(By Geoffrey James, Sales Source, first published at Inc.com on 23 April 2012 at the following site: http://www.inc.com/geoffrey-james/8-core-beliefs-of-extraordinary-bosses.html)
The best managers have a fundamentally different understanding of workplace, company, and team dynamics. See what they get right.
A few years back, I interviewed some of the most successful CEOs in the world in order to discover their management secrets. I learned that the "best of the best" tend to share the following eight core beliefs.
1. Business is an ecosystem, not a battlefield.
Average bosses see business as a conflict between companies, departments and groups. They build huge armies of "troops" to order about, demonize competitors as "enemies," and treat customers as "territory" to be conquered.
Extraordinary bosses see business as a symbiosis where the most diverse firm is most likely to survive and thrive. They naturally create teams that adapt easily to new markets and can quickly form partnerships with other companies, customers ... and even competitors.
2. A company is a community, not a machine.
Average bosses consider their company to be a machine with employees as cogs. They create rigid structures with rigid rules and then try to maintain control by "pulling levers" and "steering the ship."
Extraordinary bosses see their company as a collection of individual hopes and dreams, all connected to a higher purpose. They inspire employees to dedicate themselves to the success of their peers and therefore to the community–and company–at large.
3. Management is service, not control.
Average bosses want employees to do exactly what they're told. They're hyper-aware of anything that smacks of insubordination and create environments where individual initiative is squelched by the "wait and see what the boss says" mentality.
Extraordinary bosses set a general direction and then commit themselves to obtaining the resources that their employees need to get the job done. They push decision making downward, allowing teams form their own rules and intervening only in emergencies.
4. My employees are my peers, not my children.
Average bosses see employees as inferior, immature beings who simply can't be trusted if not overseen by a patriarchal management. Employees take their cues from this attitude, expend energy on looking busy and covering their behinds.
Extraordinary bosses treat every employee as if he or she were the most important person in the firm. Excellence is expected everywhere, from the loading dock to the boardroom. As a result, employees at all levels take charge of their own destinies.
5. Motivation comes from vision, not from fear.
Average bosses see fear--of getting fired, of ridicule, of loss of privilege--as a crucial way to motivate people. As a result, employees and managers alike become paralyzed and unable to make risky decisions.
Extraordinary bosses inspire people to see a better future and how they'll be a part of it. As a result, employees work harder because they believe in the organization's goals, truly enjoy what they're doing and (of course) know they'll share in the rewards.
6. Change equals growth, not pain.
Average bosses see change as both complicated and threatening, something to be endured only when a firm is in desperate shape. They subconsciously torpedo change ... until it's too late.
Extraordinary bosses see change as an inevitable part of life. While they don't value change for its own sake, they know that success is only possible if employees and organization embrace new ideas and new ways of doing business.
7. Technology offers empowerment, not automation.
Average bosses adhere to the old IT-centric view that technology is primarily a way to strengthen management control and increase predictability. They install centralized computer systems that dehumanize and antagonize employees.
Extraordinary bosses see technology as a way to free human beings to be creative and to build better relationships. They adapt their back-office systems to the tools, like smartphones and tablets, that people actually want to use.
8. Work should be fun, not mere toil.
Average bosses buy into the notion that work is, at best, a necessary evil. They fully expect employees to resent having to work, and therefore tend to subconsciously define themselves as oppressors and their employees as victims. Everyone then behaves accordingly.
Extraordinary bosses see work as something that should be inherently enjoyable–and believe therefore that the most important job of manager is, as far as possible, to put people in jobs that can and will make them truly happy.
N.B. Geoffrey James writes the "Sales Source" column on Inc.com, the world's most-visited sales-oriented blog, which features the best ideas from dozens of sales experts and executives, along with James' unique take on the business world. To get column updates, sign up for his weekly "insider" newsletter or follow his @Sales_Source Twitter feed. His newly published book is Business to Business Selling: Power Words and Strategies From the World's Top Sales Experts.
Showing posts with label Finance. Show all posts
Showing posts with label Finance. Show all posts
Monday, April 15, 2013
Tuesday, January 15, 2013
Humour: Democrat vs. Republican
In a departure from my usual postings which are typically non-political in nature, I have decided to post the following piece which i found to be both entertaining as well as illuminating as it illustrates a key principle in policy-making as far as the economy is concerned which differentiates the philosophies as embraced by the Democrats from the Republicans.
Although this is probably presented from the viewpoint of a Republican, I am not posting this in support of either Republicans or Democrats, since I have no vested interest in their political inclinations.
-----
A young woman was about to finish her first year of college. Like so many others her age she considered herself to be a very liberal Democrat and was for distribution of all wealth. She felt deeply ashamed that her father was a rather staunch Republican which she expressed openly.
