Why the Prudent Main Ain’t
Over about 250 years the law has developed the “Prudent Man Rule.” This requires that those entrusted with funds for another entity (fiduciary responsibility) should act as a prudent man would act. Remember that this rule developed while currency depreciation was virtually unknown, except for the period of the Napoleonic wars in England, roughly 1800-1815, the period of the War Between the States in the US, and excepting the South American states. People so trusted the money that in England in 1900 they were writing leases for ninety-nine years.
The 20th and 21st centuries, on the other hand, have been the centuries of inflation and hyperinflation.
Under a gold and silver monetary standard one can reasonably expect the currency’s value (“purchasing power”) to remain stable or even increase. Under this presupposition, investing in interest-bearing bank time deposits or bonds or money market funds makes sense—your get your purchasing power back and then some. However, under today’s monetary regime where the dollar’s value continually shrinks, buying bonds, time-deposits, or money market funds guarantees both loss and decapitalization. Following the prudent man rule may be legally accepted, but it leads to disaster and flies in the face of prudence.
I am loath to repeat what I have said so many times before, but clearly only very few have grasped it. To understand, we must expose the root.
We live under this reality: the Federal Reserve constantly expands the dollar supply. Logic says this necessarily decreases the value of each dollar. History and experience confirm logic. Since 1913 when the Federal Reserve took control of the money supply, the US dollar has dropped from a value of 0.048375 troy ounces of gold and 0.7734 troy ounce of silver to 0.000722 troy ounce of gold (US$1,385/oz, from about 1/20th oz to about 7/10,000ths) and 0.0307 troy ounce of silver (US$31.57/oz, from roughly ¾ ounce to roughly 3/100ths).
Since 1913 the dollar has lost 98.5% of its value against gold, and 96% against silver. Res ipse loquitur.
WHAT SPAWNS INFLATION?
Inflation is not accidental, not caused by changes in supply or demand, not caused by an over-heated economy, not caused by sprendthrift housewives or greedy businessmen, but is purely always and everywhere a monetary phenomenon. Inflation is not rising prices; those are the result and effect of inflation. Inflation is the cause. Inflation an increase in the money supply, and only the Federal Reserve can increase the money supply. Therefore, the Federal Reserve causes inflation, and only the Federal Reserve.
WHERE IN THE WORLD ARE WE?
Against this inflationary backdrop how can anyone calculate gain or loss on an investment? One must also reckon with purchasing power loss. Thus if I loan out $100 for a year at no interest, and the inflation rate is ten percent, the $100 I get back at year-end will buy only what $90 bought when the year began.
Although I receive back the same nominal amount of dollars, they buy far less than the dollars I loaned. They are the same green dollars, but they no longer buy as much.
Look! We have just discovered the first principle of life under inflation: dollars tomorrow will be worth less than dollars today.
But suppose some interest paid mitigates our loss. Suppose we receive five percent interest. In that case for a $100 loan we receive a $105 repayment, but we lost ten percent of the purchasing power, so we gain $5, but lose $10, and wind up with $105 nominal dollars that will purchase only what $94.50 purchased a year before.
Clearly, unless we can loan out our money at usurious rates, or at least at rates greater than the inflation rate, we are doomed to lose money by lending, and whenever you buy time deposits, bonds, or money market funds you are lending—ditto annuities and certificates of deposit.
Evade not the clear and ineluctable inference: unless we do something with our money to earn at least the inflation rate, we are guaranteed to lose purchasing power. Dollars tomorrow will be worth less than dollars today. Unless the rate earned exceeds the inflation rate, we will lose value.
Nor is the riddle answered by objecting that inflation is not always high. It matters not, because inflation is the given, high or low, always eating away at dollar purchasing power. Does it comfort you to know that the vampire at your neck is drinking your blood more slowly?
THE NATURE OF THE BEAST
What? How can I be so certain?
As the hyena eateth carrion, so the Fed inflateth. It is the nature and purpose of the Federal Reserve to inflate. The entire institutional structure of the Federal Reserve and the government is built around inflation and borrowing. Deficits arise not from negligence or accident, but by the nature of the system. (The system works on the assumption that government spending is the economy’s flywheel, so if the economy slows, government spending must increase, and vice versa. In the world of Keynesian idiocy, neither the debt’s existence nor size matter. In the real world, overhead always matters.)
If this were true for no other reason, it would be true because all our money is borrowed into existence. Either the federal government borrows the money from the Federal Reserve, or the public borrows it from the banks. Before the money is borrowed, it does not exist, therefore it is borrowed into existence.1 And every dollar borrowed into existence is born with an interest rate burden that must be paid. Therefore if the inflation slows or stops, the money supply will deflate and there will not be money sufficient to pay the interest rate burden, and it will be “Let the bankrupcies begin!”
