Recently one of my Shakaama Live on youtube viewers asked me about the disparity between the rich and the poor and how my explanation about the Austrian Business Cycle could help people understand. Below fine my brief response to him.
The Problem
One of the key aspects of the founders of the fed was to make sure no one knew who actually founded it; take over public education so that everyone was dumbed down; and make people completely dependent on the banking system.
Before, people nor businesses took out loans. AT ALL! For any reason! Imagine for one second, no car loan; no home loan; no school loan! If you wanted it, you saved and bought it.
Fast forward about 50 years after the creation of the Federal Reserve Bank, no one saved any more. Everyone was now in debt.
This is what happened. It’s not just about abolishing the Fed, it’s about returning the American way of life. Remember the saying “pull yourself up by your own boot straps”. That’s because if you wanted something, you worked hard, saved your money and got it. THEN, no one could take it away from you; not your land; not your car; not your furniture. There was no repo man. He didn’t exist. There was no such thing as credit. Credit was for rich people, and i mean the filthy rich people.
As wall street became more and more successful at their game of putting people in debt, the middle class began to slip into poverty. Imagine people with no self restraint. Why save when you can buy on credit, when you can take out a loan. When you take out a loan and buy on credit, not only do you not own the thing, you also owe all your money to someone else. You are basically working for them. People throw around the words “modern day slavery”, but it’s actually true.
The Solution
The first lesson any of these get rich quick people tell you or those motivational speakers say is “get out of debt first”. Why? Because then you own yourself. They say, pay off your credit cards, pay off your loans. That’s the first step. Now, if even the motivational speakers all agree on this, it should dawn on people what’s going on. To a man they all agree on this notion. And, this is from nearly every monitary speaker, or economic salesman with a book. They know that at the very least, if their plan to market whatever they are personally selling, they will be 70% ahead of the game if they get everyone out of debt that they are selling to.
Mine you I am not calling any of those people wrong or am I lambasting them. I’m simply saying that whatever their formula is -> over there, they know that <- over here you have to get out of debt just to start to get ahead. So if even the best and worst of the bunch, even the charlatans agree on this simple principle and they are not tin foil hat, conspiracy theorist, abolish the fed, libertarians, there must be something at the core foundation of sound money that says, get out and stay out of debt.
Even in the old testament, and a lot of my Jewish friends ascribe to this, never put yourself in debt to anyone. In fact this is repeated in the new testament where it basically says, go pay off all your debts first then come to your brother or father or enemy and have a reasonable discussion among equals.Once again you see that notion of the the disparity between rich and poor stripped away, simply by paying off your debts. Even some versions of the Lord’s Prayer has it as saying “forgive us out debts as we forgive our debtors“. You might be reading this and be atheist, but the wise man takes advice from every possible wise source, even if he doesn’t believe in the source. Good advice can be found in fools at times. [don't prejudice yourself against something simple because you don't like the package]
Get out of debt and stay out of debt. Throw away and destroy all credit cards.
A lot of people are being hoodwinked and led down a path that if fraught with danger and bad times ahead. I’m counting an extra $10 trillion introduced into the economy since 2007. [I'm counting both the very open bailouts and the under the table cash infusions by the federal reserve bank, which Ben Bernanke says he doesn't have to disclose to congress] The problem is the politicians are talking about economics, a subject most adults in America know nothing about, and they sound logical and reasonable about.
They say
” the problem is credit has stagnated and we wish to avoid credit from being unavailable to the general public. We need to get banks lending money, but they can’t since they have so many toxic assets on their books and if they lend more money they will be far more overleveraged and they refuse to do it. If we infuse the banks with cash and lower interest rates, then you the general public will continue to be able to purchase cars and homes and big screen t.v.s and our economy is based on consumer spending.”