One day she was challenging her father on his beliefs and his opposition to higher taxes on the rich as well as more welfare programs. In the middle of her heartfelt diatribe based upon the lectures she had from her far-left professors at her school, he stopped her and asked her point blank, how she was doing in school.
She answered rather haughtily that she had a 4.0 GPA, and let him know that it was tough to maintain. That she had to study all the time, never had time to go out and party like other people she knew. She didn't even have time for a boyfriend and didn't really have many college friends because of spending all her time studying. That she was taking a more difficult curriculum.
Her father listened and then asked, "How is your friend Mary."
She replied, "Mary is barely getting by", she continued, "all she has is barely a 2.0 GPA" adding, "and all she takes are easy classes and she never studies." But to explain further she continued emotionally, "But Mary is so very popular on campus, college for her is a blast, she goes to all the parties all the time and very often doesn't even show up for classes because she is too hung over."
Her father then asked his daughter, "Why don't you go to the Dean's office and ask him to deduct a 1.0 off your 4.0 GPA and give it to her friend who only had a 2.0." He continued, "That way you will both have a 3.0 GPA and certainly that would be a fair equal distribution of GPA."
The daughter, visibly shocked by the father's suggestion, angrily fired back, "That wouldn't be fair! I worked really hard for mine, I did without and Mary has done little or nothing, she played while I worked real hard!"
The father slowly smiled and said, "Welcome to the Republican Party."
Although this is probably presented from the viewpoint of a Republican, I am not posting this in support of either Republicans or Democrats, since I have no vested interest in their political inclinations.
-----
A young woman was about to finish her first year of college. Like so many others her age she considered herself to be a very liberal Democrat and was for distribution of all wealth. She felt deeply ashamed that her father was a rather staunch Republican which she expressed openly.
One day she was challenging her father on his beliefs and his opposition to higher taxes on the rich as well as more welfare programs. In the middle of her heartfelt diatribe based upon the lectures she had from her far-left professors at her school, he stopped her and asked her point blank, how she was doing in school.
She answered rather haughtily that she had a 4.0 GPA, and let him know that it was tough to maintain. That she had to study all the time, never had time to go out and party like other people she knew. She didn't even have time for a boyfriend and didn't really have many college friends because of spending all her time studying. That she was taking a more difficult curriculum.
Her father listened and then asked, "How is your friend Mary."
She replied, "Mary is barely getting by", she continued, "all she has is barely a 2.0 GPA" adding, "and all she takes are easy classes and she never studies." But to explain further she continued emotionally, "But Mary is so very popular on campus, college for her is a blast, she goes to all the parties all the time and very often doesn't even show up for classes because she is too hung over."
Her father then asked his daughter, "Why don't you go to the Dean's office and ask him to deduct a 1.0 off your 4.0 GPA and give it to her friend who only had a 2.0." He continued, "That way you will both have a 3.0 GPA and certainly that would be a fair equal distribution of GPA."
The daughter, visibly shocked by the father's suggestion, angrily fired back, "That wouldn't be fair! I worked really hard for mine, I did without and Mary has done little or nothing, she played while I worked real hard!"
The father slowly smiled and said, "Welcome to the Republican Party."
Saturday, March 17, 2012
Understand Your Brain: 6 Tricks to Help You Avoid Overspending
(By Mikelann Valterra, Contributor at Forbes' Money Wise Women, taken from Forbes' website first published on 13 March 2012: http://www.forbes.com/sites/moneywisewomen/2012/03/13/understand-your-brain-6-tricks-to-help-you-avoid-overspending/)
Whether you need to spend less when you go out shopping or you want to be a more conscious spender, it helps to have a few tricks under your belt. Stores spend billions on the science of getting you to part with your money. They understand how your brain works and then use this against you. Well, with these tricks under your belt, you can beat them at their game and feel more in control. And you’ll be able to enjoy shopping without coming home with a spending hangover. (This article is focused on brick and mortar shopping. My next one will be on Internet shopping.)
1. Be wary of stores that are new to you. Why? We spend more money when we are in a new-to-us store. This is because dopamine- a wonderful feel good drug in our brain– is activated when we experience something new or exciting. (This is one reason we spend more when we are on vacation. We are in a novel situation experiencing new stores.) So try hard to come back to the store to buy your discovery. You may want to hit the new store at the beginning of your shopping trip and then tell yourself you’ll come back to the store later to make your purchase. Trust me, it simply won’t be as exciting the second time around and you’ll make a more reasoned choice.
