled alive!

It is widely reported that real interest rates have never been so negative at any time in history. To translate this, the gap between what we earn in interest and what we lose in currency-dilution (i.e. inflation) has never been this large at any time in the history of modern markets.

Precisely how do the largest guaranteed losses in history on fixed-income investments represent a “safe haven”? This is something that the “experts” conveniently omit in dispensing their foolhardy advice.

Readers must realize, however, that there are viable options. Once we correctly define the problem, namely protecting ourselves from risk, we can begin to understand the solution to our problem: looking for investment products and opportunities which minimize risk rather than merely minimizing volatility.

The obvious starting point is to swap all of our bonds for bullion: a real safe haven. In the case of gold and silver, we have an asset class with a 2,000+ year track record for preserving wealth, combined with a 10+ year up-trend in this recent bull market. That is safety.

In comparison, we have US Treasuries. The starting point here is that with US interest rates are currently at 0%, leaving investors with no return and virtually no hope for price appreciation. On top of that, they are denominated in US dollars, which have already lost 98% of their value – and are losing value even faster every day.

Fiat currencies also have their own track record: a 1,000+ year history of always going to zero. We immediately see how utterly irrelevant it is that US Treasuries are a relatively low-volatility asset. There is no less-volatile number than zero!

In proclaiming buy-and-hold investing to be dead, the pseudo-experts masquerading as financial advisors have abandoned the fundamental principle of investing: buying undervalued assets – and then giving those assets the time necessary to mature. Instead, these charlatans have forced their clients to become short-term gamblers. Worse still, they are now consistently steering their clients toward the worst possible asset-classes rather than the best ones.

Most of the recent mass-market movements can be directly attributed to the failure by most investors to understand the fundamental conceptual difference between risk and volatility. In a market populated by panicked lemmings, we cannot avoid volatility. However, we can and must reduce risk – which begins by building an allocation of history’s true safe haven asset, precious metals.