Do the Right Thing

We all want to be one of the good guys. We want to do the right thing. However, it's far from clear what this means in practical terms. All we have as a guiding principle is the golden rule. We should do to others what we would like to have them do to us. But that's awfully vague. What exactly is it that we would like others to do? Surely, this is something that varies quite a lot from one person to another. However, there are some things we can all agree on. We don't want people to hurt us, steal from us, or defraud us. By and large, we want to be left alone to take care of our own affairs. We don't want people to nose around in our personal lives, even if the intent is to help us in some way. Unless we're in a desperate situation, we'd rather take care of ourselves.

This sort of guideline works well in our daily lives. It comes naturally to us. We don't think about it. We simply act this way out of intuition and habit. But what about bigger things, like solidarity beyond our immediate circle of family and friends. We are told that there are things that are greater than ourselves. As examples, we are told that family, and especially children, need our protection. We are also told that our nation is something worth our sacrifice. As John F. Kennedy once said: "Ask not what your country can do for you, but what you can do for your country." But is this good advice?

First off, we must recognize the fallacy in the above reasoning. While it's true that family, and especially children, deserve our protection, it doesn't follow that we must support our national government. Rather, the opposite is true. One of the greatest threats to our family's wellbeing is the national government. Listening to the advice of politicians has been the ruin of many a family. Sending children to war and putting savings into government bonds was hardly the right thing to do during the great war of 1914 to 1918, regardless of which side of the border the families lived. The same can be said about pretty much every war. Certainly any war fought abroad.

Contrary to popular belief, national interests rarely coincides with the interests of ordinary people. National interests align with the interests of a few individuals in government and their corporate friends. For the rest, government is a burden and a net loss, especially during times of crisis. When Weimar Germany was in the midst of its hyperinflationary melt down, politicians of all colours would urge people to keep their savings in the bank. Above all, people were urged not to buy gold. The right thing to do was of course the opposite of what the politicians were saying.

However, this doesn't mean that we should always do the opposite of whatever is in the interest of government and their corporate backers. Taking advice from radicals hell bent on inflicting pain on government and corporations will land us in just as much trouble as if we listened blindly to government advice. A lot of pigs got slaughtered during the latest wild moves in Game Stop and silver.

It's not only government authority that we should be wary of. Blindly following any kind of authority will lead us astray. There's simply no way around the fact that we must think for ourselves or risk having others take advantage of our trust. As a general rule, we must be sceptical to any call for action beyond our personal affairs. If something is of no direct danger or concern to us in our neighbourhood, family or circle of friends, why should we risk blood and treasure in dealing with it? In what way does it make our lives better to fight wars in distant lands, or pay for policies that benefit others rather than us?

John F. Kennedy

By Cecil Stoughton, White House - This media is available in the holdings of the National Archives and Records Administration, cataloged under the National Archives Identifier (NAID) 194255., Public Domain, Link

Doing Business in a High Inflation Environment

One of the lessons from Weimar Germany is that business goes on also when inflation becomes so high that no-one can say what the local currency will buy at a future time. Under such circumstances, local currency can no longer be use for budgeting and contracts. Instead, some other currency is used.

Gold and dollars were popular alternatives to the Mark in Germany during the Weimar hyperinflation of 1922 to 1923. Similarly in Yugoslavia, Zimbabwe, Iran and Venezuela in more recent times, business was conducted in dollars when local currencies failed. But what will happen in the event of high inflation in the world as a whole? How will business be conducted in the absence of any reliable national currency?

The obvious answer to this is gold. But some may argue that a cryptocurrency like Bitcoin will be used instead. However, for that to happen, such currencies must make the transition from speculative assets to money, and there are at least eight reasons why this won't happen. Cryptocurrencies will continue to be volatile assets priced in dollars even in the event of a dollar collapse.

Should the collapse be total, gold will continue to be used until governments of the world either accept it as the standard, or some other standard is chosen. In either event, Bitcoin and other non-government currencies will be ruled out. Gold will either become money once again, or remain a coveted commodity. Crypto on the other hand, will be revealed to be an inferior store of value, and of no use in business.