2. Leave your credit cards at home when you go out shopping. Stores desperately want you to use a credit card because they know you’ll spend more if you do. (Macy’s is the worst offender, by the way. They are very aggressive in trying to get you to use a Macy’s card. Have you noticed?!) If you know the money is going to come directly out of your bank account, you will be more mindful and usually spend less. In fact, the evidence is overwhelming that when you buy items with a credit card, particularly things you enjoy, and you spend 20-30% more. There is simply too much of a delay between basking in the pleasure of buying those sh oes and feeling the pain of having to pay for them– later. You want to “feel” the purchase in the moment. Macy’s be damned. Leave your credit cards at home.
3. The magic 90 minutes. Stores and malls do many things to get you into the “zone” of shopping. Notice that there are never any clocks on the walls of a store, and they often don’t have windows. They are hiding the passage of time. Well, after 90 minutes, you do start to zone out and mindless spending goes up. So do this: set the timer on your phone for 90 minutes. When it goes off, simply stop for a bit. Take a break and have a cup of tea. Look at what you’ve purchased and think about your plan. (Do you want to return anything you just bought?) I’m not saying go home. But taking a break every 90 minutes keeps you from overspending.
4. Limit the number of stores you visit. It’s very simple: the more stores you visit the more you buy. People may tell themselves that they are comparison-shopping. But often people feel like they need to buy something for all the legwork they’ve put in! You become very “invested” in how much time you’ve put in. You’d better at least get something….
5. Don’t carry items around with you that you are contemplating purchasing in a store. The issue is that when you carry products around with you, they begin to feel like yours. You get used to them and you feel a little “pain” if you have to put them back. You feel like you are losing something. (Humans are funny. We actually hate pain and loss more than we love pleasure and gain. It’s a brain thing.) Hence, items that get carried around are more likely to be bought. So if you are eyeing something, keep it on the rack or shelf until you decide. And if you’re worried someone will swoop it up before you decide, “hide” it on a different rack or shelf. Come on; don’t tell me you’ve never done that.
6. Don’t interact with sales people too much. Yes, they are quite friendly. But the more you interact with them, the more likely you are to purchase from them, for several reasons. One is that they are often skilled at selling to you. But people often unconsciously feel, after a point, that they don’t want to let down a sales person who has helped them.
Whether you need to spend less when you go out shopping or you want to be a more conscious spender, it helps to have a few tricks under your belt. Stores spend billions on the science of getting you to part with your money. They understand how your brain works and then use this against you. Well, with these tricks under your belt, you can beat them at their game and feel more in control. And you’ll be able to enjoy shopping without coming home with a spending hangover. (This article is focused on brick and mortar shopping. My next one will be on Internet shopping.)
1. Be wary of stores that are new to you. Why? We spend more money when we are in a new-to-us store. This is because dopamine- a wonderful feel good drug in our brain– is activated when we experience something new or exciting. (This is one reason we spend more when we are on vacation. We are in a novel situation experiencing new stores.) So try hard to come back to the store to buy your discovery. You may want to hit the new store at the beginning of your shopping trip and then tell yourself you’ll come back to the store later to make your purchase. Trust me, it simply won’t be as exciting the second time around and you’ll make a more reasoned choice.
2. Leave your credit cards at home when you go out shopping. Stores desperately want you to use a credit card because they know you’ll spend more if you do. (Macy’s is the worst offender, by the way. They are very aggressive in trying to get you to use a Macy’s card. Have you noticed?!) If you know the money is going to come directly out of your bank account, you will be more mindful and usually spend less. In fact, the evidence is overwhelming that when you buy items with a credit card, particularly things you enjoy, and you spend 20-30% more. There is simply too much of a delay between basking in the pleasure of buying those sh oes and feeling the pain of having to pay for them– later. You want to “feel” the purchase in the moment. Macy’s be damned. Leave your credit cards at home.
3. The magic 90 minutes. Stores and malls do many things to get you into the “zone” of shopping. Notice that there are never any clocks on the walls of a store, and they often don’t have windows. They are hiding the passage of time. Well, after 90 minutes, you do start to zone out and mindless spending goes up. So do this: set the timer on your phone for 90 minutes. When it goes off, simply stop for a bit. Take a break and have a cup of tea. Look at what you’ve purchased and think about your plan. (Do you want to return anything you just bought?) I’m not saying go home. But taking a break every 90 minutes keeps you from overspending.
4. Limit the number of stores you visit. It’s very simple: the more stores you visit the more you buy. People may tell themselves that they are comparison-shopping. But often people feel like they need to buy something for all the legwork they’ve put in! You become very “invested” in how much time you’ve put in. You’d better at least get something….
5. Don’t carry items around with you that you are contemplating purchasing in a store. The issue is that when you carry products around with you, they begin to feel like yours. You get used to them and you feel a little “pain” if you have to put them back. You feel like you are losing something. (Humans are funny. We actually hate pain and loss more than we love pleasure and gain. It’s a brain thing.) Hence, items that get carried around are more likely to be bought. So if you are eyeing something, keep it on the rack or shelf until you decide. And if you’re worried someone will swoop it up before you decide, “hide” it on a different rack or shelf. Come on; don’t tell me you’ve never done that.