If the economy indeed is based on consumer spending, then 1. freeing up credit markets will allow me to make purchases / loans at a reasonable level 2. lowering interest rates are in my best interest so I don’t have to pay for a house at a high interest rate 3. infusion of cash to banks allow them to lend me money.
Federal Reserve Bank Chairman Ben Bernanke
The problem is, this entire premise, is completely false, a lie and evil. Why do i say evil? If they are trying to convince you that our economy is based on consumer spending, then they are then allowed, BY YOU, to do whatever they need to free up lending so that you can continue to consume, at all costs, including devaluing your money. Also, if that’s the case, then the value of your dollar NEVER matters. For idiots that don’t understand, if you buy the notion that our economy is based on consumer spending then, if you have $1,000 in the bank, they can inflate the economy so you have only $500 effective buying power, because all prices have risen.
This means that no work you do; no matter what improvements your boss makes; no discoveries in efficiency to lower production costs will have any impact on the economy because they can wipe all that ingenuity away by inflating the economy overnight. If you understood that sentence , then my explanation about the Austrian Business Cycle will be easy. Reread that sentence and understand it and we can move forward.
John Maynard Keynes
How does your salary increase? Most Keynesian economist would say “pay me more money“. It’s a very ignorant statement to make and I’ll explain why shortly. To this end Keynesian economist say, to increase the amount of money people have, we need to raise the minimum wage. [since they can't control other wages directly] Keynesian economist think that if you increase minimum wages then the workers can buy more, since they make more. You sitting at home immediately probably already figured out if you raise the minimum wage, a lot of people are going to be fired, so that the ones left can be paid more, OR if they pay the workers more, they increase the prices. So raising the minimum wage completely is thwarted by raising prices. If everyone raises their prices, the minimum wage raise buys less and you have a zero sum gain.
How should wages be increased? I’ve already alluded to it right in the last paragraph but I’ll point it out blatantly. You don’t get paid more money, what happens is, we become better at what we do. What does that mean? You do your same job. You get paid the same salary. Your boss however, makes improvements to the company to make your job easier, so you spend less time doing more. The store owner buys in larger bulk and gets a larger price cut per item. He then, lowers the price of goods. People discover new innovations to make your job even more efficient, so you spend less time doing the same tasks. Therefore you can do more stuff in the same amount of time, because each task is now easier to do. Your boss can now lower prices because each item is cheaper to produce.
Salary Raise in an Austrian Economist Scenario
So far, the store owner lowered prices, your boss lowered prices, and production lowered prices. Check this out. You make the same amount of money you did yesterday, but ALL PRICES OF GOODS AND SERVICES HAVE BEEN LOWERED, so your salary can buy much more.
If the system is left alone, these innovations can occur all the time and prices can be lowered and lowered. A house would take far less to produce and should cost less today than it did 10 years ago. And, because all other goods and services were lowered, you would be able to purchase a much larger house today, than you could before.
Next, let’s visit credit, because I talked about it above. Let’s think about my perfect scenario, but with banks now. Because your salary can now go further, let’s assume you don’t feel a dieing need to spend every last dime you have. You go and open a savings account, so does your neighbor, your pastor and your cousin. After several years all of you have nice lump sums in the bank. The bank says,
“oh my we have quite a bit of money in the bank. you know what we can make lots of money if we lent to more people, let’s lower interest rates.” So the bank lowers interest rates. The store owner sees interest rates go down and thinks, people have more money to spend, and interest rates are lower, let me go take a loan and expand my business. So he does. One day you walk by and now your local store has groceries and a barbershop with an old fashion shave by razor. You then decide to stop by every week and get a nice shave and haircut while you shop. The store owner pays back his loan and the bank makes money. Because of all these shaves you and your cousin have been getting, your bank accounts have gone down by half. The bank raises interest rates and less people take out loans. And, life goes on.
