I believe that one of the most important things to master, particularly now while I am young and have the time to learn new things, is personal finance. This isn’t because I want to be a millionaire or drive luxury cars. Rather, it is because I think that a strong grasp of good personal finance in these harrowing economic times can essentially be the difference between financial security and ruin.
Peace of mind is hard to come by these days, especially if you understand on a theoretical level how dangerous the economic fundamentals of the United States have become.
The fact of the matter is that the economy is in terrible shape and it does not look like it will improve any time soon. Keynesian stimulus efforts have failed again, as they have multiple times throughout history. In fact, the recent onslaught of bailouts, stimulus packages, healthcare provisions, cash for clunkers, and financial regulations have thwarted true recovery by artificially propping up failing financial institutions and markets. These institutions should have been allowed to reallocate and restructure their labor and capital after the housing bubble burst in 2008. If they had, 2008 would already be a bad, but distant memory.
In short, the very inefficiencies and bad policies that drove our economy into meltdown in 2008 are being repeated by Congress, the President, and the Federal Reserve. Except this time, things don’t even feel right…most people understand that something’s wrong with the economy. That’s a good first step, but being uncomfortable and being prepared are two different things.
Not Being Alarmist
I truly want to see the American economy recover based upon sound, market-based principles. I really do. That’s one of the reasons why I help run the Facebook page for the Capitalism Institute alongside Shaun Connell (who, I will admit, takes the majority of the credit for the success of CI thus far…I help out with the FB page when I can and write for the site). We have almost 4,000 followers on FB after one year of existence and some of the content that we have produced has gone viral. I also write articles for CI about the importance of good economic theory in an attempt to educate individuals about the virtue of liberty and the intellectual superiority that is inherent within a defense of the free market.
I’m fighting for a free and prosperous society because I know that it’s the right thing to do.
The problem is that I still have to manage a budget wisely in the meantime as the economy continues to stagnate and as government interventions continue to grow. Looming dangers on the horizon deeply concern me as to where the state of the U.S. economy (and the regulations that govern it) will be in ten years. These concerns are not just important to understand on a theoretical economic level…I also want to understand them in regard to how they will relate to me. These dangers include, but are not limited to:
1) The Dangerous Monetary Policy of the Federal Reserve
I’m no tin-foil hat conspiracy theorist, but I do understand the economics of central banking. When the Federal Reserve was created in 1913, the U.S. dollar was a strong and vibrant currency. Today, the dollar is worth a mere nickel of what it was back then and there is no reason to believe that it will gain strength any time soon. Why?
Let’s start with a basic concept: how increasing the money supply stimulates boom-bust cycles. Friedrich Hayek won a Noebel prize in 1974 for his research on business cycles. He argued that business cycles occur first and foremost because there is a dramatic increase in the money and credit supply that seems to stimulate growth, but in reality, just creates perverse incentives that lead to mal-investments. Obviously, such an expansion of the money and credit supply can occur in a system of free banking, but it cannot be sustained for nearly as long…meaning that boom-bust cycles will be much shorter and easier to recover from relative to economies with a central bank. But central banks ensure that the financial booze keeps flowing long into the night, ensuring the severity of the hangover the next day.
Because the Federal Reserve has committed America to increasing the money supply, in the long run, it will likely trigger another very severe economic bust that may be accompanied by the collapse of the U.S. dollar and a severe inflation of prices. I don’t mean to say that anyone at the Fed wants this to happen, but it is economically impossible to triple the money supply (as the Fed has done since 2009 through its quantitative easing programs) and simultaneously avoid fairly severe inflation. Michael Pollaro at the Mises Institute presents a compelling argument for why the United States is headed for a crash even more severe than the housing bubble due to the expansion of the money supply that has taken place under Bernanke’s watch.
The most compelling and startling graphs that Pollaro presents is the following:
These graphs illustrate the Austrian measure of the money supply and track that measure across three different boom-bust cycles: the housing bubble, the dot-com bubble, and the coming Bernanke bubble. Notice how the percentage increase in the money supply in the second graph literally parallels the growth rate in the money supply prior to the burst of the 2008 housing bubble.
Peter Schiff, an investor and student of Austrian economics, is also predicting much doom is ahead for the U.S. economy. Why more people aren’t listening to him, I’m not sure. He accurately predicted the burst of the housing bubble because he understood how monetary policy creates perverse incentives and stimulates boom-bust cycles. But now, he’s predicting that the economy is headed for a worse crash than before…an inflationary depression. I am not sure that I agree with him on timeframe (2013-2014), but I can’t argue with the economics of his prediction.
