Opinion from a Libertarian ViewPoint

Posts Tagged ‘Bonds’

Some common sense advice from two billionaires

Posted by M. C. on December 18, 2021

Simon Black

Elon Musk didn’t have a care in the world last week as he hilariously mocked questions in a live interview with the Wall Street Journal.

The Journal’s reporter had essentially prepared a number of softball questions designed for Elon to praise the US government’s new ‘Build Back Better’ bill.

If you haven’t heard, the legislation contains a number of provisions which should greatly benefit Tesla, including major subsidies to build electric vehicle charging stations across the US.

But Elon had no interest in the puff piece.

“Unnecessary,” he interjected when the reporter started to ask what he thought of the subsidies.

“Do we need support for gas stations? We don’t. So there’s no need for support for a charging network. I’d delete it. Delete.”

This left the reporter flummoxed… how could Elon possibly not be excited about “free” government money that would support his business?

But Elon’s point seemed completely lost on her.

“Seriously we shouldn’t pass it,” Elon continued, almost exasperated.

“If we don’t cut government spending, something really bad is going to happen. This is crazy. Our spending is so far in excess of revenue its insane. You could zero out all billionaires in the country… you still wouldn’t solve the deficit.”

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So the reporter said, well, let’s change the subject.

Elon then sounded-off on issues like the rise of China and corresponding decline of the US. He also called declining birth rates “one of the biggest risks to civilization.”

Now, Elon Musk is a famously eccentric character.

But another more ‘traditional’ billionaire is also on board with this ethos.

Ray Dalio founded and runs the largest hedge fund in the world, Bridgewater Associates.

He has been very vocal over the past several years about the pathetic state of US government finances, and obvious shift of wealth and power away from the US.

For example, last year he published an article which asks, why in the world would you own bonds?

Dalio points out that, buying US Treasury bonds (which is tantamount to loaning money to the federal government) USED TO BE a good investment, back when America was actually creditworthy.

But now when you buy bonds, you’re loaning money to the largest debtor that has ever existed in the history of the world… and in exchange you are receiving return that is well below the rate of inflation.

Dalio points out that people still value US government bonds because of “the ‘exorbitant privilege’ the US has had being the world’s leading reserve currency, which has allowed the US to overborrow for decades.”

But there are signs of the changing global wealth and power dynamic, as international investors are starting to shift to Chinese bonds.

That’s a major theme in Dalio’s new book, Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail.

Dalio has made it his life’s work to understand debt and political cycles, in order to foresee risks that others miss, and better serve his clients.

He makes a lot of the same assertions that Elon makes; for example, Dalio explains that economies, governments, and civilizations move in cycles. And in simple terms, there are good parts of the cycle, and there are bad parts.

The good part of the cycle is characterized by peace, prosperity, and production. The bad part includes recession, depression, inflation, social conflict, and war.

If you think about US history, we can see that the 1920s were a ‘good’ part of the cycle. The 1930s and 1940s were bad— the Great Depression, World War II, etc.

Then the 1950s and early 1960s were good again. The late 1960s through the early 1980s were bad, marked by extreme social turmoil, geopolitical conflict, and stagflation.

The mid 1990s through the mid 2010s were generally quite good, especially from an economic perspective.

Now we seem to be in transition once again to a bad part of the cycle— social conflict, inflation, geopolitical tensions, and more.

Dalio’s book, which I highly recommend reading, lays out a very clear case of what is happening right now, and why.

His ideas are quite similar to much of what we have been writing about for so long here at Sovereign Man.

And Dalio has suggested some of the same solutions that we’ve discussed in these pages.

First, education is critical: it’s imperative to understand how these cycles work in order to be prepared for what’s coming.

Mindset is also key: There’s no reason to panic. The world is not coming to an end. But it IS changing. Rapidly.

Dalio writes that the transition from the good part of the cycle to the bad part are rarely smooth or peaceful. And they often coincide with a shift of wealth and power.

And the United States, while still strong, is clearly losing its wealth and power thanks to its historical debt, massive deficits, an utter embarrassment in Afghanistan, the rise of Marxism, ridiculous ‘woke’ national priorities, etc.

For these reasons, it makes sense to take rational steps to mitigate these long-term risks.