6. Don’t interact with sales people too much. Yes, they are quite friendly. But the more you interact with them, the more likely you are to purchase from them, for several reasons. One is that they are often skilled at selling to you. But people often unconsciously feel, after a point, that they don’t want to let down a sales person who has helped them.
Monday, December 26, 2011
Early To Rise: A Self-Made Millionaire's Guide to Dealing with Debt
(By Mark Ford, Editor of The Palm Beach Letter: http://www.palmbeachletter.com/)
I had my first serious run-in with debt when I was 30 years old.
My wife K and I were renting a condominium in Washington, D.C. Our landlady came to us with an exciting opportunity: We could buy the condo for $60,000 with no money down. For just $100 a month more than what we were already paying for rent, we would be paying a mortgage. It sounded like a great deal, so we took it.
What we bought was a negatively amortizing mortgage with a three-year term and an 11% interest rate. That meant, every three years we were paying $19,800 in debt service and another $3,000 in closing costs.
We didn't realize what was going on because our monthly payments were only $550. I was too foolish then to ever ask myself, "What is the cost of this debt?"
I tried to find another bank to take me out of this scam but none would. The mortgage we had signed was not backed by the government (Freddie Mac/Fannie Mae), which meant that no other bank would touch it.
I learned that when banks make it easy to borrow money, it's not because you are a nice, deserving person. I learned that if you can get a loan despite poor credit (as ours was at the time), there is usually a scam involved. It also taught me to always ask the two critical questions about debt, "How much will it cost?" and, "Can I afford it?" It was an expensive lesson.
Many of us view debt as a necessity. We buy homes with it. And cars. And boats, and toys, and vacations. Some use it to buy the basics: clothes, food, and furniture.
Debt is not necessary. It is a luxury. Sometimes debt is useful. Sometimes it is wasteful. But debt is always dangerous.
It is unnecessary because there are always less expensive ways of getting what you want. And it is dangerous because it can sometimes be very expensive.
Let me give you two examples.
Let's say that, like most Americans, you are in the habit of buying things with credit cards. After a while, you notice that you have accumulated $30,000 in total debt. You decide to cut up your cards and repay your debt. You can devote $400 a month to paying it back. How long will it take, and how much will it cost you?
The answer may surprise you. Assuming an interest rate of 10%, it will take you 10 years to pay off the credit card debt. And your total payments will be $47,275. Of that, $17,275 will have been in interest payments.
Or let's take a $150,000 home on which you take a $120,000 loan with a 6.5% interest rate over 20 years. The mortgage payments are $894 a month, which you can afford. But how much will that house really cost you? Including interest payments? You will end up paying $244,725 for that house. Almost 40% of that – $94,725 – will have been to interest payments.
The commercial community (bankers and manufacturers) doesn't want you to be afraid of debt. And neither does the government. These institutions want you to like debt. They want you to use it. They want you to go into debt because it is good for them.
When you take out a mortgage to buy a home, or sign a lease on a car, or use credit cards to pay for your lifestyle expenses, the commercial community profits. The manufacturers make money on products you may or may not need. And the banks make money on your debt.
The mainstream financial media rarely talks about the dangers of debt. That's because they make their profits from the financial institutions and manufacturers whose advertisements support their publications.
And the government actually encourages its citizens to take on debt. This was the recommended strategy for getting us out of the Great Recession that the (second) Bush administration (and the Federal Reserve) advocated and it's the same scheme that Obama's people are advocating today.
Here's what you should know about debt:
As a general rule, you should live without it. You should find less expensive ways to acquire the things you need.
Unless you are wealthy, don't lease your car. Buy it. Buy the car you can afford, not the car you believe will make you happy. Any non-appreciating asset (such as a car) will never make you happy if you have to pay its debt service. I didn't buy my first luxury car until I was a multimillionaire.
Don't buy anything with a credit card. Keep only one credit card for renting cars. Use a debit card to buy clothes and groceries. If you don't have enough money in your bank account to use your debit card on a purchase, don't buy it. If you don't have enough money in the bank to buy something, it means you can't afford it.
If you can't afford the debt on your house, sell it (if you can) and buy something cheaper. In any case, start paying off the principle balance of your house (the amount you owe, not the interest you will owe) as fast as you can. Make it a goal to own your house free and clear as soon as possible.
If you have debt, pay it off as fast as you can, but not before you have filled up your bucket for emergency savings. By emergency savings, I mean money you will need to pay your bills if you lose your job. Six months' income is what some financial advisors recommend. I'd recommend a year. It may take you that long to replace your lost income.