Regardless of when the next crash happens, there is no question that it will occur thanks to the Federal Reserve’s devaluation of the U.S. dollar and constant expansion of the money supply. The question will be how severe it is.
2) Increased Banking Restrictions, both Foreign and Domestic
The U.S. government is severely cracking down on the economic freedom of its citizens these days. Although most people are not aware of the full impact of laws such as Dodd-Frank, Obamacare, the TARP bailout, and the stimulus package, the reality is not just that these laws are ruining America’s chance at prosperity, they are also destroying our financial freedom.
Consider the fact that Dodd-Frank has barely been implemented by bureaucrats and it already has created 9,000 pages of new regulations for banks and financial institutions. Additionally, Dodd-Frank has set up the Consumer Finance Protection Bureau (CFPB), which will operate under the authority and funding of the Federal Reserve. The CFPB has the authority to punish and prevent any actions by banks that it deems unfair or abusive. The catch is that there is literally no definition of what unfair and abusive practices actually look like. It’s going to be impossible to have financial institutions continue to provide us with services like free checking and affordable loans when the full force of Dodd-Frank’s regulations kick in.
But wait, isn’t it good to check the expansion of the money and credit supply, given what we know about the business cycle? If Dodd-Frank provides more incentives for banks to loan less, isn’t that good from an economic perspective?
The free market, in and of itself, without the perverse incentives created by the Fed or by congressional policies is fully capable of cutting back on lending if such a move is necessary to get the United States’ economy back on track. But codifying the punishment of banks into law will do nothing to save the economy. In the long run, it will probably destroy our banking system.
Meanwhile, Congress has also dramatically restricted Americans’ ability to invest in foreign banks. Matt Welch at Reason has already noted that, due to a law passed by Congress entitled the “Foreign Account Tax Compliance Act,” which basically gave the IRS the authority to hound foreign banks for U.S. account holder information. How they justified this violation of international sovereignty and foreign banking laws is beyond me. But the practical result is that foreign banks, in order to avoid the hassle of dealing with the U.S. government, are literally closing their accounts with U.S. citizens. Although it is still possible to save and invest abroad, it is very commonly being perceived as unpatriotic and criminal to do so in the United States. As a result, the laws are tightening around our ability to take our money overseas.
Again, I want to reiterate that this is not mindless alarmism. These are real regulations that are producing real results that will likely help cripple financial freedom and prosperity. The U.S. government has begun a path to successfully strangle domestic banks while not allowing Americans to seek cheaper and safer alternatives abroad. This is actually pretty scary if you think about it.
3) Increased Government Spending and Taxation
Ethically speaking, taxation is the transfer of property from one person to a group of people without the consent of the property holder. This is undeniably a form of theft that the French politician Frederic Bastiat called “legal plunder.” Therefore, if it should be admitted that government is a necessary evil, taxation should be as close to zero as possible.
Instead, the United States has a highly burdensome tax code that nickels and dimes Americans into thinking that the government doesn’t take too much money. In reality, the government is sucking money straight out of Americans and funneling it into its failing programs such as Social Security, Medicare, Medicaid, Obamacare, bailouts, stimulus packages, and more.
We literally have a system of taxation in America that punishes financial success through theft of property. Every payday, millions of Americans look helplessly at the numbers on the withholding section of their paycheck. Every time I look at mine, it boggles me that government thinks it has a right to take a cut off of the money that I worked for and that I earned…before I even receive my check. What’s sad is that this number will increase by over two percent come December because neither Republicans nor Democrats are doing anything to keep the payroll tax cut extended. More money will go to the thieves that identify themselves as corporate lobbyists, bureaucrats agency experts, and politicians. Less will go to you, despite the fact that it’s really your money.
“Now, it’s ok,” some people say. “The government will give some back to you if you’re in a low enough tax bracket and have enough deductions and credits.” But the problem with that is that you will almost never get it all back. And even if you did, it would still count as an interest-free loan that the government fleeced you for. Meanwhile, if you’re in a high tax bracket, you can definitely kiss that money goodbye.
Oh, and if you are self-employed and earn money outside of your 9-5 job, you can expect to pay significant taxes on that, including a 15% “self-employment tax.” Because it’s essential that we punish individuals who have the gumption to make a living on their own!
The simple fact of the matter is that the United States has a complex, but effective, system of legalized plunder that is, at some point, going to destroy the spirit of American entrepreneurship. In many cases, it has done so already.
