Financial Goals

What You Don’t Know CAN Hurt You!

BY RICH KIRKHAM

If you are a saver and you try to put a few dollars aside every month, then you should learn this dirty little secret about economics: The Government has a back door into your bank account! Watch out! The question is, how do you shut that back door and stop the loss?

TAXES? You probably think I’m talking about taxes … but I’m not. That is unless you consider inflation a tax, which it is, except that its an illegal tax – one that is never legislated, enacted, or published. Inflation affects everyone but it especially hurts people who are savers. Those who have currency or who hold currency, such as dollars in a bank account, are sitting ducks. Inflation is systematically designed to diminish your wealth over time if you hold that wealth in dollars. In a recent article entitled “A Trade Surplus Benefits the Nation” by Gary North – January 31, 2013, Gary explains how mass ignorance about economics makes stool pigeons out of most of us. You should refuse to be one of the ‘uninformed’ and set a goal to learn enough basic economic theory that you can’t be duped any more by political pundits and intelectual elites. Some points from Gary’s article are a starting point you can use as an economic tutorial. Here are some portions from that article along with my comments…

It has been common for over 300 years for people to say that it is a good thing for a nation to export more goods and services than it imports. If a nation is a net exporter, it is widely believed, that that nation is a true economic powerhouse. This is why China is regarded as an economic powerhouse. It is competitive in its ability to export goods abroad. But to do this, it must be willing to take IOUs from foreigners. Also, when I say “it”, I do not really mean the nation. Calling “China” a net exporter is misleading. This identifies the Chinese civil government as the nation. It isn’t.

GOVERNMENTS ARE NOT PEOPLE. Americans often get confused because we like to say ‘we the people’, but that is like saying ‘we are Wal-Mart’. We aren’t Wal-Mart. Even if you own stock in Wal-Mart, you aren’t Wal-Mart. If you think you are, try to change it. Try to change America. Good luck with that. You can only do so much. If you are a collectivist then you will include yourself when they say ‘WE are better off when we export if our dollar is cheap”. I am an individualist. I am also NOT and exporter. So I personally do not gain when the dollar is devalued. I lose. Most people lose. Exporters gain. This is simple economic wealth transfer. Gary continues…

What I really mean is this: individuals who are exporters are willing to accept IOUs or other kinds of digit-based assets in exchange for physical goods. The exporter gets money, meaning U.S. dollars, in an American bank, or in a foreign bank with an American branch. He has some use for those dollars. If he did not, he would not have exported the goods. He can buy his own domestic currency with these dollars, or he can keep them in a foreign bank. Maybe he will buy stocks or other assets that are sold for dollars. The point is, he has to be willing to accept IOUs, meaning digital promises, in exchange for real goods. That is the only basis for exporting.

The United States imports far more goods than it exports. Yet the United States is also regarded as an economic powerhouse. Why is this? Because foreigners want to invest here. The trouble is, the favored investment is IOUs issued by the Treasury. Foreign investors buy these IOUs, but in most cases it is central banks that buy. The central bankers buy them, because central bankers are told by their governments to keep the value of their domestic currencies down, so as to be able to increase exports to the United States. In other words, the Chinese government really is the source of the exporting power, because it is rigging the currency markets in favor of its exporting industries.

GOOSE AND GANDER. What is good for the goose isn’t always good for the gander. You and I are getting robbed so exporters can gain. This is the policial sales job we always get from the government. They ‘say’ exporting benefits all. In a free market that is true, but if the government debases your dollars to help exporters sell their products abroad then you lose. But thats how they sell debasement to us. That’s how China is selling it to the masses there. We are watching the right hand while the left hand is stealing out of our bank account. As I said, I am an individualist and I have to worry first about my own family, my own bills, and my own bank account first. If everyone had this focus then the aggregate effect would be a responsible and strong nation. My mother used to say, “mind your own p’s and q’s.” Strong groups are made up of strong individuals. Strengthen the individual and you strengthen the whole.

