The pursuit of economic growth and inflation has always been part of the practice in achieving 'Income Inequality'. It was an idea conceived long ago when the U.S. Government enacted The Federal Reserve Act of 1913-The easiest way to make money is to 'make money'. 100 years later we now see the plan coming into fruition, and they sure are reaping what they sow.
For those hoping for better days, there is light at the end of the tunnel. It will be a train wrecking calamity. The following will occur in months to come:
1. Corporate profits will decline dramatically. There's a point where the lower and middle class will run out of money to support this charade.
2. Stock markets will fall accordingly from missed expectations and lower guidance.
3. Bankruptcy filings will appear in droves.
4. Government will react by saving Too-Big-To-Fail with bail-ins and bail-outs using whatever wealth that the lower and middle class still has.
5. Violence erupts in the masses. Worse case scenario is war.
There are no 'happily ever after' in this scenario as long our government continues to support the practices we have today.
Thursday, January 30, 2014
Tuesday, January 28, 2014
Income Inequality and Wealth Transfer Simplified
Let's begin with the catchphrase, "The rich gets richer and the poor gets poorer." We all hear this at some point or another, but never really took the time to understand why. In basic economics, it is referred to as 'Income Inequality', a widening gap in wealth between the rich and poor. Today's world, it is caused by the transfer of wealth from the poor to the rich. To solve a problem such as this, we must identify the root cause by going to the fundamentals of money creation.
Money Creation via Currency
Imagine a scenario when money must first be created. First, the money printer prints $200, and gives it to 2 people. They both hold $100 each, which they both hold 50% of the money supply. The $100 bill is quite valuable as it is only 1 of 2 in the entire world. They both use it to trade for goods and services from each other.
Transfer of Wealth via Money Creation
The money printer creates $100 and gives it to Person A. This time Person A holds 2/3rd of the money supply! Suddenly, that $100 that was worth 50% is now worth 33.33%. Person B is now at a disadvantage, since he only holds 1/3rd. The creation of a $100 dilutes the value in terms of basic 'supply-and-demand'. Person A is now richer because he was the recipient of the extra $100.
Income Inequality via Transfer of Wealth
Person A sees the benefits of transferring wealth from Person B, and asks for money from the Money Printer. There is now $400 in existence, and Person A holds $300 ( 75%) of the wealth. Person B is still holding the same $100, but it is only worth 25%. By continuing to dilute the money supply, the gap in wealth continues to widen.
Real Life Scenario Comparison
The story sounds ridiculous but this is essentially what is occurring in the world. Each country has a Central Bank that creates new money and charges interest. The interest payment goes to the owners of the Central Bank. The more money the Central Bank creates, the more interest payment they get. Private Banks benefit from this as well as they are the recipient of the printed money. This is simply a wealth transfer by dilution of the money supply. Those that are able to gain easy access are the ones that benefit. A scheme such as this is only possible when government mandates it, and the people accepts it.
Real Life Solution
The only solution is to replace the current monetary system that is not inflationary by design. There are no exceptions. It is a system rigged to benefit those that are in control of the monetary system.
Money Creation via Currency
Imagine a scenario when money must first be created. First, the money printer prints $200, and gives it to 2 people. They both hold $100 each, which they both hold 50% of the money supply. The $100 bill is quite valuable as it is only 1 of 2 in the entire world. They both use it to trade for goods and services from each other.
Transfer of Wealth via Money Creation
The money printer creates $100 and gives it to Person A. This time Person A holds 2/3rd of the money supply! Suddenly, that $100 that was worth 50% is now worth 33.33%. Person B is now at a disadvantage, since he only holds 1/3rd. The creation of a $100 dilutes the value in terms of basic 'supply-and-demand'. Person A is now richer because he was the recipient of the extra $100.
Income Inequality via Transfer of Wealth
Person A sees the benefits of transferring wealth from Person B, and asks for money from the Money Printer. There is now $400 in existence, and Person A holds $300 ( 75%) of the wealth. Person B is still holding the same $100, but it is only worth 25%. By continuing to dilute the money supply, the gap in wealth continues to widen.
Real Life Scenario Comparison
The story sounds ridiculous but this is essentially what is occurring in the world. Each country has a Central Bank that creates new money and charges interest. The interest payment goes to the owners of the Central Bank. The more money the Central Bank creates, the more interest payment they get. Private Banks benefit from this as well as they are the recipient of the printed money. This is simply a wealth transfer by dilution of the money supply. Those that are able to gain easy access are the ones that benefit. A scheme such as this is only possible when government mandates it, and the people accepts it.
Real Life Solution
The only solution is to replace the current monetary system that is not inflationary by design. There are no exceptions. It is a system rigged to benefit those that are in control of the monetary system.
