Economics post for Borodog

[Exsubmariner]

This post is inspired by Borodogs inflation post. In that post he hit on several things that have been on my mind lately. I would like to air them and get the reactions of economics guys out there.

Basically I have been thinking about how to accumulate wealth and the challenges involved in doing so. As I have come to understand the problem, the crux of the matter is ownership. This is not as simple as it may sound.

First, there is the problem of cheap money. There is lots and lots of low interest money to be had out there. I could, today, walk into a bank and get a home equity loan for around 5%. All I have to do is show a good credit score and the ability to pay the loan back, and bang, I could have tens of thousands of dollars just like that. Of course the problem with doing that is that I would incur debt that I would not only have to pay back, but pay compound interest on over the life of the loan. The only way this would be a feasable or sensable move is if I could invest the money in such a way that it would yield far more than the interest that loan would incur. If I just saved the money, I could look forward to a pittance of interest on it and it's value dropping on a per dollar basis because of the rising price of commodities like oil, gold, and land.

Well, lets look at my options. There's the stock market. It took me a decade of investing in the stock market before I realized that it was being systematically looted. Brokers everywhere push highly speculative investments based on the bigger sucker theory. Companies like Google trade for $400 a share and have never paid a dime in dividends. In fact, if such a company needs capital, the first thing that happens is they sell some shares. This will devalue the shares you hold and erase any appreciation you may have been fortunate enough to have made. Another way the market gets looted is the constant granting of shares to executives as compensation. This also serves to devalue the shares because the executives sell them which of course drives the price down. Google is just an example and I'm sure some google investor out there is willing to defend why google is such a good IPO to own at $400 a share.

Then, there are the mutual funds that get churned, the broker fees, account fees, etc. In short, the only stocks that ownership produces a steady cash flow from are highly regulated industries, such as utilities, for example. The problem is that these dividends are taxed and the cash flow that is generated from them will take many many years of reinvestment to add up to any measurable cash flow.

Think about IRA's for a moment. What happens at the end when you cash out all that money that has been accumulating tax free for your for 30 or 40 years. That's right, it gets taxed. Not only that, you can look forward to it buying less than the equivalent amount of money when you started investing as now there are more dollars floating around. Also, what's to stop Uncle Sam, when he's in a pinch because the entitlements to social security are so large, from just jacking the tax on your IRA to the moon? That's right, nothing.

One could buy gold. Gold is being touted as the thing to own these days. I remember when it was $300 an ounce. Of course, gold is subject to the same supply and demand market forces as stocks and when you want to sell your gold, chances are that lots of other folks will be wanting to sell theirs, too. Again, you get the effect of losing any appreciation you may gain. And, if things get bad enough, some Democrat like FDR will have an attorney general like Janet Reno kick in your front door in the middle of the night and take your gold by armed force because your having it will be a threat to national security. So, not only will you have bought it in the first place, but you will loose it because of the intrinsic value you bought it for. In fact, any gold coins that you buy from the US mint will come with a statement saying that your gold can and will be confiscated by the US treasury should the need arise.

Then, there is real estate. Of course, ownership of rental property will entail paying more mortage interest and is again slow going. If your tenants fail to pay, your cash flow can be easily upset. Then there are the ever increasing real estate taxes that you have to pay. Again you have the problem of ownership entailing liability to the government.

The more I think about the inherant problems associated with trying to gain cash flow, the more I come to the conclusion that it is simply far better to erase my debts (mortgage) as fast as I can and spend my money instead of saving it.

I hit on a lot of things in this post and they are probably not as clear as I want them to be. Working my way to wealth is not as easy as it seems because every step of the way is taxed and hendered by a monetary system which is set up to profit from every stage. In a sense, I get the feeling I will be forced to keep producing all of my life and that when I no longer can produce, what little ownership I hold will not be enough to sustain me, as my acquisition of that ownership will have sustained many others as I acquired it.

OK economists, how do I keep more of what I make?

[SheetWise]

Don't borrow money unless the value you can add to it's use is greater that the vig. When you spend it, spend as much as possible on items that appreciate or that you can add value to.

[Borodog]

Well, one way is to queue up at the trough. Become a political entrepreneur rather than a market entrepreneur. I wouldn't advise that.

In many ways the productive individual is looked upon as a carcass to be picked apart by various government agencies and their bureaucrats, as well as the mercantilists and the non-producers that support them politically (both at the collection plate and the ballot box). These hyenas and jackals are, of course, picking apart the geese that lay the golden economic eggs.

Personally, I would diversify beyond the political boundaries of any one country, in addition to diversifying across more than one investment vehicle. Look to invest in countries that are high on the various indeces of economic freedom, but that are also showing a positive slope on those indeces, possibly places like Ireland, Costa Rica, Estonia, etc.