Pay off your debt even if the interest rate is low. In theory, you should put your extra money elsewhere if you can earn more on it than you are paying in interest. If, for example, you can get 4% in municipal bonds and you have a student loan at 2%, it makes more sense to buy municipals bonds and pay your student loan off slowly. But in reality, the extra 2% you are earning on the spread is not worth the risk in carrying the debt.
When I started earning money, the first thing I did was get rid of that terrible loan on the condominium I told you about earlier.
The next thing I did was pay off the mortgage I took on a home. I paid it off in two or three years, even though it was a 30-year mortgage. I loved the idea of owning my home free and clear. So I put every extra dollar I had toward paying down that mortgage. The bank didn't like it, but the day I tore up that mortgage... I felt like I had been emancipated from financial slavery.
Finally, if you are troubled by debt, know this: you can get out of it just as I did.
I had my first serious run-in with debt when I was 30 years old.
My wife K and I were renting a condominium in Washington, D.C. Our landlady came to us with an exciting opportunity: We could buy the condo for $60,000 with no money down. For just $100 a month more than what we were already paying for rent, we would be paying a mortgage. It sounded like a great deal, so we took it.
What we bought was a negatively amortizing mortgage with a three-year term and an 11% interest rate. That meant, every three years we were paying $19,800 in debt service and another $3,000 in closing costs.
We didn't realize what was going on because our monthly payments were only $550. I was too foolish then to ever ask myself, "What is the cost of this debt?"
I tried to find another bank to take me out of this scam but none would. The mortgage we had signed was not backed by the government (Freddie Mac/Fannie Mae), which meant that no other bank would touch it.
I learned that when banks make it easy to borrow money, it's not because you are a nice, deserving person. I learned that if you can get a loan despite poor credit (as ours was at the time), there is usually a scam involved. It also taught me to always ask the two critical questions about debt, "How much will it cost?" and, "Can I afford it?" It was an expensive lesson.
Many of us view debt as a necessity. We buy homes with it. And cars. And boats, and toys, and vacations. Some use it to buy the basics: clothes, food, and furniture.
Debt is not necessary. It is a luxury. Sometimes debt is useful. Sometimes it is wasteful. But debt is always dangerous.
It is unnecessary because there are always less expensive ways of getting what you want. And it is dangerous because it can sometimes be very expensive.
Let me give you two examples.
Let's say that, like most Americans, you are in the habit of buying things with credit cards. After a while, you notice that you have accumulated $30,000 in total debt. You decide to cut up your cards and repay your debt. You can devote $400 a month to paying it back. How long will it take, and how much will it cost you?
The answer may surprise you. Assuming an interest rate of 10%, it will take you 10 years to pay off the credit card debt. And your total payments will be $47,275. Of that, $17,275 will have been in interest payments.
Or let's take a $150,000 home on which you take a $120,000 loan with a 6.5% interest rate over 20 years. The mortgage payments are $894 a month, which you can afford. But how much will that house really cost you? Including interest payments? You will end up paying $244,725 for that house. Almost 40% of that – $94,725 – will have been to interest payments.
The commercial community (bankers and manufacturers) doesn't want you to be afraid of debt. And neither does the government. These institutions want you to like debt. They want you to use it. They want you to go into debt because it is good for them.
When you take out a mortgage to buy a home, or sign a lease on a car, or use credit cards to pay for your lifestyle expenses, the commercial community profits. The manufacturers make money on products you may or may not need. And the banks make money on your debt.
The mainstream financial media rarely talks about the dangers of debt. That's because they make their profits from the financial institutions and manufacturers whose advertisements support their publications.
And the government actually encourages its citizens to take on debt. This was the recommended strategy for getting us out of the Great Recession that the (second) Bush administration (and the Federal Reserve) advocated and it's the same scheme that Obama's people are advocating today.
Here's what you should know about debt:
As a general rule, you should live without it. You should find less expensive ways to acquire the things you need.
Unless you are wealthy, don't lease your car. Buy it. Buy the car you can afford, not the car you believe will make you happy. Any non-appreciating asset (such as a car) will never make you happy if you have to pay its debt service. I didn't buy my first luxury car until I was a multimillionaire.
Don't buy anything with a credit card. Keep only one credit card for renting cars. Use a debit card to buy clothes and groceries. If you don't have enough money in your bank account to use your debit card on a purchase, don't buy it. If you don't have enough money in the bank to buy something, it means you can't afford it.
If you can't afford the debt on your house, sell it (if you can) and buy something cheaper. In any case, start paying off the principle balance of your house (the amount you owe, not the interest you will owe) as fast as you can. Make it a goal to own your house free and clear as soon as possible.
If you have debt, pay it off as fast as you can, but not before you have filled up your bucket for emergency savings. By emergency savings, I mean money you will need to pay your bills if you lose your job. Six months' income is what some financial advisors recommend. I'd recommend a year. It may take you that long to replace your lost income.