To clarify, I’ve never been an advocate of tax evasion because it ultimately will wind up with the IRS throwing you in a cage. There’s not much you can do for liberty from inside a prison cell. But, the inherent immorality of having to live under such a system does bug me and I hope it bugs you too if you’re concerned about the future of America’s economy.
What to do? Buy gold and silver!
The things I’ve covered merely represent the tip of the iceberg as far as the dangers that the American economy faces due to our government’s destructive interventionism.
So here I am, a young professional, wondering how in the world I can secure my finances against the the economic dangers that our country faces. I only wish I had dug deeper into this subject sooner and started on a long-term plan when I was in college. I would already be leap years ahead of where I am now had I learned in 2009 what I have taught myself over the past few months.
I’ve explored a lot of alternatives and have looked for a lot of advice. Some things that I’ve allowed myself to become interested by are very intriguing, but in the long run, they’re experimental if I end up trying them. However, there is one thing that I believe anyone who cares about their economic future should be doing right now, in light of what will likely happen to the U.S. economy in our lifetimes (if Peter Schiff is right, as he likely is).
And that is to buy gold and silver a little bit at a time for the foreseeable future.
I want to be a little nuanced here. I don’t believe that anyone should “invest” in gold and silver. It’s not an issue of profit, nice houses, yachts, or private jets as the long-term goal. Rather, I believe that individuals should save in gold and silver as a means of holding assets that are bulletproof to a collapse of the U.S. dollar. The difference that this will generate in mindset is huge. People who think of gold and silver as investments will be more likely to try to play the dangerous game of predicting gold and silver prices and then trying to realize profits too early. However, individuals who view gold and silver as saving tools will care less about price and more about overall financial security. Fundamentally, this is because buying gold and silver should be about security, not necessarily profits, although the two may go hand-in-hand if/when the U.S. economy goes through its next crash.
What’s So Special About Gold and Silver?
In June, I purchased and read through Michael Maloney’s Guide to Investing in Gold and Silver and was pretty much blown away. Although I ultimately disagreed with Maloney’s view of gold as an investment rather than as a savings instrument, I found little to fault in his economic understanding of why gold and silver beats out centrally issued paper fiat currency every time in the long run.
Simply put, Maloney demonstrates (and economic historians confirm) that no paper fiat currency has ever been introduced in an economy without eventually becoming worthless. When this happens, individuals return to commodities as currency because commodities retain their value and their purchasing power even as the purchasing power of paper fiat currency drops to zero.
I don’t know how close the United States is to the point of seeing its paper fiat currency system explode. It’s certainly headed in that direction and the warning signs are becoming more clear. However, I trust the government to do one thing right and that is to keep the paper currency system afloat as long as is possible. The Federal Reserve has already done a good job of this by keeping much of its new currency within itself, not releasing it into the market. This has dramatically tempered inflation and kept the dollar from losing its value even faster. Thus, I have no doubt that both Congress and the Fed will work along with the rest of the central banks of the world to keep the dollar afloat as long as is possible which is why I won’t offer a prediction as to when the dollar will collapse.
But, as Maloney demonstrates in his book, you can’t argue with the economic fundamentals of the dollars’ coming collapse. It’s pretty much a rock-solid law of economics that as you increase the money supply, prices of goods and services will eventually increase. As the Federal Reserve continues to increase the money supply in order to ward off fears of depression, we will see in the coming years drastic increases in prices.
As bad as this will be for those who hold their assets in dollars, this will ultimately be good news for gold and silver. As the dollar loses purchasing power, gold and silver will dramatically increase in value. Many people were shocked last summer when gold almost hit $2,000 an ounce. Since then, it’s fallen back to around $1,600 and has hovered there throughout the summer. Meanwhile, silver spiked to near $50 last year and has since fallen back to around $25-27. However, both gold and silver are still dramatically undervalued relative to the dollar and to the stock market itself in light of the likely fact that another, probably more severe, crash is coming.
But remember, ultimately, saving in gold and silver is not about profits. It’s about being able to weather the next economic crash with a peace of mind.
How to Buy Gold and Silver
If you are already financially well-established and have the means to start buying lots of gold and silver, I would do so immediately. However, even if you’re a college student, it’s possible to start saving in gold and silver.
There’s multiple ways to accomplish this goal:
1) Go to a coin shop. This can be a good idea, but if you’re new to the concept of buying gold and silver, you could wind up with the problem of dealing with an overly exuberant sales person that wants to sell you the types of gold and silver that he thinks best at a price that may be too high. Plus, you immediately have to store your purchases in a very secure location. Always buy bullion, not numismatics (the reason why is explained at the end of this article).