Monday, January 27, 2014
Overview of Asset Classes for Investments
Asset Classes are a group of securities that can be invested for the purpose of profits:
The most common and popular choice is stocks (equities). Stocks require minimal amount of starting capital, and could potentially return the greatest. Stocks perform exceptionally well when governments/central banks impose inflationary policies though money printing. However, the risks are very high and prices can go to zero.
Bonds are essentially loans charging interest payment until maturity. Upon maturity the loan is paid back at bond value (par value). The value of the bond changes according to interest rates. If interest rates rises, then the value of the bond declines. This could potentially cause losses, especially if the bond issuer defaults (bankrupt). Ideally, bonds returns the greatest gain when interest rates are high and trends downward before maturity.
Perhaps the most lucrative investment are Real Estates. Limited land and rising population are favorable condition for owning land. There are typically 2 ways to profit from real estate: leasing or selling. A critical mistake often made is using debt to finance the purchase and calling it an Asset. Unless the debt is paid in full, it can not be considered an Asset.
Commodities can range from a wide variety of items such as goods, services, natural resources, and precious metals. These are the least sought investment as the value generally rises during times of currency inflation or fear. Historically, commodities retain their value and do not succumb to default or going to zero in price.
- Stocks (Equities)- shares of ownership in a company
- Bonds- lending money to an organization to earn interest
- Real Estate- physical property for leasing
- Commodities- natural resources and precious metals
The most common and popular choice is stocks (equities). Stocks require minimal amount of starting capital, and could potentially return the greatest. Stocks perform exceptionally well when governments/central banks impose inflationary policies though money printing. However, the risks are very high and prices can go to zero.
Bonds are essentially loans charging interest payment until maturity. Upon maturity the loan is paid back at bond value (par value). The value of the bond changes according to interest rates. If interest rates rises, then the value of the bond declines. This could potentially cause losses, especially if the bond issuer defaults (bankrupt). Ideally, bonds returns the greatest gain when interest rates are high and trends downward before maturity.
Perhaps the most lucrative investment are Real Estates. Limited land and rising population are favorable condition for owning land. There are typically 2 ways to profit from real estate: leasing or selling. A critical mistake often made is using debt to finance the purchase and calling it an Asset. Unless the debt is paid in full, it can not be considered an Asset.
Commodities can range from a wide variety of items such as goods, services, natural resources, and precious metals. These are the least sought investment as the value generally rises during times of currency inflation or fear. Historically, commodities retain their value and do not succumb to default or going to zero in price.
Tuesday, January 21, 2014
U.S. Monetary History says gold is a good bet
Monetary History
Since the Coinage Act of 1792, the United States was functioning under a bimetallic standard: gold and silver. Until 1873, the German empire dropped the coinage of silver causing a downward pressure in value. This prompted the United States to fully embrace gold. By the end of 1870s, all other major countries switched to the gold standard, and began what was known as the Classical Gold Standard.
Since the Coinage Act of 1792, the United States was functioning under a bimetallic standard: gold and silver. Until 1873, the German empire dropped the coinage of silver causing a downward pressure in value. This prompted the United States to fully embrace gold. By the end of 1870s, all other major countries switched to the gold standard, and began what was known as the Classical Gold Standard.
By 1914, the standard came to an end as World War I broke
out. Countries abandoned the gold standard in order to finance the war. The
year prior, The Federal Reserve Act of 1913 created the nation's central bank in
an attempt to curtail economic fluctuations, This gave the Federal Reserve Board the power
to issue new currency called Federal Reserve Notes.
From 1925 to 1931, another gold standard was brought back- known as the Gold Exchange Standard. The primary reserves were held as dollars, pounds, or gold. The standard was short-lived due to Britain’s departure from gold in 1931, which sought the ability to pursue inflationary practices.
From 1946 to 1971, the U.S.and most countries were tied to a partial gold standard known as Bretton Woods system. Countries currency's were tied to the U.S. dollar, which in turn is tied to Gold. Persistent U.S. inflationary practices reduced confidence in the U.S. dollar. As a result, countries began redeeming the dollar for gold. By August 15, 1971, the United States declared the ineligibility to redeem U.S. dollar for gold.
Analysis
In the 1870s, we see how competing nations can force the U.S. to adopt the gold standard or be left behind. Then in 1931, Britain left the gold exchange standard- pressuring others to follow. Finally, on 1971, we see how dwindling confidence can cause a run on the reserve currency. There are two observations one can safely make:
1.) It is without a doubt, that the U.S. again, will be forced by the external markets to adopt a new monetary standard.
2.) More importantly, anyone holding onto a paper currency and gold from 1914 would find that only gold still has value.