Investors frequently diversify their portfolios to reduce risk; they spread their assets around different companies, different sectors, and even different asset classes, in order to ensure that they’re not over-exposed to a single set of risks.

Similarly, our approach at Sovereign Man is to diversify your geographic/country risk as well.

Give serious thought to the long-term risks where you live. Will your home country experience social conflict, inflation, capital controls, or war?

The good news is that not all countries are going through the same part of their cycles. By taking a global view, you can avoid the worst of the economic shifts that Elon Musk and Ray Dalio are talking about… and what we’ve been writing about for years at Sovereign Man.

This could mean securing foreign citizenship or residency, to ensure you always have another place to go, just in case you ever need the option.

It could mean using alternative assets like crypto or precious metals as a hedge against inflation. Or investing internationally to reduce exposure to your home currency.

The key idea is— don’t put all of your eggs in one basket… especially when that basket is the largest debtor in world history that’s blindly racing as fast as it can into a fiscal abyss.

PS: Alternative residency or citizenship generally forms the backbone of any robust Plan B. But there are WAY more things to consider. That’s why we created our 31-page Ultimate Plan B report to help you get to grips with this topic, and you can download the full, unabridged report here – 100% FREE.

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The High Price of a “Free Lunch” | Mises Wire

Posted by M. C. on September 7, 2019

Two of the greatest periods of GDP growth in the US, 1820 to 1850 and 1865 to 1900, had deflations of 50%. Deflation should be hailed instead of being scorned as it is currently by most professional economists and central bankers.

One of the Ten Commandments is “thou shalt not steal,” and theft is generally condemned in most religions, yet our religious leaders and followers have essentially turned a blind eye to government theft.

Based on a policy of envy, Bernie Sanders, for example, has bluntly stated he intends to tax the rich to fund his programs, as though the word rich itself justifies theft. The current crop of other democratic candidates is offering a beehive of free programs without any real discussion on how to pay for them.

Three Ways to Pay for the State

Governments can finance these programs in only three ways: (1) direct taxation of its citizens, (2) borrowing money, and/or (3) printing money. Few citizens understand the nefarious effects these methods can have on their own well-being. None of them provide “free” money.

The first and most obvious way to raise money is by direct taxation. When you pay your income tax or sales tax, you are brutally aware of how much money is being taken out of your own pocket. If the government only uses these taxes to fund itself, it would quickly run into serious taxpayer opposition; would we still be in Afghanistan today if the government took your flat-screen TV or cell phone to pay for soldiers half a world away?

The second way to raise money is by government borrowing. When the government borrows, it takes money from people who are trying to save, promising a seemingly riskless asset: a government bond. The government has displaced money that would normally have been used to invest in a new computer or machines or buildings, or even a consumption good as a new car. When the government borrows, there are real sacrifices today, not in some distant never existing future when the debt is repaid. There are real resources that are extracted from the economy in the now and present. This is a good example of what is seen, what is not seen and what should be foreseen. Government borrowing finances government consumption which crowds out investment spending that would normally have created a more prosperous economy.

Government Crowds Out Other Borrowers

Now, government borrowing is normally also constrained. The more the government borrows, the greater the demand for loanable funds and the higher the rate of interest. Here again, taxpayers who are also trying to borrow to buy a car or a house would soon realize that it’s the government borrowing that is crowding them out of the loan market. Of course, there is a point of no return for government debt, when the markets doubt a country’s ability to repay this debt — as Greece discovered in 2010.

Now, the obvious question is, how can the US or any other country run record budget deficits and have rock-bottom interest rates at the same time? The answer is the third way by printing money, or often called “quantitative easing.” This way also impacts the government’s ability to borrow.

A simple example will make this path of funding clearer. Suppose an economy has $10 to purchase 10 pencils. The price of the pencils will be $1 each. If the price increases (inflates) to $2 each while the supply remains constant, there would be 5 pencils that can’t be purchased, but if the cost of the pencils were reduced (deflated) to only 50¢ each, there would be people holding $5 looking to purchase nonexistent pencils. Supply and demand in the marketplace give us a price of $1 per pencil. Now suppose the economy is growing and is now producing 20 pencils. Because there are now more pencils in the supply pipeline, the price of pencils will drop to 50¢, a deflation rate of 50%. Deflation here reflects society pushing back the constraint of scarcity. It cannot eliminate scarcity or all prices would be zero, but this deflation shows an increase in the standard of living for everyone.

