Tuesday, August 23, 2011

Dave Ramsey, Paper Bug

Dave Ramsey does the world an invaluable service with his advice on how to reduce personal debt. As Austrian economist Robert P. Murphy noted in a recent article, deleveraging is generally good for an economy in recession.

But Ramsey is spectacularly wrong when it comes to investment advice. In an October 2009 article on his web site, Ramsey was cited for his stern opposition to owning gold. The price of gold that day stood at $1,068. Not quite two years later, gold is hovering near $1,900 an ounce – a 70% increase in price.

In 2007, Ramsey was among those assuring the public that real estate values were generally stable, that problems would be confined to the sub-prime mortgage market. Since that time property values across the nation have generally fallen to 2003 price levels, according to the Case-Schiller index.

How could a guy so right about the need to reduce personal debt turn out to be so wrong about investments? I think it is simply because Ramsey is not a student of monetary economics. Despite his penchant for quoting long-range historical trends (“From 1833 to 2001, the compound annual growth rate of gold was only 1.54%”), he seems unaware of how drastically the monetary landscape changed after August 15, 1971. Yes, it has taken about 40 years, but the decoupling of the dollar from gold is finally coming home to roost.

In short, Dave Ramsey trusts Uncle Sam. He is a paper bug.

Not that I’m a gold bug. If I could afford it I would follow the conventional wisdom of having at least 10% of my assets in gold and silver. As it is I’m fortunate to own a few junk silver coins. After the market crash of 2008 (which Ramsey didn’t see coming, and which took the industrial white metal down with it), I went to a local coin shop seeking to add to the small collection of silver coins my grandfather had given me. At the time I began purchasing these coins the market price of silver was around $9.50 per troy ounce. As of this writing silver is around $43 per ounce – a staggering 450% increase. Silver has to some extent decoupled from the stock market. Its exchange value as money exceeds its industrial value in use.

I agree with investment guru Jim Rogers: buy precious metals when they dip and never sell them. Why? Because metals aren’t “investments.” They’re insurance – havens to preserve savings in the face of fiat money devaluation.

Since 1971, and since the crash of 2008 in particular, the success of Ramsey’s urging to hold mutual funds has ridden the thermals of monetary inflation, or “quantitative easing,” by the central bank. Ramsey’s investment recommendations thrive to the extent that the government is able to “paper over” its fiscal obligations. Now, as investors become more frightened of the sovereign debt crises, stocks are moving wildly in response to every shred of news good or bad, while metals and other commodities are generally trending upward. As for real estate, it is in a protracted downward correction, unwinding years of bogus, unsustainable appreciation since 1997.

Get out of debt? Sure thing – my family and I have our sights set on that objective. But when it comes understanding what has served for thousands of years as real money versus government fiat, I will go with the boy from Alabama over the boy from Tennessee. In an emergency we’ll have in our bug-out bag something that folks will readily trade for gas and food. The greenbacks we can use for kindling.

Wednesday, August 17, 2011

I Heart Ron Paul

Old Hop has never quite been the blog that I wanted it to be. It began at the end of 2008 as a replacement for my old blog, Rublev’s Dog (a play on Pavlov’s dog with a religious twist) that had taken some tangents of its own. At the height of my blogging frenzy (which has died down in recent months due to demands at work) Rublev’s Dog became a platform for sharing my support for presidential candidate Ron Paul in 2007. It was Paul’s candidacy and his eerie prescience about the real estate meltdown (real property being my field of work) that led me to more deeply investigate the Austrian school of economics and its theory of the business-credit cycle.

Paul’s candidacy excited me like none other in my lifetime. As a teenager I was a sworn “Reagan Republican,” but only because the Gipper had been my dad’s candidate. I realized into his presidency that, while we all felt substantially better about being Americans than we had throughout the scandal-ridden and stagflated ‘70s, the fact remained that Reagan did not deliver on his promise of a smaller government. In fact it grew exponentially under his watch. By the time Bush I and Clinton came on the scene I was deep into theological reflection and had become a political non-participant. The roaring ‘90s passed me by. I was oblivious to the seeds of economic destruction that had been sown by Reagan’s choice for Federal Reserve chairman, Alan Greenspan.

To understand that a bit better, we have to go back to the event, 40 years ago this week, that tilled the economic soil for Greenspan’s pernicious monetary seeds. It was Richard Nixon’s autocratic decision on August 15, 1971 to untie the U.S. dollar to gold, closing of the convertibility of dollars to gold, which gave the green flag to our central bank to print up money. And it was Nixon’s coup that provoked Ron Paul, a Duke-educated obstetrician and spare-time student of Austrian economics, to launch his own political career.

Congressman Paul predicted as early as 2001, in the wake of Greenspan’s money-pumping, that an unsustainable housing bubble would ensue with disastrous consequences. I did not hear the Texas congressman’s speech until years later; but I sat at my desk between 2002 and 2006 watching sale prices for homes soar to dizzying heights.

The bubble burst in 2007. Countrywide Mortgage, a subsidiary of our local giant Bank of America, went belly-up. The good doctor from Lake Jackson, Texas had been right all along. I was spellbound. Suddenly, everything Ron Paul had been preaching about, from monetary policy to the unconstitutional, unwinnable and unsustainable wars in the Middle East, began to make perfect sense. As I stated above, he became the most exciting presidential candidate of my lifetime.