Wallpaper

By Bundesarchiv, Bild 102-00104 / Pahl, Georg / CC-BY-SA 3.0, CC BY-SA 3.0 de, Link

Lessons From Weimar

We live in an inflationary era that was established shortly before the great war of 1914 to 1918. Bring up a 100 year gold chart measured in any western currency, and we can see the effect of this. Every single currency has lost about 99% of its purchasing power over that time period. In the case of the Norwegian Krone (NOK), there's been a fall of more than 99% just in my lifetime. I remember buying a sweet treat for myself for 0.02 NOK as a kid. Today, 50 years later, 2 NOK buys nothing at all.

The erosion of purchasing power has been remarkably well managed over the past 100 years. Inflation has been tolerable in all but a few counties, with the collapse of the German Mark during the Weimar republic as the most notable example of how inflation can suddenly get out of hand.

This raises the question as to what the Germans did differently from other western nations to end up with hyperinflation. Also, what signs, if any, were there of an imminent collapse? What were the right and the wrong moves? What can we learn from the Weimar republic?

Luckily for us, there's no lack of history books on the subject. I just read Jens O. Parsson analysis, a 15 page introduction to his book about inflation in America, which I found quite enlightening. Not least because it mentioned a number of things that are currently being repeated all over the world, and in the US in particular.

First thing to note is that Weimar Germany didn't do things all that differently from other countries. Their mistake was merely that they went too far. Second, there was a persistent delay between the monetary debasement and its effect on the economy. What was visible were the effects of earlier decisions. The collapse from 1922 to 1923 was a result of bad decisions made in 1920 to 1921, which in turn were based on the decision to finance the war of 1914 to 1918 through deficit spending.

The delay between monetary inflation and price inflation meant that current prices didn't fully reflect the debasement. This effect worked to the state's advantage since they were first in line to spend the freshly printed money. As a consequence, there was little political will to stop. There was no opposition to deficit spending. Furthermore, monetary inflation sustained a financial boom that gave the economy a veneer of health. Politicians could point to new all time highs in the stock marked as a sign of strength. But outside the financial markets there were signs of decay everywhere.

The quality of German industrial production deteriorated noticeably. Things that used to work fine started to fall apart. In society at large, speculators got richer while just about everybody else got poorer. A class of conspicuous super rich speculators emerged. While some were in awe of these clever ones who were able to game the system so perfectly, others resented them for their smug disregard for sound business practices. Businesses didn't have to make money, and they didn't have to make sense. All sorts of Mickey Mouse companies popped up, mostly centred around financial services. There were legions of nonsensical paper shuffling jobs. There were also huge conglomerates of companies with little to no synergies between them. Leveraged to their eyeballs, these companies invested heavily in all the latest and greatest in technology.

Instead of dealing with the heart of the problem, politicians focused on rules and regulations, hoping in that way to reign in the consequences of their own irresponsible monetary policies. There was rent control, preventing landlords from raising rents in response to inflationary pressures. There were minimum wage laws and limits to legal working hours. Huge inefficiencies of commerce arose as a consequence.

This went on until there was a stock market crash, followed by hyperinflation. This crash pulled the valuation of all industries down by about 25%. Good quality companies went down just as much as the Mickey Mouse ones. When hyperinflation kicked in, stocks remained at their low level in German Marks, but relative to foreign currencies and gold, the fall continued until the money printing stopped cold turkey in 1923.

The sudden stop in credit expansion killed off all the Mickey Mouse companies. Only top quality companies survived, and they were dirt cheap. The total price of the Mercedes motor company was about 300 cars of their own brand. Anyone who flipped their gold for an index fund of good quality German companies back then would have made an absolute fortune.

Reading Parsson's analysis, I couldn't help feeling we're currently living through times similar to Weimar Germany 1921. Time will tell if we'll see 1922 and 1923 as well, but if we do, I'm confident I'm correctly positioned for the turmoil to come.

Paper money

By Bundesarchiv, Bild 183-R1215-506 / CC-BY-SA 3.0, CC BY-SA 3.0 de, Link

Where to Store It

I trust bankers about as much as I trust government bureaucrats. First and foremost, they follow government rules and regulations, then they serve themselves, and finally they'll take care of me and my needs. Seen in this perspective, keeping valuables in a safety deposit box is about as safe as keeping them with the state. Everything is safe and sound until the law changes against us, and we're suddenly without access to our own valuables. I had a safety deposit box for a while, and I didn't like it. There was always this creepy feeling that something could go seriously wrong, and with both the bankers and the state between me and my valuables, I felt positively exposed.

