Three Essential Economic Facts You Want To Know… Maybe

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Pedro

thanks

Pedro

Hi Todd
Can you give more details about how to buy gold & store it safely?. I had thought to do it through ETF funds, but I don’t trust them 100%. On the other hand I have read what Steve says and I agree that they’re a handy tool but I don’t know if enough “transparent”
Thanks, Pedro

Todd Tresidder

@ Pedro - Your concerns regarding transparency and questioning what you actually own with a gold ETF are shared by many. I've studied the issue some and remain firmly on the fence. It is hard to get clear on what is "conspiracy theory nonsense" and what should be taken seriously. To learn more on the subject the two primary information web sites are http://www.kitco.com/ and http://www.321gold.com/ Those two would be good starting places for your search...

Hope that helps...

Mark Kesler

A big can of worms to say the least! I would like to use that can to just go fishing today.....since I don't have to go to work cause I have made enough money that a 'job' is no longer necessary -- and then I woke up :-) Someday I hope it will be other than a dream.

Mark Kesler

What did they do before Income Tax? I am really shocked by your figures....and it really is patently unfair. But every time you listen to the news it's always "no new taxes" or "lower my taxes" -- but don't dare cut my program is the next tacit phrase. Taxes are the price we pay for a civilization. Perhaps it is time for a national sales tax. No one would be able to dodge paying that.

Todd Tresidder

@ Mark - now your are creating a whole new conversation - the fairness of the tax system. That is more of a political discussion than an economic one. For example, you are clearly describing your political tendencies based on your analysis of tax fairness and the solution. Many others would disagree based on their belief about "who should pay their fair share". It is a big can of worms.

Mark Kesler

Well that is some comfort -- cold comfort if nothing else....hopefully they will have a COLA on salarys/pensions to match the soon-to-be-enormous inflation rate.
I read that it would take every family paying $31,000 a year 75 years to pay off the debt we owe. That is just insane.

Todd Tresidder

@Mark - It's actually far worse than the figures quoted in the article because an amazing percentage of families pay no taxes at all. I don't remember the actual figures but it is on the order of 40%+ if memory serves me right. In other words, for families that actually pay taxes it would be roughly double the figure quoted in the article. In addition, of the families that pay taxes only a small percentage pay anywhere near double the figure quoted meaning "ability to pay" would focus the tax burden on a remarkably small percentage of the population. The politically expedient solution is to just steal it from everyone's savings through inflation.

Dustin

I'm pretty surprised that someone else (Steve and Tamara Farwig) is thinking the same thing I am. My red alert came when I saw how far the USD has fallen compared to the yen. In 2007 it was 120 yen=1 USD, on friday it was almost 80 yen=1 USD. I personally encouraged some of my Japanese friends to buy American assets like crazy now that everything is 33% off for them. For me, I'm not sure how to play it. Gold and other commodities seem obvious but don't really do anything by themselves. The best strategy I have thought of is to borrow money on a mortgage to buy as much rental property as I can. That way I can cash in on cheap money AND invest it in cheap real estate that is guranteed to sky rocket if inflation takes off like everyone thinks. If I am wrong and we experience more of this malaise we are in currently then I'll still be getting a cheap house with cheap money and letting renters pay the mortgage. For me it has a huge upside if I'm right but don't lose much if any for being wrong. Just my thoughts

Todd Tresidder

@Dustin - Your analysis of the real estate alternative is similar to my own. There are two keys to the strategy working: (1) you must buy it right so that you have sufficient positive cash flow to weather any interim deflationary decline. Positive cash flow gives you an infinite holding period; whereas, negative cash flow puts a gun to your head. (2) You must finance it with moderate leverage 50-70% LTV on long-term, fully amortizing, fixed rate mortgages only (no variables, balloons, etc.) so that you have both strong cash flows and minor leverage to inflation producing wealth in real terms while fixing your largest cost of ownership (mortgage interest) for safety and long-term cash flows.

Anyways, I find it interesting that two of my readers have come to similar conclusions. What is everyone else thinking...

Mark Kesler

I am very concerned about what will happen when the government goes bankrupt....not the least of which is both my current civil service job and military pension are paid from public money. Being overseas doesn't allow me the luxury of seeing things firsthand, but through the news and internet filter, I am beginning to wonder if I even want to go back to America and be caught in this slow motion disaster.