Ludwig Von Mises Proponent of the Austrian School of Economics
Are you getting angry yet? Is the light coming on? Are you putting 2 and 2 together? Yes, let’s go back the Keynesian economists? They think the government has to oversea you, and your boss and the store owner. If the store owner says, “oh no I bought to much corn meal, I’m going to lose my shirt over this” they say no problem, we’ll infuse cash to you, so you don’t lose your shirt. They just stopped all the progress you, your boss, and production have been making, because prices are now inflated. In essence, they stole from you. They also lower interest rates artificially. Then the store owner is confused and thinks he should take out a loan and expand his business. However, you and your boss don’t make what you should be making due to the new inflation. You stop by the shop and shake your head when you see the new addition, because you don’t have the money for it. After about 6 months to a year, the store owner goes completely out of business because he can’t pay back that loan he took out because no one gets haircuts and shaves.
Which brings me to the Austrian Business Cycle.
“The theory views business cycles (which they also call credit cycles) as the inevitable consequence of inherently damaging and ineffective central bank policies, which cause interest rates to remain too low for too long, resulting in excessive credit creation, speculative economic bubbles and lowered savings. According to the theory, the business cycle unfolds in the following way. Low interest rates tend to stimulate borrowing from the banking system. This expansion of credit causes an expansion of the supply of money, through the money creation process in a fractional reserve banking system. This in turn leads to an unsustainable boom during which the artificially stimulated borrowing seeks out diminishing investment opportunities. This boom results in widespread malinvestments, causing capital resources to be misallocated into areas that would not attract investment if the money supply remained stable. A correction or “credit crunch” – commonly called a “recession” or “bust” – occurs when credit creation cannot be sustained. Then the money supply suddenly and sharply contracts when markets finally “clear”, causing resources to be reallocated back towards more efficient uses.The theory proposes that a sustained period of low interest rates and excessive credit creation results in a volatile and unstable imbalance between saving and investment.”
Production Increases Prices Lower
The boom comes from The Federal Reserve lowering interests rates [not because the banks have a lot of people who have large savings accounts] and business owners start a building frenzy or opening new businesses or whatever the latest fad is. The bubble is created because all these people are put to work, that didn’t work before. There’s all this money infused into something that wasn’t at the same volume before.
The burst comes from when you, YEAH YOU, don’t go out and buy these widgets from them. Why? Because you never said you wanted them in the first place. And, you never said you wanted them at twice the price. Did you?
So what’s the answer? First we need to do away with the entire federal reserve structure and dismantle all of their banks in America. We do not need a central bank dictating to everyone, including non-business people, such as yourself, by taking your savings away from you. We need to reduce regulation on businesses. It’s just taxes that takes away buying power from businesses. The only regulation we need from the government, is protecting your constitutional rights, and protecting you from being gouged economically. We need to go on a gold standard so this entire process can never occur again. On a gold standard you, your pastor, your neighbor and your boss all can rely on what a dollar is today and tomorrow. On a gold standard, if you put money in a savings account, the government can’t come steal it. On a gold standard, although your salary won’t increase, your dollar will increase due to the price of gold increasing. We were just on the gold standard all the way up until 1971 when Richard Nixon, by himself, took us off the gold standard. [wasn't he a great guy?] On a gold standard a bank can gouge you either.
Recently Warren Buffet has been appearing on the national scene, moreso than before. He is now the darling of both the press and Washington.
He figured prominently during the bailout talks when he invested $5 billion in Goldman Sachs. There was a proverbial gasp heard
The Warren Buffet Way Click Here
round the investing nation at the time because everyone knew the financials were in trouble, in general, banking in specific. But, let’s look at his deal. At the time the stock seemed like a steal. In fact, many thought he was taking advantage of the venerable bank. For Berkshire Hathaway, it bought a US$5 billion equity stake in the dominant player of the industry, and for its money receives a guaranteed dividend of 10 per cent a year on its perpetual preferred shares. On top of that Goldman’s gave Berkshire 5 year warrants which give Berkshire the right to buy 43.5 million common shares of Goldman Sachs at a strike price of US$115 at any time before 2013. However, banking stocks tanked, the crisis deepened, Goldman shares hit a low of US$47.41 on November 21st. After writing an op-ed piece for the New York Times on why he buys America, Mr. Buffet came in for criticism.