A final word in regards to investing, one could stand to benefit greatly if they got in before the masses. The masses have yet to participate.
Michael D. Bordo, "Gold Standard." The Concise Encyclopedia of Economics. 2008.
From 1925 to 1931, another gold standard was brought back- known as the Gold Exchange Standard. The primary reserves were held as dollars, pounds, or gold. The standard was short-lived due to Britain’s departure from gold in 1931, which sought the ability to pursue inflationary practices.
From 1946 to 1971, the U.S.and most countries were tied to a partial gold standard known as Bretton Woods system. Countries currency's were tied to the U.S. dollar, which in turn is tied to Gold. Persistent U.S. inflationary practices reduced confidence in the U.S. dollar. As a result, countries began redeeming the dollar for gold. By August 15, 1971, the United States declared the ineligibility to redeem U.S. dollar for gold.
Analysis
In the 1870s, we see how competing nations can force the U.S. to adopt the gold standard or be left behind. Then in 1931, Britain left the gold exchange standard- pressuring others to follow. Finally, on 1971, we see how dwindling confidence can cause a run on the reserve currency. There are two observations one can safely make:
1.) It is without a doubt, that the U.S. again, will be forced by the external markets to adopt a new monetary standard.
2.) More importantly, anyone holding onto a paper currency and gold from 1914 would find that only gold still has value.
A final word in regards to investing, one could stand to benefit greatly if they got in before the masses. The masses have yet to participate.
Michael D. Bordo, "Gold Standard." The Concise Encyclopedia of Economics. 2008.
Thursday, January 16, 2014
Is 2014 another good year for U.S. Stocks?
In this round of Heads or Tails, we'll be making the case for the 2014 prediction of the U.S. stock market. The list will accumulate periodically to better gauge the trend.
Heads: 2014 will be a good year for stocks
Tails: 2014 will end badly for stocks
At this moment, there is very little evidence to suggest a strong trend up or down. However, a $17 trillion debt is not to be taken lightly. We'll continue to add more to the list, but this is it for now.
Heads: 2014 will be a good year for stocks
- On December 18, 2013, the Federal Reserve has announced they will keep interest rates low
[source] - The US is sitting on a huge stock pile of natural gas which could provide new opportunities
[source] - Unemployment rate improved drastically to 6.7 taking it to pre-2008 crash level
[source]
Tails: 2014 will end badly for stocks
- On December 18, 2013, the Federal Reserve has announced their intention to reduce bond purchases
[source] - Despite the improved 6.7 unemployment rate, the wage trend indicator shows very low wages and low wage growth
[source] - On December 30, 2013, margin debt is at an all time high
[source] - As of January 15, 2014, the US national debt exceeds $17 trillion.
[source]
At this moment, there is very little evidence to suggest a strong trend up or down. However, a $17 trillion debt is not to be taken lightly. We'll continue to add more to the list, but this is it for now.
Tuesday, January 14, 2014
How entrepreneurs use Arbitrage and how Government destroys it
Arbitrage is the capitalization of spreads in the markets. The spread is the price difference of the same item. A seller can buy and sell the same item for a profit. The process normally starts with the seller making an offer/asking price to sell the good. A potential buyer may bid on the price or haggle. There are many scenarios to explore which gives keen insight to how markets behave.
Free market economy scenarios
1. A merchant sees that consumers in town are buying milk for $5 per gallon. He stopped by a farm and was able to buy them for $0.50 per gallon. The next day he sold milk at the town for $4.50 per gallon to beat the competition. The spread declines due to increasing competition.
2. In hopes in repeating the success, the merchant goes to the farm to buy more milk. Due to shortages they are now charging $1.00 per gallon. He decides to purchase them since the profit is still attractive. Customers came to his shop again, but the majority only offered $4.00 below his asking price. Since diary spoils, he had to sell it or risk losing inventory. As a result, the drop in demand and higher cost lower his profits.
3. The next day, customers began lining up at the merchant's shop. Fortunately, the other stores stop selling milk because they decide it wasn't worth it. Customers were willing to pay $7 per gallon. The profit increase as demand rises and competitors drop off.
In a free market economy, the market spread expands and contract within reason. All prices are justified through the choices of buyers and sellers. The merchant was rewarded because of the work he put in. His competitor gave up profits, because they weren't willing to do it anymore. There are no exceptions.
Government interference scenarios
4. Due to reckless spending, the government need funding by imposing higher income tax for small businesses. The farm increase the cost of milk and the merchant did not want to earn less because of the government's reckless spending so he increased the price of milk to $9 per gallon. The consumers did not like this.