The thing about gold is that gold is real money. Sooner or later all fiat currencies fail, but the qualities that make gold an excellent currency will not change. In other words, I understand what you mean when you say that all the other people holding gold will be trying to sell it at the same time, thus dropping the price, but the value of gold will never drop below the value of gold, if you see what I mean. Gold is never going to be cheap compared to vastly infated fiat currencies. I think transactions like e-gold are going to gain in popularity simply from the market; in other words, the market may squeeze out the fiat monies, once a system is in place that can compete. As more and more transactions occur online, a real money supply will be much more attractive to people than a money supply that is becoming ever more worthless.

But I don't have a crystal ball. There are extraordinarily powerful political forces in place that act to protect the inflationary money supply. Government becomes ever more intrusive and property rights and individual liberties are under constant assault. They are eroded every day. It remains to be seen whether market forces can undermine the political power structure before America turns into one giant Haiti, from sea to shining sea.

[Cyrus]

[ QUOTE ]
The thing about gold is that gold is real money. Sooner or later all fiat currencies fail, but the qualities that make gold an excellent currency will not change.

[/ QUOTE ] What do you mean "real money" ?

Money itself is a convention. We accept a piece of paper with some signatures and symbols on it because we trust that this paper will be redeemed for products and/or services of a value that is equal to the value nominated on the paper. This is true for any symbol that carries no inherent value itself. (The paper of the paper money has almost no value.)

What practical, real-life good is gold for? Aside from being used for special engineering processes and jewelry, what are the qualities that ascribe to gold the intrinsic value you claim? It's just rare and doesn't degrade.

[pvn]

[ QUOTE ]
[ QUOTE ]
The thing about gold is that gold is real money. Sooner or later all fiat currencies fail, but the qualities that make gold an excellent currency will not change.

[/ QUOTE ] What do you mean "real money" ?

Money itself is a convention. We accept a piece of paper with some signatures and symbols on it because we trust that this paper will be redeemed for products and/or services of a value that is equal to the value nominated on the paper. This is true for any symbol that carries no inherent value itself. (The paper of the paper money has almost no value.)

What practical, real-life good is gold for? Aside from being used for special engineering processes and jewelry, what are the qualities that ascribe to gold the intrinsic value you claim? It's just rare and doesn't degrade.

[/ QUOTE ]

Exactly. It's rare - and much, much harder to counterfeit than paper. Gold is "real" money because people use it as money without coercion from a government.

[Borodog]

[ QUOTE ]
[ QUOTE ]
The thing about gold is that gold is real money. Sooner or later all fiat currencies fail, but the qualities that make gold an excellent currency will not change.

[/ QUOTE ] What do you mean "real money" ?

Money itself is a convention. We accept a piece of paper with some signatures and symbols on it because we trust that this paper will be redeemed for products and/or services of a value that is equal to the value nominated on the paper.

[/ QUOTE ]

A nitpick; this isn't quite correct. We exchange paper money for goods or services that we value more than we do the money, or the other things that we could buy with the money.

[ QUOTE ]
This is true for any symbol that carries no inherent value itself. (The paper of the paper money has almost no value.)

[/ QUOTE ]

Of course, therein lies the beginnings of the answer to your question. Everyone in society knows, just as they know that smoking is bad for you, that paper money is "bad" for you. The longer you hold on to it, the lower its value. It becomes progressively less valuable. The same is not true of gold. The value of gold relative to other commodities may fluctuate, but it cannot be predicted with 100% accuracy to march to oblivion and someday be absolutely worthless, as is the case with all fiat currencies.

[ QUOTE ]
What practical, real-life good is gold for? Aside from being used for special engineering processes and jewelry, what are the qualities that ascribe to gold the intrinsic value you claim? It's just rare and doesn't degrade.

[/ QUOTE ]

Who cares what "practical, real life good" gold might be for? Everyone values it. Gold has special properties that, if you sat down to design a perfect money, you would probably end up inventing gold. It's pretty amazing actually. Gold is rare, uncorrodable, indestructable, maleable, smeltable and moldable, (practically) infinitely divisible, portable, and not the least important, beautiful. It's the perfect money. It can be shaped, divided, combined, carried, but cannot be faked. It's very weight reminds you of it's value so it's not easily lost.

[Exsubmariner]

Boro,
I did some looking up about e-gold. It seems e-gold is stored in several vaults in different countries. I have to do some more research into it, but it looks interesting. I imagine FDR would have a pretty hard time getting his hands on my gold if it were sitting in a London bank, or in Switzerland, or maybe the Bahamas.

One thing is certain, it would hold it's value against inflation. If instead of saving and investing, a portion of the capital accumulation budget went to buying e-gold every month, it could add up to a substantail reserve over time. I may even be able to figure a way to get dollars from Neteller into e-gold, heh, heh, heh......