To cease to inflate, therefore, is to die.
THE GAME OF CARDS
This simple example explains. Suppose five men are stranded on a desert island. Four of them are bored to death, and want some diversion. The fifth has a deck of cards.
He advances and offers to loan thirteen cards to each of the four upon the execution of a lien against their property, but upon this condition: at the end of one hour, each borrower must repay him fourteen cards, or forfeit his property. They agree, but clearly at the end of the hour one or more of the borrowers will lose his property and go bankrupt, because only 4 x 13 = 52 cards exist while 4 x 14 = 56 cards must be repaid.2
The system must inflate, or die. If the system does not inflate, the interest rate burden on money created earlier cannot be paid, bankruptcies follow, and the money supply deflates in a vicious cycle.
THE STACKED DECK
Yet another ground for inflation exists. Over the past 60 years, debt has been substituted for production in the American economy, while production, both agricultural and industrial, has been transferred overseas.3 As a result, in nearly every state 20-25% of income arises from state and local government spending. Another 30-40% arises from direct federal spending. In the once productive American economy, 50 to 60% of income in every state arises from government spending.
The government spending cannot stop. Half the people’s income depends upon it.
Where do governments get money to spend? Taxing never covers spending, so governments get it from borrowing, or, in the federal government’s case, from monetizing debt directly, that is, creating money against their debt, or borrowing it into existence.
Ponder this spending, ponder its spawning, ponder private debt borrowing yet more money into existence, and you will understand why the mere thought of deflation terrorizes the Federal Reserve and the federal government. The tiger will not stop, the rider cannot dismount.
Inflation is the backbone of the government, financial, and monetary system. Therefore little likelihood exists that it will stop in the near future, absent some now unimaginable revolution.4
Therefore, dollars tomorrow will continue to be worth less than dollars today. The institutional structure guarantees it.
This is the system that “prudent men”, the experts academic, financial, legal, and monetary, have created. And the experts expect us to abide by the rule that keeps us in their trap.
If we are to preserve our capital and purchasing power, we must find some way around this doomed impoverishment—but what?
THE PRIMARY TREND
The first principle of investing is always align your investments with the primary trend.
What is the primary trend? That is the trend that once begun carries an investment class up or down for 15 to 20 years. For example, the Dow Jones Industrial Average bottomed about 777 on 12 August 1982. From then it rose in a primary uptrend (“bull market”) until its peak at 11,722 in January 2000, increasing 15.09 times. You could hardly go wrong buying stocks from 1982 to 2000.
Why? A rising tide raises all boats.
Likewise, if you bought silver or gold from January 1980 until 2001, you couldn’t win, because they were locked into a primary downtrend (“bear market”).
Since 2000, stocks have been in a primary downtrend, correcting the previous bull market, and we can expect that downtrend to continue until roughly 2015. Silver and gold began a primary uptrend (bull market) in 2001, and we can expect that to continue to 2015 or longer.
For reasons explained above, the US dollar since 1913 has been in a perpetual downtrend. However, it also has its primary uptrends and downtrends within that perpetual decline. A primary downtrend began for the US dollar in 2001.5 It has fallen from 121 on the US dollar index to a recent (2008) low of 70, a purchasing power loss of 42%. (A 35% loss as of 17 February 2011 with the dollar index at 78.)
But wait! The US dollar index is an index trade-weighted against the dollar’s major trading partners’ currencies. I’m not importing wine or tires or chopsticks from overseas, so that doesn’t really matter to me, does it?
Yes, it matters plenty, because imported goods form such a large part of what we buy, and more, because the dollar’s course domestically has not been much better. Consider the following domestic inflation estimates:
- From Bureau of Labor Statistics, http://data.bls.gov/cgi-bin/cpicalc.pl, 2001’s $1,000 equals 2011’s $1,243.50, a 19.6% purchasing power loss.
- From Tom’s Inflation Calculator, www.halfhill.om/inflation.html,
- 2001’s $1,000 equals 2011’s $1,264.37, a 21% purchasing power loss.
Because the US government continually fudges and changes the way it calculates inflation statistics and indices, economist and statistician John Williams offers at www.shadowstats.com the data without the changes. His inflation calculator shows
- 2001’s $1,000 equals 2001’s $422.75, a purchasing power loss of 58.8%.
Choose which estimate you will, it remains plain that anyone who holds US dollars is constantly losing purchasing power.
