Friday, June 13, 2014

Code Red by John Mauldin

 The authors lay out a very thorough history of how the central banks and governments, both in the United States and a number of other countries, such as Japan, the UK, and the Eurozone, have steadily and perhaps recklessly overspent, overborrowed, and overinflated the currency of our respective nations. There's nothing really new to me in all of this, it's pretty standard fare from "gold bugs", most of whom are trying to sell precious metals. For someone who hasn't seen this information before, it serves as a thorough education in finance and history at a level which most people will not get from the public schools.

I even learned a new (to me) term - rentier capitalist - one who no longer works for a living, but makes their living by "clipping coupons", collecting dividends, spending interest on accumulated capital.

The point of all this rhetoric, of course, is to tell a cautionary tale, which can be summarized thusly:

"Since there can actually be no such thing as a government raising revenue at no cost, simple logic tells us that someone has to pay. It is impossible to know in advance who will pay for a central bank's 'free lunch,' only that someone, somewhere will eventually pay."

So enjoy all your free lunches, folks. At some point, the bill will come due, and whatever working stiffs are left in this country (and others) will end up paying the tab. If you think The Rich are going to pay, you haven't been paying attention. The Rich will never pay this bill, they own the bankers and the lawmakers. You need to get over that bit of foolishness and figure out how to make sure paying the bill doesn't break you and your family.

There's a sentence in this book that explains a lot of the semi-recent headlines.

"After the introduction of the euro, capital flowed freely; and countries such as Spain, Portugal, Ireland and Greece imported lots of foreign goods, borrowed heavily, and built up very large unsustainable external debts in a currency they could not print or devalue."

One of the "traditional" methods that governments have for paying down their borrowing is to inflate their currency, so as to use less valuable (in terms of goods and services which one can purchase with them) dollars, e.g. When you take away this ability by assigning the "value" of a currency to a central authority, as happened in the Eurozone, governments which behave irresponsibly with their money cannot take advantage of this tactic. And the unrest begins.

What was rather novel about this book was that Mauldin doesn't appear to be selling precious metals, like most inflationary Cassandras. In fact, he doesn't really push buying gold, merely mentions it as part of a balanced portfolio.

I found interesting Harry Browne's Permanent Portfolio, proposed in 1981, which apparently has had a pretty steady, though not spectacular, return over several decades.

  • 25 percent in U.S. equities, which tend to do well when economic times are good.
  • 25 percent in gold and precious metals to protect yourself against inflation.
  • 25 percent in Treasury bonds, which normally do well when the economy is slowing, and in a recession.
  • 25 percent in cash, which adds stability to the portfolio

Worth considering.

Mauldin makes a claim, based on statistics, I'm sure, that,

"With interest rates so low and inflation eroding their income as the cost of living rises, older people cannot afford to retire and are often beating out younger jobseekers in the job market because they have more experience and are willing to work as hard as the young people."

As a person rapidly approaching the "older" worker status, my experience and that of my cohort seems to be that many companies are actually letting older workers go, and replacing them with younger workers, strictly for financial considerations - younger workers will work more cheaply, while older workers have commanded higher salaries. There may be some countercurrents to this in the entry level Wally World jobs, but older workers are being given "early retirement" in droves, and many of them are having serious difficulty finding new jobs comparable to the ones they are leaving. Take it all with a grain of salt.

A good book, with some good strategies for managing your family's nest egg over the coming decades, I believe, but nothing truly revelationary here.

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