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.

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