PROTECTIONISM. Don’t get me wrong. I’m not a protectionist either. I believe in free trade. I don’t believe in duties and tariffs. What I am saying is keep government out of it entirely. Don’t trust their money and don’t trust them to make your trade decisions either. If someone else can make and sell something to you cheaper than you can make it or buy it yourself then you should want to be free to do business with that person, entity, or country. I don’t want the government deciding who I can trade with or if I should pay a premium (tax) for that privilege. Gary continues…

This is a classic example of using state power to subsidize a small percentage of the domestic population, but always in the name of strengthening the nation as a whole. The argument is, as with all government promises, completely fallacious.

What strengthens the nation’s domestic population is a predictable currency. This makes forecasting easier. It reduces people’s concern about fluctuating currency values. But you cannot get a predictable currency internationally, because other nations are constantly tampering with their currencies, almost always by expanding the money supply. In other words, foreign central banks inflate. So, a domestic currency that is in fixed supply is going to appreciate in relationship to those foreign currencies. In other words, there will be an increase in purchasing power. There will not be stable monetary exchange rates, country to country.

PREDICTABLE CURRENCY. Advocates of a gold standard have it right. A fixed currency that cannot be manipulated by banks and governments is beneficial to individuals because with a fixed commodity (like gold) as a medium of exchange they know what they can count on. Fiat (paper) currencies benefit central planners, bankers, and politicians. Those so called ‘leaders’ will tell you they know what is best for you and so you stand by and let them devalue your dollars. Let them try to do that with gold. They can’t manipulate gold because it cannot be counterfeited or printed easily. It takes effort to mine gold, coin it, and because of its rarity people keep track of it and hold on to it. There is a market for it. Its predicable and stable. Gold is an excellent store of value. Even the poorest peasants in India know this and so they hold gold whenever they can. India is the largest holder of gold in the world.

If the Chinese central bank operated a full gold coin standard, it would not be able to inflate the currency very much. The same would be true of Chinese commercial banks. Any bank that expanded its issuing of IOUs would face bank runs on gold coins. It would run out of gold coins relatively rapidly. So, the fear of a bank run, where depositors come in with digital money and demand payment in gold coins, restrains the expansion of the money supply. This means that the currency would appreciate in relationship to foreign currencies that are not restrained by such a threat. This would mean that citizens or residents inside the gold coin standard nation would find it less expensive, year by year, to import foreign goods. As customers, these people would be benefited.

DECREASING YOUR COST OF LIVING. Years ago I had a friend who lived in Uruguay when the government was rapidly debasing its currency there. Fortunately he worked for an American company so he got paid in dollars. His cost-of-living fell every month because he was not tied to the peso. His dollars got more valuable as the pesos in the money supply expanded. Of course there was rapid price inflation all around him but his stronger currency kept him ahead of the price increases. Dollars were a good store of value for him.

Gold coins can provide the same effect for those of us who are paid in dollars today. As dollars are being debased and as more dollars come into the money supply, the dollars you save or hold will fall with regards to their purchasing power. If you exchange those dollars for gold then you have effectively insured yourself against central bank inflation because gold can’t be printed into existence. Its true that people can bid up the price of gold and can overpay for it when there is a lot of uncertainty and frenzy, but thats the case with any commodity that becomes scarce – the price goes up and when demand decreases the price will go down. Chances are better in the long run that gold will hold its value over time while dollars will surely devalue over time. This phenomenon makes it appear that gold is going up in value but the better way to look at it is that it isn’t gold that is changing, its the dollar.