Pay off your debt even if the interest rate is low. In theory, you should put your extra money elsewhere if you can earn more on it than you are paying in interest. If, for example, you can get 4% in municipal bonds and you have a student loan at 2%, it makes more sense to buy municipals bonds and pay your student loan off slowly. But in reality, the extra 2% you are earning on the spread is not worth the risk in carrying the debt.
When I started earning money, the first thing I did was get rid of that terrible loan on the condominium I told you about earlier.
The next thing I did was pay off the mortgage I took on a home. I paid it off in two or three years, even though it was a 30-year mortgage. I loved the idea of owning my home free and clear. So I put every extra dollar I had toward paying down that mortgage. The bank didn't like it, but the day I tore up that mortgage... I felt like I had been emancipated from financial slavery.
Finally, if you are troubled by debt, know this: you can get out of it just as I did.
Sunday, October 16, 2011
Financial Journals: The Broken Window Fallacy
(Reproduced from an article taken from "The Daily Crux Sunday Interview" entitled "An economic lie that is ruining America" - An interview between The Palm Beach Letter and one of its authors, Mark Ford)
The Palm Beach Letter: Let's talk about books. What is the best book on economics or investing you've ever read?
Mark Ford: I haven't read all that many. But I'd have to say that the book that had the greatest impact on my thinking was Henry Hazlitt's Economics in One Lesson.
PBL: A classic. How did that affect you?
Ford: It was one of those "eureka!" moments. It was like coming up from a murky basement into a bright room. The book gave me a clear, common-sense explanation of why things were the way they were. I could finally see the fallacies that supported so much stupidity that passed for economic science.
PBL: Such as?
Ford: Such as why public works are so often wasteful, why government credit diverts production, why technological advances are good, not bad, for employment, why spread-the-work schemes inevitably fail, why government price-fixing and tariffs make us poorer, etc.
PBL: So what is the most important thing you got from reading Economics in One Lesson?
Ford: That you can't understand any economic policy unless you look at the whole picture. It's not enough to see the immediate, localized consequences of any public action. You must see its long-term effect on the entire economic community. Hazlitt says that nine-tenths of the economic fallacies politicians use do so much harm because they ignore this lesson. After reading the book, I can't help but agree.
PBL: That's a little abstract. Can you explain?
Ford: Hazlitt explains it beautifully in the second chapter, entitled "The Broken Window."
It goes like this:
A hoodlum throws a rock through a baker's plate glass window. A crowd gathers and talks about what a shame it is. But someone suggests that it is actually a blessing. He points out that the $250 the baker must pay for a new window will make the glazier $250 richer. And the glazier will use that $250 to spend with other merchants. The smashed window, according to this theory, will go on providing money and employment in ever-widening circles.
The logic is that the hoodlum who threw the brick was not a menace at all, but a public benefactor. The crowd agrees.
PBL: It does seem like a compelling argument.
Ford: It does. Yet, it's a logical fallacy.
PBL: So what's the fallacy?
Ford: The crowd is right that the broken window will benefit the glazier. But the crowd is looking only at one part of the picture: the effect on the glazier. That's the fallacy. To view the event properly, one must take into account its effect on not just one person or group, but also on the entire economy.
If you do that, you will quickly see that the baker is poorer by $250. And that means he won't be able to spend $250 on the suit he was planning to buy. The tailor that was to get his order for the suit won't have the $250 that would have come to him. And so he won't be able to spend that money with other merchants.... and so on, down the line.
The crowd was thinking only of two parties – the baker and the glazier – because they can see the window. But they don't consider the tailor because the suit is invisible – it is never made.
PBL: That's good. So how does this apply to governmental policies?
Ford: One example Hazlitt gives is government credit to farmers. (This was a big issue during the 1940s, when the book was written.)
At that time, many politicians supported government credit to farmers because farmers represented a big constituency for them. The argument in favor of farm credits was based on particular farmers who could not get the credit they needed from private lenders (banks, mortgage lenders, and so on).
In proposing the legislation, politicians always told stories about the poor farmer who won't be able to make it unless the government steps in to help him. If we buy a farm (or tractor) for him, he will be productive again and resume his role as an upstanding citizen. His farm will add to the total national product, and he will eventually pay it off with the produce he sells. So the loan actually costs the taxpayers nothing, since it will be self-liquidating.
PBL: Again, it sounds like a compelling argument.
Ford: Yes it does, so long as you look at only part of the picture: the short-term effect on the particular farmer who can't get the loan. But if you have learned Hazlitt's lesson, you will see the fallacy in it.
There is a reason this particular farmer cannot get the loan he wants. It is because the private lending community doesn't think he or his farm is worthy of it. (In other words, he is not credit-worthy.)