Dollars tomorrow will be worth less than dollars today.
HOW I LEARNED
I understand the power of the primary trend because I didn’t understand it before, and for more than 10 years rode a falling market down in flames. I bought gold in the 1970s and confused a bull market with investing genius. The market, however, is not benevolent. I learned a bear market’s power by buying that knowledge with my own time and money after my genius expired in 1980.
More than my personal experience, history and economic data plainly agree. Dollars tomorrow will be worth less than dollars today. Gold and silver benefit from that decline.
WHAT ABOUT THE FUTURE?
I well know that “the opera isn’t over until the fat lady sings.” No investment’s performance can be finally evaluated until it is sold and realized. And I well know that the argument from pragmatism—do this because it works—often proves fallacious. However, for right now, gold and silver are working very well. I know of no money market fund, savings account, or certificate of deposit that would pay an average 31-1/3% per year, as our gold and silver have over the past three years.
Further, we can expect this performance not only to continue but to improve for the next three to ten years, because a primary uptrend (bull market) remains in force in the silver and gold markets.
How can I be so sure? Time and price. Neither have been fulfilled.
Primary trends run 15 to 20 years, but the silver and gold bull market has lasted only 10 years so far. Thus much time remains.
In price, gold in the 1960-1980 bull market rose from $35 to $850 or 24.28 times; silver rose from $1.29 to $50, or 38.76 times. Since this bull market began, gold has climbed from $252 to a high of $1,422.60 or 5.64 times; silver from $4.01 to $31.57 or 7.87 times. Even the stock market’s performance from 1982 to 2000 outperformed that, rising about 15 times. Price is not yet fulfilled.
A TIME FOR EVERYTHING
Doubt it not, a time will come to sell the gold and silver, but that time is not yet. The greater profits lie ahead, as we have only recently (2008) emerged from the first bull market leg up. Two far wilder and more rewarding legs lie above us.
Wait a minute! I listen to Fox News and MSNBC and read the Wall Street Journal and listen to all the Wall Street experts. They all say gold is in a speculative bubble. How can I be so sure that silver and gold are not in a speculative bubble? Because
(1) they are not being financed by government money as was the real estate bubble, and
(2) the time and price considerations above.
Our greatest allies are the US government and Federal Reserve. As I pointed out above, the institutional set up must inflate or die, and it is primarily that inflation that is driving monetary demand into gold and silver and running up their prices, because silver and gold are not investments but alternative money, a refuge for those fleeing dollars.
GO TO THE ROOT
When searching for answers, nothing helps but going to the root. We have to dig out the cause before we understand the effects and where they lead.
Y’all are probably as tired of hearing these things as I am of repeating them, so why do I keep on repeating them? Because most people still don’t understand. The monetary and financial and economic system are so cleverly constructed, public opinion so cannily managed, the media so co-operative, public education so intelligence-annihilating, mis-education so thorough, and people so unaccustomed to thinking through anything for themselves, that the truth must be spoken many times, in many different ways, before they see the root sticking out of the ground. Even then, they will only hear if you say it with a smile.
Is our situation it hopeless then? No, not at all. All truth belongs to God, and God makes the truth known. He isn’t bound by corrupt governments, lying Fed chairmen, totalitarian elementary schools, bought-out newscasters, or know-nothing university professors. His truth reaches to the clouds, and cannot be hidden. (Ps. 108:4) God cultivates understanding and judgement to bring out truth (Is. 42:3). His enemies might as well forget suppressing the truth. “Truth shall spring out of the earth; and righteousness shall look down from heaven.” (Psalm 85:11)
God often brings out the truth by bringing the lie to a crisis. Over the last 100 years a Tapeworm system has infected us. It is not only illogical and stupid, it is thoroughly evil and oppressive, bloated with theft and murder. None of the horrors of the 20th century would have been possible without central banks and fiat money, not to mention the damage to individuals outside war. By mere taxation no government could support a World War I or World War II or Korea or Viet Nam or Iraq or Afghanistan. The people would simply plant their feet and revolt, the money would stop, the war end.
Now the lie has come to the crisis. The drug—the inflation—no longer works, the addict—the economy—no longer responds, grow the doses never so large. The crisis reveals the lie, and the truth.
A Chinese proverb says, “When the pupil is ready, the teacher appears.” It is a great irony that the US government installed the Internet, and now the internet becomes, with all its faults, a place of teachers, and truth. And the pupils are ready to listen.
Here is my deepest, my hidden goal, to expose the monetary system and to urge you to buy silver and gold: after the crisis will come the re-building. After the crisis we have the chance to build a new and just economy on a foundation of sound money. All those who have silver and gold will have capital to build that new economy.