Because there are vastly more people involved in domestic production than in exporting, a policy of stable money domestically serves to benefit those members of the community who are economically efficient and can gain a steady stream of the domestic currency. Their cost-of-living falls consistently, year after year, because foreign central banks are inflating their currencies. The value of those currencies in relationship to a gold coin-based currency continues to fall. So, this is a benefit to consumers who live under the gold standard. Only a relatively small percentage of the nation’s businesses and workers are in the export sector of the economy. This is why the subsidy from a depreciating currency is a benefit to a minority of businesses and workers. The vast majority of the residents in the society pay more for their imported goods because of central bank policy, namely, to inflate the currency in order to keep its international value low. But by doing this, the monetary planners are harming the interests of the vast majority of the nation. The subsidy benefits a minority. There are enough people in the majority from which to extract wealth, by means of inflating the currency, which enables the export sector to gain above market revenues by exporting. The minority cannot effectively subsidize the majority. It always has to be the other way around.

PUSH FOR A GOLD STANDARD. So if you are an exporter, disregard what I am saying. But if you are like 99 out of 100 people who buy mostly imported goods, and export nothing then you should be pushing for a gold standard.

So, a stable money economy benefits a majority of citizens, who are constantly able to buy at ever-lower prices. Defenders of mercantilism argue that this is a bad policy. They are convinced that the subsidy involved to the export sector from the central bank that is inflating the currency is a greater value to the nation than the reduced quantity of goods and services that are available to domestic customers. The defenders of mercantilism never discuss the economics of redistribution. They never point out that a majority of citizens experience economic losses, when compared to the gains that they would have made, had they been able to buy foreign goods at ever-lower prices.

The vast majority of citizens have no idea about the relationship between monetary expansion and reduced imports from abroad. They do not understand that they are being harmed by the policy of monetary depreciation domestically. If they understood economics, they would demand a full gold coin standard, and they would benefit from the rising international value of the domestic currency. How would they benefit? By being able to buy more goods from abroad at ever-lower prices.

ECONOMIC ILLITERACY. Economic illiteracy is such a problem in our society. We all recognize the need for basic literacy – reading and writing. Someone who can’t read and write today is at a terrible disadvantage. But an even greater literacy vacuum exists in economics. Most people who even study economics in college only learn only about the Keynesian school. I should know. I graduated with a degree in Business Management and I took many economics courses. Those clases didn’t make any sense to me because the theories of Maynard Keynes are the center piece of most economic theory being taught and Keynes is fluent in gibberish. Keynesian policies are good for bankers and governments but they are harmful to the rest of us. Years after graduation I learned about the Austrian School of Economics. It was like breathing fresh air. If you don’t know about the Austrian School you should look into it. The Mises Institute is a great place to start.

Unfortunately, so few people understand economic logic, that this subsidy from the majority to the minority is not understood as being a coercive wealth-transfer program for the benefit of the minority. Very few Americans understand this. Very few Chinese understand it. Whenever a nation adopts mercantilism, which is approximately 100% of the time, it does so on the basis that almost no one understands that the policy inflicts damage on the vast majority of citizens, and it benefits only a minority who are in the export sector of the economy.

The world is adopting policies of competitive monetary depreciation. This is going to work to the disadvantage of the vast majority of citizens in every nation. They will not be allowed the benefit of having a strong domestic currency, which would enable them to import more goods from abroad. They would be able to get the goods and services they want, at an ever-declining price, if the domestic currency were based on a gold coin standard. If they had full gold coin redeemability on demand — if they could go to a bank and get a fixed quantity of gold coins in exchange for digital money — they would experience an ever-rising living standard. But they do not understand economics, so they consent to policies of mercantilism. This ultimately means monetary debasement. It steals from the masses for the benefit of the exporters. It sends desired goods to foreigners.

It is a shame that most people do not understand economics, but not a shame for favored exporters, who benefit from the theft of purchasing power. You cannot get something for nothing. A minority group of exporters get a lot. The masses get rising prices for almost everything.

CONCLUSION – Inflation is how the government steals from your bank account and discourages saving in general. Inflation encourages debt. Debt is bondage. Free people must avoid debt and free people must elect leaders who won’t spend our nation into oblivion. The good news is that there are ways to save that can avoid the inflation trap, such as gold or real estate. These commodities may have different risks but at least they can’t be printed out of thin air. Set a goal to become a saver and to get out of debt. This will help you Get Where You’re Goaling!