When he was ignored by the media and laughed off the stage other mainstream Republican candidates, I became embittered again with the political process. My rantings on Rublev’s Dog gave way to this blog, where I intended to write at leisure on whatever struck my fancy. But the political and economic consciousness remained – informed by writers and thinkers from history who had inspired Ron Paul or laid some of the intellectual groundwork for his political career. In congress, Paul had been a reincarnation of John Randolph of Roanoke, voting against every bill and proposal not substantiated by an originalist reading of the Constitution. As a presidential candidate he was as committed to sound money and non-intervention as Stephen Grover Cleveland, the last true libertarian in the Oval Office.

To understand why Ron Paul’s chances of being elected president are 1 divided by infinity, we must look in Hans Hoppe’s book, Democracy: The God that Failed. Democratic government is a system of legal plunder, pitting interests that can out-clamor others for favors from the political class in exchange for votes. Democracy, it turns out, is the people’s way of trying to overcome the first law of economics – that you cannot have something for nothing. But everyone believes, with an almost religious fervor, that “their” government can provide jobs, welfare, education, healthcare, social security, ad infinitum by the magic of fiat. It seldom occurs to the common folk that resources are eventually starved, capital is destroyed, and the economic pie shrinks (Greece is an excellent example of the failure of social welfare democracy). What the government cannot raise in taxes it borrows. The central bank finances the sovereign debt and in so doing lowers the rate of interest – the ratio of money borrowed to money saved – to a sub-market figure. This in turn causes the misallocation of resources, leading to a temporary boom (or “bubble”).

America has had a phony, debt-driven economy since at least the mid 1960’s. Johnson’s Vietnam War and the “war on poverty” led to hefty money-printing by the Fed, which led Nixon to unhinge the dollar from gold. Within a year (1972) the U.S. began down a decade-long road of price inflation and job loss. Paul Volcker, appointed Fed chairman near the end of Jimmy Carter’s presidency, took the bold and necessary step of allowing interest rates to rise toward the market rate – a rare instance of the central bank doing the right thing. While the correction was painful it was momentary, and by the middle of his first term Reagan was reaping the undeserved benefits of Volcker’s austerity (it is questionable whether “supply-side” economics had as much to do with the recovery, though it did encourage the business sector for a time). Whatever good Reagan might have done was undone by his build-up of the U.S. military to the role of globo-cop and the appointment of Greenspan, who would preside over a steady increase in money printing and dollar devaluation. Since 1971, the dollar has lost 82% of its purchasing power. Real wages have netted a zero percent increase since that time, and the new norm includes two- or more income households with substantial personal debt.

So, is America now ready to listen to Ron Paul? To a point, maybe; but it is certainly not willing to let go of [unaffordable and unfunded] social welfare entitlements.

The Economist did a poll of Americans in late 2010 in which respondents were asked which in a list of spending categories they would cut. The only one that a majority of Americans would cut was foreign aid, which amounts to a fraction of one percent of the federal budget. In no other area did even 30 percent of Americans say they wanted cuts. That means default. What else could it mean?

The politicians are not defying public opinion. They are reflecting it. With the unfunded liabilities of Social Security and Medicare in excess of twice the GDP of the entire world, this has to end badly.
(Thomas Woods, in an interview with the Harvard Political Review)
His anti-war, anti-military-industrial complex stance doesn’t play well to that part of the populace whose favorite slogan is “support the troops!” Moreover, unlike the great orator Randolph, Paul is a rambling public speaker. While the texts of his congressional speeches are quite good, his debate appearances display an off-the-cuff, ill-preparedness and frustrating tendency to wade into arcane details that get lost on prospective voters. His ardent acolytes understand where he is coming from; but the chair-squirming head-scratchers of the “sound bite” generation quickly lose attentiveness.

So, no; Paul probably doesn’t stand a snowball’s chance. Once the GOP establishment successfully shoves him aside yet again, and that other Texan Rick Perry emerges as the darling of the flag-waving, God-and-country-country-and-God evangelical right, I will retreat once more into democracy-hating cynicism.

In national politics, in America, rarely do the best and most honest(with their philosophy and integrity) reach the top. By the time all the political favors are paid off and their positions compromised, once a politician gets into power, he or she is nothing but a puppet of the powers behind the throne that helped to get that person into office. Ron Paul is different. So different, that his policies would be the only thing that could save America from going over the cliff. At this time, early on, Ron Paul is either being ignored or left out on the margins. (a reader comment at The American Conservative)
Regardless, in the meantime I say, Ron Paul for President.

Friday, August 5, 2011

From Deep to Deep

Found on the Internet this week: two snippets that pretty much encapsulate my waking thoughts. First, the bad news, from Eric Fry at The Daily Reckoning:

Democracies vote themselves perks and entitlements they cannot afford…until they go bankrupt. Empires, likewise, gorge themselves until their economies become starved for self-sustaining productivity.

So what hope is there for a democratic empire like America?

The Fates will not be denied. America will grow fat and happy until she cannot lift herself out of her La-Z-Boy to punch a time clock. She will vote herself perks she cannot afford until the day her creditors say, “Enough!” Her fate is certain; the day is unknowable.

And then, the good news, from the Facebook page for St. Michael's Church in Charleston, SC:

If you’ve been around Christianity for any length of time, you know that we are saved by our faith, our trust, in Jesus and his finished work on the Cross. But this good news often raises this question, “How much faith is enough faith to save me?” Stated differently, “How much faith does God require before I’m saved?”

Many of us are worried that our faith is too little or weak to save us. We have doubts about the truth of Christianity and its claims. While we know Jesus promises that our sins are completely and eternally forgiven, we still fear that there might be some wrath left over for us. These doubts and fears cause us to wonder if we really, truly trust him for salvation.

If this describes you, know that I have good news for you. The answer is that we are not saved by the strength of our faith, but the object of our faith.