2) Buy bullion coins online at full price. There are a lot of sites where you can do this, including Apmex, Euro Pacific Precious Metals, and Monex. This can also be a good idea, particularly if you have the resources to place large orders. However, the drawback comes for those who can’t shell out $1,600 for an ounce of gold right now or place a large order for 40 silver coins at once.
3) Accumulate gold and silver bullion on a schedule through Silver Saver. This is one of the best options because of how flexible and easy Silver Saver is for people to use. Instead of purchasing an entire shipment of gold and silver all at once, Silver Saver essentially allows you to open up gold and silver “bank accounts.” You can set up a disciplined schedule to automatically buy gold and silver every month. When you do, Silver Saver purchases the metal for you and keeps it in an insured vault that is assigned to your name. Ultimately, you can either sell your gold and silver back for cash or you can take delivery and have Silver Saver ship your gold and silver to you.
Silver Saver produced a chart demonstrating how effective this disciplined schedule of buying gold and silver every month was over the last decade. My expectation is that it will continue to be effective in the coming years:
If you buy into the argument that gold should be saved as opposed to being used as an investment vehicle, Silver Saver probably is the best way to go. Over the long run, using Silver Saver can allow anyone to start saving in silver and gold, even if you can only afford to buy $100 worth of metal every month. It’s much better than nothing.
In fact, one of my biggest regrets about college is that I didn’t start doing something like Silver Saver a lot sooner. If you are a college student reading this, I encourage you to open an account with Silver Saver and to discipline yourself into putting just a little bit of money (say $50) every month into silver at the very least. Scrimp on things like video games, booze, decorations, and designer clothing and put a little bit of savings into gold or silver. You will be leaps and bounds ahead of your friends that are spending their money on trivialities and you might be able to encourage some of them to wisen up.
Ultimately, the method that you go about buying gold and silver is up to you. Regardless of which avenue you choose, you absolutely should look into buying gold and silver sooner rather than later. We live in a dangerous economy, but you can at least give yourself some peace of mind by saving in an asset that can’t vanish into thin air like the U.S. dollar.
On numismatics vs bullion: I don’t see an advantage to buying numismatic gold and silver coins. If you want to save in physical gold and silver as an asset, I highly recommend bullion. The reason is because numismatic coins are collectibles that have a specialized place within the gold and silver market. Some are worth a good deal of money for their historical value or some other special significance factor, but many more are worth a lot less than what you end up paying for. They are also not reliable savings assets since they are not tied to the official price of gold and silver. Bullion on the other hand is tied to the official price of gold and silver and is easy to calculate value for.
Rarely do I write a post that includes some kind of call to action. However, I hope this post has encouraged you to at least consider more carefully the precarious position of the U.S. economy and the safety net that gold and silver can provide in case of a collapse. I want to clarify that I don’t believe that anyone should approach personal finance through the lens of tying all of their assets to gold, silver, and other precious metals. Diversification is the unbreakable law to financial success, regardless of any other consideration. I plan to experiment with other concepts that I have learned about personal finance. Simply put, there’s a lot more that I’ve learned in the past few months and I am looking to learn more in the months ahead. But saving in gold and silver is a safe bet, long-term, and should be a part of anyone’s financial strategy.
Finally, I really hope that my concerns are misplaced and that my worry about the collapse of the dollar and the U.S. economy is wrong. I don’t want to see America become drastically poorer, nor do I want to see my fellow citizens lose their liberty. However, given the knowledge that I currently have, I cannot wish what I want without preparing for what I believe could happen. I want to reiterate that alarmism and conspiracy theory is not the gist of this post. In fact, I really don’t like either forms of marketing. What I do like is rationally considering the the realities of the U.S. economic system and developing a smart, sustainable plan for ensuring financial security in the long run. That’s why I am buying gold and silver every month and that is why I encourage you to do the same.
“One last thing to consider when it comes to your investments–make sure to warn your family and friends. If you arrange your investments in a manner that allows you to prosper while most other Americans go broke, many of those closest to you will likely share their fate…In the end, of course, you can lead a horse to water, but you cannot make it drink. However, at least your family and friends can’t blame you for keeping your insights to yourself. The bottome line is that a major economic event looms on the horizon. Knowing about it is one thing–being prepared is another.” – Peter Schiff, The Real Crash, p. 300