As Hazlitt points out, credit – good or bad – is what the farmer already has before he applies for the loan. If he has credit, he will get the loan privately. It is only when he doesn't have credit that the government must step in. In other words, the only purpose of government credit is to provide loans to people or businesses that are not credit-worthy.
To understand the whole picture, you must look at the effect of that loan. To provide the loan, the government must take the money – in the form of taxation – from the private sector. And that money will not be used for whatever purposes it would have been used.
For every $1,000 that is given by the government to a farmer with bad credit, $1,000 will not be spent by some private person or business on a person or business with good credit. The long-term implication is obvious: more risk, greater net losses, and less efficiency. The economy loses out in the long run.
PBL: Yes, I can see that. But that particular farmer, if he doesn't get the loan, will be worse off.
Ford: Yes. In the short term, he will be worse off. Hazlitt doesn't deny this. And that is one of the things I like about his thinking. He does not make the mistake that some free-market theorists make in denying these short-term, limited problems.
Economic progress in a free market always produces limited and temporary hardships, but those hardships are more than offset by an overall long-term increase in wealth. Hazlitt doesn't pretend that free markets will solve all problems. He argues that in the long run they provide the best net result.
PBL: Can you give me examples of how this is relevant today?
Ford: Open up any newspaper and you will see evidence of it in the editorials. Watch any talk show on economics and you'll see it all the time. The broken window fallacy is the go-to gimmick of almost every successful politician, Republican or Democrat.
PBL: For example?
Ford: On the treadmill this morning, I saw a "news" story about what the "reporter" called "the growing problem of hunger in America."
The reporter showed a clip of a young woman who said she was having trouble feeding her children with the $300 a month she gets in food stamps. She said the pain of hunger was "unimaginable." The reporter concluded that something must be done to increase food stamp allocations.
If it weren't for the fact that this young woman weighed about 280 pounds, I would have been moved. But had I believed her, I would have reminded myself that this was the broken window theory in operation.
No mention was made of the fact that the $300 in food stamps she was getting from the government was actually costing taxpayers much more than $300. With all the government bureaucracy involved in qualifying her, tracking the expenses, and reporting them, the cost of those food stamps was probably closer to $500 or $600. And that $500 or $600 was taken from taxpayers that would have spent it elsewhere, providing food and clothing for others.
So the net effect is actually negative. That wasn't part of the report.
PBL: So how does this idea affect you personally? I mean, how can a person use this knowledge to better his life?
Ford: Well, for one thing, I'm very careful about my charitable expenditures. I don't give to major charities, because I'm afraid they may be as inefficient as the government.
I do spend a good amount of money every year on charitable projects, but they are all my projects – ones that I feel responsible for and that I control. I want to know that if I spend $60,000 to build a library in Nicaragua, it will do more good than spending $60,000 on a new BMW. This makes me work much harder to make sure the investment pays off.
This idea has also been important in my business thinking. When I discuss capital expenditures with my client companies, I always stop to think, "Is this the best use of this money? Or would we get a higher return for the whole company if we spent it elsewhere?"
But the most important benefit for me is that it allows me to spend very little time worrying about government policies that attempt to regulate the economy. I know that most of them – regardless of what party favors them – will be wasteful. That gives me extra time to focus on my investing.
PBL: Thank goodness for that.
N.B. The Broken Window Fallacy was first introduced via the Parable Of The Broken Window by Frédéric Bastiat in his 1850 essay "Ce qu'on voit et ce qu'on ne voit pas" (That Which Is Seen and That Which Is Unseen) to illustrate why destruction, and the money spent to recover from destruction, is actually not a net-benefit to society. The parable, other than the Broken Window Fallacy is also known as Glazier's Fallacy, and demonstrates how opportunity costs, as well as the law of unintended consequences, affect economic activity in ways that are "unseen" or ignored.
The Palm Beach Letter: Let's talk about books. What is the best book on economics or investing you've ever read?
Mark Ford: I haven't read all that many. But I'd have to say that the book that had the greatest impact on my thinking was Henry Hazlitt's Economics in One Lesson.
PBL: A classic. How did that affect you?
Ford: It was one of those "eureka!" moments. It was like coming up from a murky basement into a bright room. The book gave me a clear, common-sense explanation of why things were the way they were. I could finally see the fallacies that supported so much stupidity that passed for economic science.
PBL: Such as?
Ford: Such as why public works are so often wasteful, why government credit diverts production, why technological advances are good, not bad, for employment, why spread-the-work schemes inevitably fail, why government price-fixing and tariffs make us poorer, etc.
PBL: So what is the most important thing you got from reading Economics in One Lesson?