Beyond this, I'm not going to tell anyone where we keep our valuables today. All that I'll say is that if anyone enters our apartment and trashes it completely in search of valuables, they won't find anything. The valuables are either not in our apartment, or so well hidden that no-one finds it even after hours of searching. That's much longer than a typical burglar feels comfortable roaming around in an apartment, especially one in a building full of neighbours who keep an eye out for each other. Furthermore, I have no trouble smashing in the skull of an intruder with a frying pan or other blunt instrument. The burglar runs a very real risk of being carried out of our apartment with his feet first.

Even the completely insane scenario of someone coming into our apartment with a gun, demanding our valuables at gunpoint, won't work. The answer to such a person is that the valuables aren't in our house. They are hidden in a box underneath a loose floorboard, in the attic of my wife's mother's house out in the country. We'll have to go for a walk, and ounce out in the street, I'll call attention to the situation.

I very much doubt that there's anyone willing to take this kind of risk in order to get hold of a very uncertain amount of valuables, especially since there are a couple of PCs and a TV readily available for the burglar to steal.

Apart from my wife and I, there's only one other person who knows where the valuables are stored. That's a relative in Norway, two thousand miles away from where we live, and this person is not prone to talk about secrets. This person knows about the valuables in case there's an accident and both my wife and I die. Had I trusted this person less, I would have left instructions in an envelope, only to be opened in case of our death. That would make it easier for the trusted relative to keep the secret.

When valuables are used as security for a loan internal to the family, the loan provider and the security provider both know where the security is stored. That may be at a third person's place, in which case a total of three people know the location. Assuming that none of them are stupid enough to talk about it, three remains the grand total of knowing heads.

With this all said and done, there's this link for inspiration as to where to hide valuables. Deception and inaccessibility are keywords. Think in terms of lofts and basements, sheds and boxes of knick knack. Remember that a small fortune can be hidden in a box less than a litre. Even a small place has plenty of nooks and corners for such a small volume to completely disappear into its surroundings.

Fort

By Albrecht Dürer - Collection privee, Public Domain, Link

A Strategic Savings Plan

After some deliberation, I've come up with a strategic savings plan that will help both my son and my stepdaughter. It solves several problems particular to our family as well as the general problems of inflation hedging and premiums. The particulars of this plan are as follows:

1. My wife and I buy one sovereign for my son every month here in Porto.
2. We send the bill for this to my son who credits our account from where he lives in Norway.
3. Once my son has at least 30 sovereigns, we let him borrow 1000 Euros per sovereign, or twice their total worth, whichever is greater. This loan is financed in our bank in Porto, with our apartment as security.
4. My son pays down on the loan until the remainder of the loan equals the value of the security.
5. My wife and I take full possession of the security and full responsibility for the remainder of our bank loan.
6. My stepdaughter is then encouraged to buy the security from us in monthly instalments in the exact same way that my son did.
7. My stepdaughter gets a loan from us when she has full ownership of the security, and the above process repeats.

The above scheme will take about ten years to complete. Monthly fluctuations in the price of gold will thus be drowned out by the general price trend. With the security in gold rather than cash, we don't have to worry about currency debasement and inflation. Even hyperinflation will do nothing to wipe out our savings. Furthermore, premiums are only paid during the initial purchase done for my son. When the security passes on to my stepdaughter, we save on premiums.

The timespan involved means that the above plan must be understood loosely. It's a general outline, not an exact plan. Should gold become so overvalued that it is better sold for something else, we'll have to arrange for that. There's also no telling what sort of income our children will have. All sorts of things may pop up, and must naturally be dealt with there and then, when it happens. However, as an outline, it's specific enough to serve as road map. It can be implemented exactly as is.

Finally, it's worth noting that there's very little risk in this for my wife and I. We'll have 50% security in gold and the benefit of social control by virtue of being the parents of the lenders. This fact will no doubt become apparent to our children who will hopefully do this type of planning for their own children, thereby turning this into a permanent feature of our family's saving habits.