Two of the greatest periods of GDP growth in the US, 1820 to 1850 and 1865 to 1900, had deflations of 50%. Deflation should be hailed instead of being scorned as it is currently by most professional economists and central bankers.

Now, returning to our initial example of $10 and 10 pencils. Suppose the government prints another $10 to buy pencils but our supply of pencils has not changed. The money supply has doubled so we now have $20 chasing 10 pencils. The price for each pencil will inflate to $2, and the government will be able to buy 5 pencils by cutting the purchasing power of money in half. In other words, you have been robbed or taxed 5 pencils because your cash can now purchase less than before.

If at the same time the economy is growing, then we would have $20 chasing 20 pencils and the price of pencils would have remained at $1. There is no inflation but the rise in real income, exemplified by the 10 pencils that would normally have gone to the citizenry, has been siphoned off or stolen by the government. To a large degree, this is what has been happening since we moved to a fiat currency system in 1933. The central bank has been keeping the CPI in check but has created massive asset inflation, a massive redistribution of income from the poor to the rich and has been a major contributor to financing ever-growing government expenditures.

As Lord Keynes said,

By a continuing process of inflation governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but at confidence in the equity of the existing distribution of wealth.

Many in the lower rungs of the economic ladder blame their declining real incomes, and other inequities, on capitalism. They should, instead, be blaming the central bank.

When the government borrows, it increases the demand for loanable funds, and with a fixed supply, interest rates should normally rise. If at the same time the central bank is increasing the supply of loanable funds by printing money to buy government bonds, then interest rates will decline if the increase in supply is greater than the increase in demand. Here, we are basically monetizing the debt. Worldwide, this printing has currently driven interest rates to zero or into negative territory. Using the economy as an excuse, central banks have been monetizing government debt, alleviating any pressure on governments to control their spending.

Continuing from Keynes,

As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

Many economists are currently predicting we will experience another devastating recession in the US. Will we repeat the errors of the past by trying to fix a credit crisis with more debt? Or will we find a permanent solution by ending central banking, fractional reserve banking, and the government’s ability to borrow and print money? If we do, any future government spending would require an immediate and clear sacrifice on the part of the citizenry: unlike what politicians would have you believe; there is no free lunch.



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Lance Armstrong’s Toughest Climb

Posted by M. C. on June 30, 2012

The USADA has formally charged Lance Armstrong with using blood boosters and steroids.

The question that the lamestream media ignores is why are sports issues any of the government’s business.
Fans either care about how their sports are run or not.  The judgement is passed at the ticket counter.  But that is fodder for a  future post.

The USADA win/loss record has been poor lately.

Barry Bonds convicted on a technicality and Roger Clemens found innocent on quite poor, shall I say, trumped-up evidence.   A needle in a beer can. Why hasn’t the USADA released their evidence against Armstrong?  Embarrassment?

Government agencies (I’m thinking FBI, ATF, DHS in particular) have these guiding principles.

1.  Do nothing  to tarnish the image.

2.  Do not violate rule 1.

3.  Get convictions any way possible for pay raises and promotions.

73. Don’t invade the wrong house and stomp the pets to death

103.  Make sure you have the guilty person.

273.  Serve and Protect.

Shocker – I question the USADA’s true motives.

The French and Cyclists Union International have been trying to get Lance for
years.  Indeed Lance constantly makes clear he is the most drug tested athlete in history.  The French
don’t like anyone let alone US citizens.  Particularly one that dominated their national sport for the better part
of a decade. If the French haven’t nailed him after 500 some drug tests then I think he must be fairly clean.  We
may know more when the USADA decides to make the evidence public.  Just remember cyclists tend to sweat a lot and
occasionally fall.  Some DNA on a cotton ball does not amount to much.

I’ll admit that I want to see Lance cleared of all charges.  But if he is really guilty, something completely
different from a quasi-government organization ruling, then he deserves what he gets.  But…it is not the government’s job to do the giving.

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