I wonder if my employer would consider paying me in e-gold???? Probably too much to ask.

Anyway, thanks for the suggestion. I will definately look into it. A problem I see immediately is the size of the Federal Banks gold reserve. The federal bank, if it wanted, could start selling gold on the open market. This would effectively get the reserve dollars without having to print more of them and deplete the value of gold at the same time. This would serve to neutralize the economic forces that dealt in gold and prop up the fiat dollar. Of course, those reserves are limited and there is weak link. Before it was all over, interest rates would be driven ever upward and the cost of money would skyrocket as inflation boomed, kind of like the late seventies. Perhaps, though, not in my lifetime.

I kind of doubt that America will ever turn into a giant Haiti. The reason for this is that it is one very valuable piece of real estate. It is Temperate from coast to coast and that climate is friendly to all the high yield crops you can imagine. There is plenty of fresh water on the contenant, abudant forests, wildlife diversity, mineral resources, oil, etc. This does not mention the constant process of improvements that have taken place over two centuries like roads, power lines, irrigation systems, etc. Anybody from anywhere in the world is interested in owning a slice. The economy is the most robust in the world and attracts the brain trusts of many nations. I know more PhDs from outside the US than I do from the inside. I really think it would take a slimey politician on the order to make Bill Clinton look like the run of the mill garden snake to subvert all those market forces. I'm sure the socialist liberal lawyer professor political complex will make a go of it and maybe a pretty good one, but the thing that will end it is what made communism fail. That is, non producers produce nothing and therefore can't control what is produced as well as producers because producers can't be forced to produce. They have to have incentive and incentive is sorely lacking in a socialist economy.

I watched a program about the central bank recently and the philosophy that came across from the board members who were interviewed, Greenspan amoung them, was that the central principle was to keep capital liquid so that anyone who wants it can get it. That allows individuals and groups of individuals to do the magic that they do and produce wealth. Of course, as you pointed out, inflation is measured by a goods index that does not take into account things like energy prices, gold, land or other valuable commodities, just what you would buy at Walmart. So long as you can fill your buggy at Wally World for your monthly budget with things you need and want, so says the consumer price index, then inflation is under control and everything is happy. It used to be said that what was good for General Motors was good for America, I think that paradigm has shifted to Walmart. I'm not so sure about the wisdom of that shift.

[Cyrus]

[ QUOTE ]
A nitpick. We exchange paper money for goods or services that we value more than we do the money, or the other things that we could buy with the money.

[/ QUOTE ]Nope. You give to the other guy a piece of paper with "$100" written on it in order to buy from him goods/services which you value at almost precisely $100.

[ QUOTE ]
Gold is rare, uncorrodable, indestructable, maleable, smeltable, moldable, portable...

[/ QUOTE ]
You probably mean rare, incorrodible, indestructible, malleable, meltable... [img]/images/graemlins/grin.gif[/img] And you forgot fungible.

BTW, gold is NOT indestructible. Try leaving your jewelry in bleach (chlorine) overnight.


[ QUOTE ]
...and not the least important, beautiful.

[/ QUOTE ] I knew it: A goldbug! [img]/images/graemlins/smirk.gif[/img]

[ QUOTE ]
[Gold] ... cannot be faked.

[/ QUOTE ] Of course, it can.

[Borodog]

[ QUOTE ]
[ QUOTE ]
A nitpick. We exchange paper money for goods or services that we value more than we do the money, or the other things that we could buy with the money.

[/ QUOTE ]Nope. You give to the other guy a piece of paper with "$100" written on it in order to buy from him goods/services which you value at almost precisely $100.

[/ QUOTE ]

Like I said.

"Almost precisely?"

[ QUOTE ]
[ QUOTE ]
Gold is rare, uncorrodable, indestructable, maleable, smeltable, moldable, portable...

[/ QUOTE ]
You probably mean rare, incorrodible, indestructible, malleable, meltable... [img]/images/graemlins/grin.gif[/img] And you forgot fungible.

BTW, gold is NOT indestructible. Try leaving your jewelry in bleach (chlorine) overnight.

[/ QUOTE ]

You can recover the gold. Or is it carried away by pixies?

[ QUOTE ]
[ QUOTE ]
...and not the least important, beautiful.

[/ QUOTE ] I knew it: A goldbug! [img]/images/graemlins/smirk.gif[/img]

[/ QUOTE ]

And you think gold is ugly?

[ QUOTE ]
[ QUOTE ]
[Gold] ... cannot be faked.

[/ QUOTE ] Of course, it can.

[/ QUOTE ]

Oh, it can? I suggest you start manufacturing and get rich quick.

[SheetWise]

[ QUOTE ]
[Gold] ... cannot be faked.

[/ QUOTE ]
Without commiting fraud.