Todd Tresidder

@Mark - The one place where I disagreed with the article is the "default" conclusion because history shows that when a government is deep in debt denominated in its own currency the probability of an actual default approaches zero. The incentive to inflate the debt away so that few voters understand what is going on is too great. An outright default would be too honest and straightforward - politicians and the banking interests that run the financial side of our government should provide the more insidious and underhanded solution... inflation.

My two cents worth...

Steve and Tamara Farwig

Hi Todd,

Thanks for the straight forward article. It is nice to see it in black and white on a graph without a lot of rhetoric to cloud the facts. The problem is where do you invest to get a good return in this kind of market. The common view is to put it in metals, and commodities to hedge the (potential) inflationary environment. Deflationary right now. I am a firm believer of getting your money working for you and metals and commodities just don't do it for me. I suppose I should just buy some gold, but where do I store it,seems crazy. I don't have much faith is the ETF funds since all the scams on Wall street. Gold is basically mattress money. I think a great way to hedge the US dollar is by borrowing as much a possible at the lowest long term rates you can and essentially shorting the US dollar long term. Paying back those debts with other people's inflated dollars. (OPM) Of course what you borrow has to be paid back. So what you buy has to be able to cover the costs of ownership and then some. That is not easy to find where I live but with patience and time you can find the deals. I would love to know of some other great ways to combat the possible monetary inflation that we face. Can you or others share some of your ideas?

Thanks,

Steve Farwig

Tony Friendly

@Steve and Tamara Farwig:

Steve, shorting the U>S> dollar sounds dangerous, has a way of backfiring. I suggest a more conservative investment plan. :-)

Todd Tresidder

@Steve - I just love how this blog has attracted such a smart group of readers.
You just nailed it on the head with everything you said. I have nothing to add. You covered it very well.
Thanks for your input.

Stephen

Let me get this straight here. From what Steve is suggesting, we should all buy apartments buildings, lock them in on a 30 year fixed and sit back?

Todd Tresidder

@ Stephen - There are important to understand assumptions behind your conclusion.

The first and most important assumption is that inflation wins the day. Ultimately that outcome is a question of when - not if - but we can't be certain what will happen between now and then. It is entirely possible for another nasty bout of deflation to occur first on a double-dip recession (not a prediction - just a description of what is possible) that could do serious damage to people following that strategy so timing is an issue.

That is why I emphasized in several articles on this blog the importance of selective buying with high margins of safety both in equity and cash flow.

In addition, it is essential that one use long-term, fixed rate, fully amortizing financing to harvest the potential of this strategy because it essentially creates a short against the currency borrowed and allows you to repay in inflation destroyed dollars. It fixes your biggest cost of ownership and your biggest risk - interest rate changes. This strategy does not work with any other type of financing... it is that important.

In summary, yes, you can build wealth in real terms following this strategy when inflation rears its ugly head. However, I get concerned when the strategy gets oversimplified. It is a sound approach, but there are risks that must be controlled and understood.

Hope that clarifies...

Garry Davis

How can we not feel completely powerless and at the mercy of idiots with way too much power after reading this article? Talk about motivation to figure out a better way to structure our financial lives.

Todd Tresidder

@Garry - Thanks for you input Garry and getting the conversation rolling...

I personally go back and forth. On one hand I agree with you and would prefer a world pre-1970s where our currency was sound and our government debt was manageable and our markets weren't manipulated. It would make the whole process of planning for your future and choosing investment strategy so much more straightforward and easy. On the other hand, every disaster holds the seeds of opportunity for those wise enough to harvest it. In other words, I cannot change the world but must accept it as it is and play my best hand accordingly.

So yes, on my bad days I go victim to our situation, get frustrated and scream out in anger at the self-dealing rip-off of "Government Sachs" and the jerks running our economy (either directly through the government or indirectly through the big banks) and how they have really messed things up for the average American, and on my good days I realize I'm still in control of my decisions and can harvest opportunity from this insanity if I play my cards right.

Anyway you look at it, this situation is far more difficult and risky than if our government was ethical and had played their cards with integrity instead of self-dealing ineptitude. Now we are left to decide how we will play our cards. Will we be a victim or a victor?

My two cents worth...

Again, thank you Garry for getting the conversation rolling. Now, what is everybody else thinking?