5. After many complaints about the price of milk from low income families, the government on election year issued subsidies for milk to low income families. All the other merchants decided to carry milk again and sets the asking price at $11 per gallon. The low income families paid the asking price without issue as it was free money. The higher income families than not like this, since they are now paying a higher price, and could not bargain due to the other consumers.
6. After more complaints on high milk prices, the government place a $5 per gallon cap on milk. The merchant closed his milk business and pursues more profitable alternatives.
Government regulations will cause abnormal market spreads as it limits the choices of the individual. The merchant must adjust the price due to government factor and not market factor. We can see how prices can suddenly inflate due to stimulus and taxation. It is always the case.
Free market economy scenarios
1. A merchant sees that consumers in town are buying milk for $5 per gallon. He stopped by a farm and was able to buy them for $0.50 per gallon. The next day he sold milk at the town for $4.50 per gallon to beat the competition. The spread declines due to increasing competition.
2. In hopes in repeating the success, the merchant goes to the farm to buy more milk. Due to shortages they are now charging $1.00 per gallon. He decides to purchase them since the profit is still attractive. Customers came to his shop again, but the majority only offered $4.00 below his asking price. Since diary spoils, he had to sell it or risk losing inventory. As a result, the drop in demand and higher cost lower his profits.
3. The next day, customers began lining up at the merchant's shop. Fortunately, the other stores stop selling milk because they decide it wasn't worth it. Customers were willing to pay $7 per gallon. The profit increase as demand rises and competitors drop off.
In a free market economy, the market spread expands and contract within reason. All prices are justified through the choices of buyers and sellers. The merchant was rewarded because of the work he put in. His competitor gave up profits, because they weren't willing to do it anymore. There are no exceptions.
Government interference scenarios
4. Due to reckless spending, the government need funding by imposing higher income tax for small businesses. The farm increase the cost of milk and the merchant did not want to earn less because of the government's reckless spending so he increased the price of milk to $9 per gallon. The consumers did not like this.
5. After many complaints about the price of milk from low income families, the government on election year issued subsidies for milk to low income families. All the other merchants decided to carry milk again and sets the asking price at $11 per gallon. The low income families paid the asking price without issue as it was free money. The higher income families than not like this, since they are now paying a higher price, and could not bargain due to the other consumers.
6. After more complaints on high milk prices, the government place a $5 per gallon cap on milk. The merchant closed his milk business and pursues more profitable alternatives.
Government regulations will cause abnormal market spreads as it limits the choices of the individual. The merchant must adjust the price due to government factor and not market factor. We can see how prices can suddenly inflate due to stimulus and taxation. It is always the case.
Monday, January 13, 2014
How Money makes you rich and Fiat Currency makes you poor
Money has been around for many centuries, but most people do not fully understand it. We use money as a medium of exchange for goods and services. We also work for money, so that we can pay for things. Sometimes people save their money for future use. So we know what we can do with it, but let's explore why we could.
Money contains the following properties that makes it special:
1. Portable- it is convenient to trade with
2. Durable- it should still be there when you need it
3. Divisible- can be broken it into smaller amounts for smaller purchases
4. Interchangeable- can be traded for the same
5. Valuable- it has universal appeal and worth
Believe it or not, but most of us no longer use money. We now use Fiat Currency. It is a government note acting as money, and can be created without limitations.This is an important concept to understand. When there is a lot of something, it is valued a lot less.
As value declines,so does our ability to purchase goods and services,
our reward for the hard work, and savings for retirement.
Only Gold and Silver can be money. They contain all the properties of what money is, and serve the purpose of what you do with money.
1. Portable- you can easily carry Gold and Silver
2. Durable- they are the least reactive substance on earth.
3. Divisible- you can create smaller portions
4. Interchangeable- Gold and Silver is the same anywhere
5. Valuable- it has intrinsic value and hasn't changed for thousands of years.
source: Lessons for the Young ECONOMIST. ROBERT P. MURPHY
Money contains the following properties that makes it special:
1. Portable- it is convenient to trade with
2. Durable- it should still be there when you need it
3. Divisible- can be broken it into smaller amounts for smaller purchases
4. Interchangeable- can be traded for the same
5. Valuable- it has universal appeal and worth
 |
| US Dollars - Fiat Currency |
As value declines,so does our ability to purchase goods and services,
our reward for the hard work, and savings for retirement.
 |
| Gold and Silver - Money |
1. Portable- you can easily carry Gold and Silver
2. Durable- they are the least reactive substance on earth.
3. Divisible- you can create smaller portions
4. Interchangeable- Gold and Silver is the same anywhere
5. Valuable- it has intrinsic value and hasn't changed for thousands of years.
source: Lessons for the Young ECONOMIST. ROBERT P. MURPHY
Subscribe to:
Posts (Atom)