Sovereign

By Heritage Auctions for image, Mary Gillick for coin - Newman Numismatic Portal, Public Domain, Link

Enticing My Son to Save in Gold

One of my two sons in Norway is not on board with my strategy. He thinks he can do better, and I'm worried he'll get himself fleeced at the casino. Instead of getting closer to his goal of buying an apartment, he'll find himself farther away. Gambling is simply no alternative to saving.

Then it occurred to me that my strategy gives me plenty of leverage when it comes to control over my son's investment habits. I can promise him a sweet deal on a future loan. Instead of saving for his first down payment for an apartment in Norwegian Kroner, I can promise to cover it with a cheap loan, provided he saves one half of the required amount in gold. I get the gold as security, and he gets to buy an apartment a few years sooner than he would otherwise get it.

Gold will no doubt outperform the Norwegian Kroner over the next six years, so the deal will illustrate the value of this type of savings. The gold may already have appreciated a lot by the time he's ready to buy an apartment, and it will most certainly have appreciated substantially by the time he gets his gold back three years later in return for having paid down his loan to me. That should teach him the value of my strategy because it will be clear by example that it works to everybody's advantage.

There's also the possibility that it will be one of my other children, rather than I, who provides him with a loan. They have their own apartments. Three years from now, they may be able to borrow more on their apartments. They can then lend this forward to him in return for security in gold, and I'll be no more than a guarantor in case something should go wrong.

There are other possibilities as well. I have a brother who's on board with my strategy, and he has several children. They will no doubt insist on 100% security. But the fact that this is a possibility will further illustrate the strength of this strategy. Gold can be used as security, something speculative assets can't due to their volatility.

I've briefly mentioned this sweet deal to my son, and he was predictably happy about my proposal. He might object to the part about gold rather than Kroner, which I haven't yet mentioned, but I don't expect it to be a major hurdle. The deal is likely on, and I can notch down another victory for my strategy. Not only will I help my son get an apartment a few years earlier than he would otherwise get it. I've greatly reduced the danger of him taking on too much risk. His regular gold purchases will ensure that there won't be much money left for him to waste in the casino.

Sovereign

By Heritage Auctions for image, Mary Gillick for coin - Newman Numismatic Portal, Public Domain, Link

Another Lesson in Supply and Demand

Money markets are again in turmoil, and once again it's hard to figure out exactly what's going on. However, the example I used back in September 2019 serves to explain things rather well this time too.

Back then, there was an effort by the Fed to keep interest rates low and withdraw liquidity at one and the same time, which is comparable to a warehouse deciding to lower prices while at the same time reducing supply. Naturally, this didn't work. Demand for credit exploded higher at the the very same time that supply was reduced, with dramatically higher interest rates in the overnight REPO market as a result.

Then we got the Covid plague just in time to rescue the Fed. Main Street demand for credit was crushed, and interest rates could be kept low for another year. Coupled with a flood of credit to Wall Street, all sorts of asset prices exploded higher while the average Joe was locked down at home, scared and confused.

But of late, interest rates at the long end have crept higher. People are increasingly reluctant to lend money for more than a few years to a government that spends money as if there's no tomorrow. This is problematic for an economy levered up to their eyeballs in debt. But something equally troubling is also happening at the short end. Overnight rates are about to go negative.

This latest development seems at first absurd. How can long rates go up and short rates go down at one and the same time? However, this too can be explained in terms of our warehouse once we recognize that this warehouse only serves the short end of the credit curve. It's an overnight facility, and as such it serves the sort of banks that the average Joe uses for his affairs. When Joe feels confident enough to borrow some money, banks go to the warehouse for cash. When Joe is more inclined to save, banks go to the warehouse to deposit their excess cash.

With Joe still reluctant to go out and borrow, stimulus money coming from the US treasury go directly into savings accounts. This cash is then handed over to the warehouse which tries its best to discourage this behaviour. Interest rates go down to the point of going negative. Joe has gone from overly confident to overly cautious, and the Fed is now trying to change his sentiment once again. But Joe is already in the grip of a manic depressed anxiety. This latest push will likely aggravate his condition further, and the net result may turn into a hyperinflationary melt down.

It appears that the Fed is once again close to the breaking point and only inches away from loosing control. What happens next is anyone's guess.

By U.S. Government - Extracted from PDF version of the Federal Reserve's Purposes & Functions document (direct PDF URL [1])., Public Domain, Link