And I hope we see it together, with our own eyes.
1How it works: You walk into the bank and ask Sally, your loan officer, for a $25,000 loan to buy a new Harley. Sally looks at you and says, “Well, Fred, you’ve always been a faithful customer, so why not? Say, nice-looking doo-rag you’re wearing.” She picks up the phone and dials upstairs to Louise in accounting. “Louise, put a $25,000 loan on the books for Fred.” Louise turns around to her computer, and credits your checking account with $25,000 and debits Loans Receivable for $25,000. Voila! The bank just created by loaning, and you just created by borrowing, $25,000. Where was that $25,000 five seconds before you walked into the bank? Nowhere—didn’t exist. By your borrowing and the miracle of double-entry bookkeeping, you and the bank just created it. Whoops! Don’t forget this: that baby $25,000 comes into the world with an interest rate burden. When it’s a year old, you’ll have to pay $26,250 back to the bank, so you’d better get busy hustling pizzas on that Harley.
2Clearly, the interest rate burden each borrowed dollar carries also means that whoever creates the currency will eventually own all the property. Suppose on round one only a single borrower goes bust in our card game. Three are left. They play again, this time to repay 15 cards. Another goes bust when the second round ends. Inevitably, one by one the players will lose to the banker, until at last he owns everything. Borrowing money into existence transfers ownership of everything to the money creator.
3Now I know that behind this statement that production has been transferred overseas lies somewhere the conclusion that American government policy since World War II has aimed to de-industrialize the America. At the end of World War II, the US had the largest, most productive, richest economy in the world. Europe was flattened, Japan was flattened, China was flattened, and the Soviet Union was an economic joke. But why would a ruling class actually set out to destroy its own country. Cui bono? Who benefited? Only answer I can come up with is that they did it to enrich themselves. After all, it’s not the Chinese who own all those corporations that shifted production from South Carolina to Szechuan. And from a study I did long ago about the 1948 German monetary reform, I can never forget that all the gigantic German & Japanese corporations and cartels that went into WW II emerged intact. With their US counterparts, they now rule the world. No enemies, just customers. Nations and national interest have been abolished in one vast corporate cosmopolitanism. In Paddy Chayefsky’s great movie, Network (1976), oil executive Arthur Jensen (Ned Beatty) says to TV news broadcaster Howard Beale (Peter Finch), “You are an old man who thinks in terms of nations and peoples. There are no nations! There are no peoples! There are no Russians. There are no Arabs! There are no third worlds! There is no West! There is only one holistic system of systems, one vast and immane[nt], interwoven, interacting, multi-variate, multi-national dominion of dollars! petro-dollars, electro-dollars, multi-dollars!, Reichmarks, rubles, rin, pounds and shekels! It is the international system of currency that determines the totality of life on this planet! That is the natural order of things today! That is the atomic, subatomic and galactic structure of things today! And you have meddled with the primal forces of nature, and you will atone! Am I getting through to you, Mr. Beale? (pause) You get up on your little twenty-one inch screen, and howl about America and democracy. There is no America. There is no democracy. There is only IBM and ITT and AT&T and Dupont, Dow, Union Carbide and Exxon. Those are the nations of the world today. . . . We no longer live in a world of nations and ideologies, Mr. Beale. The world is a college of corporations, inexorably determined by the immutable by-laws of business. The world is a business, Mr. Beale! It has been since man crawled out of the slime, and our children, Mr. Beale, will live to see that perfect world in which there is no war and famine, oppression and brutality—one vast and ecumenical holding company, for whom all men will work to serve a common profit, in which all men will hold a share of stock, all necessities provided, all anxieties tranquilized, all boredom amused.” Something like that is probably the truth, and it means the abolition of mankind.
4 It is possible that the present episode of much-more-severe-than-usual inflation will end in a hyperinflation, which burns itself out shortly as the economy seizes up. After that might come a restoration of silver and gold money and you might simply spend your silver and gold into circulation, without ever selling it, or use it to buy productive assets. Just as possible, and more likely given the present distribution of power, is that our rulers will seize that opportunity to install “monetary” reforms that are democratic and gold plated but still suck our blood with equal efficiency.
5 Whether this downtrend is accidental or deliberate policy the ignorant may debate, but in a world of fiat currencies, central banks manipulate all exchange rates of all currencies. Thus one has to conclude, and conclude correctly, that the US regime has embarked on a policy of deliberate dollar devaluation. Other countries must and will retaliate, so a race to the bottom of the pile has already begun.
Originally published February 2011