However, we are talking about Warren Buffet. I’m often reminded of the movie “Wall Street” when i think of him. Anything he purchases will sooner or later gather stragglers, who mistrust their own investment skills. Goldman shares have doubled since November, closing at $111.93 last Monday.
“The Investment bank has had to change its business model, and reduce the amount of leverage it carries on its balance sheet, but some business areas are positively on fire with flow or client driven trading benefiting from wide spreads being charged and really bringing in the moolah.” [what a shocker, that actually works]
Benjamin Graham Click Here
For every silver lining however there is a cloud. The GE deal Berkshire got, with those same warrants, don’t look so delicious. The warrants were for an aggregate cost of $3 billion @ $22.25 per share. Ge closed at $10.43. Yeah, not so much.
Warren Buffet Click Here
Which brings me to the next point. Disciples of the value strategy, like Berkshire Hathaway’s Warren Buffett, focus on the long-term intrinsic value of a company, hoping to buy shares in good companies at reasonable prices. For financial stocks—some of which haven’t or won’t survive the crisis—it’s nearly impossible to identify the long-term value, whether through profits, cash flow, or other measures.
But what are companies worth these days? What is the value of a company that accepts TARP money? Hard isn’t the proper word for what investors are up against when trying to figure this out, impossible is more like it. And these atrocious bailouts and stimulus packages flowing out of Washington and the Federal Reserve [secretly, psssst hey AIG, come here in the alley i got some more money for ya] are only hurting the situation. In the mean time Buffet is seen publicly on T.V. talking about he praises Obama for his efforts and he’s optimistic for the long term. Was that on a Hallmark card Warren? “Get Well Soon America” from your buddy Warren.
Bull Moves by Peter Schiff Click Here
He’s lost it. In fact if you go back and look at Berkshire Hathaway’s performance versus the dow over the past 20 years, it has underperformed. GASP!!! Not the sage of Omaha!!! Oh brother. Yes he’s lost it. Hell, he got lucky in the first place. He never “had” it. A study was done once, some university economists [this is no joke, this is serious research here] wallpapered their class with the Wall Street Journal [yay free plug WSJ] blind folded several students, gave them darts and had them throw them. They picked the stocks they landed on and invested. [don't try this at home kids, these guys have PhDs] Every single student’s stocks out performed the DOW. GASP!!! [and i would have gotten away with it if it weren't for you meddling kids] Apparently they did this study for years. They concluded that the big performer investors are simply lucky and actually have no “magical skills” to predict good stocks. [ha what do those snotty nosed professors of economics know]
So Warren [we're on a first name basis] says he’s optimistic for the economy and Obama’s the bee’s knees. Wellllllllll Peter Schiff, Ron Paul, Lou
Crash Proof by Peter Schiff Click Here
Rockwell, Judge Napolitano, Glen Beck [I had to mention him so people who Google his name read this blog teehee], all say the exact opposite. And, I agree with them [but who listens to me *sigh* I need a hug]. Can vultures pick up the pieces Warren Buffet leaves behind? Sure, mull over the carcasses of the straggler investors who follow him blindly. But, be wary and trust your own learning. Read Adam Smith. Be an “Austrian” school of economics disciple. These Keynesian economist are the darlings of Washington right now, since they chant spend, spend, spend.
Jim Rogers
For the rest of us, invest in gold. Buy dividend paying stocks OVERSEAS. Stay away from cash and the dollar. When this hyper-inflation hits, [oooooh boy don't you dare argue with me there] and it will hit, all of your cash is going to go up in smoke.
How many billionaires…. were removed off the Forbes Billionaire list.