Ford: That you can't understand any economic policy unless you look at the whole picture. It's not enough to see the immediate, localized consequences of any public action. You must see its long-term effect on the entire economic community. Hazlitt says that nine-tenths of the economic fallacies politicians use do so much harm because they ignore this lesson. After reading the book, I can't help but agree.
PBL: That's a little abstract. Can you explain?
Ford: Hazlitt explains it beautifully in the second chapter, entitled "The Broken Window."
It goes like this:
A hoodlum throws a rock through a baker's plate glass window. A crowd gathers and talks about what a shame it is. But someone suggests that it is actually a blessing. He points out that the $250 the baker must pay for a new window will make the glazier $250 richer. And the glazier will use that $250 to spend with other merchants. The smashed window, according to this theory, will go on providing money and employment in ever-widening circles.
The logic is that the hoodlum who threw the brick was not a menace at all, but a public benefactor. The crowd agrees.
PBL: It does seem like a compelling argument.
Ford: It does. Yet, it's a logical fallacy.
PBL: So what's the fallacy?
Ford: The crowd is right that the broken window will benefit the glazier. But the crowd is looking only at one part of the picture: the effect on the glazier. That's the fallacy. To view the event properly, one must take into account its effect on not just one person or group, but also on the entire economy.
If you do that, you will quickly see that the baker is poorer by $250. And that means he won't be able to spend $250 on the suit he was planning to buy. The tailor that was to get his order for the suit won't have the $250 that would have come to him. And so he won't be able to spend that money with other merchants.... and so on, down the line.
The crowd was thinking only of two parties – the baker and the glazier – because they can see the window. But they don't consider the tailor because the suit is invisible – it is never made.
PBL: That's good. So how does this apply to governmental policies?
Ford: One example Hazlitt gives is government credit to farmers. (This was a big issue during the 1940s, when the book was written.)
At that time, many politicians supported government credit to farmers because farmers represented a big constituency for them. The argument in favor of farm credits was based on particular farmers who could not get the credit they needed from private lenders (banks, mortgage lenders, and so on).
In proposing the legislation, politicians always told stories about the poor farmer who won't be able to make it unless the government steps in to help him. If we buy a farm (or tractor) for him, he will be productive again and resume his role as an upstanding citizen. His farm will add to the total national product, and he will eventually pay it off with the produce he sells. So the loan actually costs the taxpayers nothing, since it will be self-liquidating.
PBL: Again, it sounds like a compelling argument.
Ford: Yes it does, so long as you look at only part of the picture: the short-term effect on the particular farmer who can't get the loan. But if you have learned Hazlitt's lesson, you will see the fallacy in it.
There is a reason this particular farmer cannot get the loan he wants. It is because the private lending community doesn't think he or his farm is worthy of it. (In other words, he is not credit-worthy.)
As Hazlitt points out, credit – good or bad – is what the farmer already has before he applies for the loan. If he has credit, he will get the loan privately. It is only when he doesn't have credit that the government must step in. In other words, the only purpose of government credit is to provide loans to people or businesses that are not credit-worthy.
To understand the whole picture, you must look at the effect of that loan. To provide the loan, the government must take the money – in the form of taxation – from the private sector. And that money will not be used for whatever purposes it would have been used.
For every $1,000 that is given by the government to a farmer with bad credit, $1,000 will not be spent by some private person or business on a person or business with good credit. The long-term implication is obvious: more risk, greater net losses, and less efficiency. The economy loses out in the long run.
PBL: Yes, I can see that. But that particular farmer, if he doesn't get the loan, will be worse off.
Ford: Yes. In the short term, he will be worse off. Hazlitt doesn't deny this. And that is one of the things I like about his thinking. He does not make the mistake that some free-market theorists make in denying these short-term, limited problems.
Economic progress in a free market always produces limited and temporary hardships, but those hardships are more than offset by an overall long-term increase in wealth. Hazlitt doesn't pretend that free markets will solve all problems. He argues that in the long run they provide the best net result.
PBL: Can you give me examples of how this is relevant today?
Ford: Open up any newspaper and you will see evidence of it in the editorials. Watch any talk show on economics and you'll see it all the time. The broken window fallacy is the go-to gimmick of almost every successful politician, Republican or Democrat.
PBL: For example?
Ford: On the treadmill this morning, I saw a "news" story about what the "reporter" called "the growing problem of hunger in America."
The reporter showed a clip of a young woman who said she was having trouble feeding her children with the $300 a month she gets in food stamps. She said the pain of hunger was "unimaginable." The reporter concluded that something must be done to increase food stamp allocations.
If it weren't for the fact that this young woman weighed about 280 pounds, I would have been moved. But had I believed her, I would have reminded myself that this was the broken window theory in operation.
No mention was made of the fact that the $300 in food stamps she was getting from the government was actually costing taxpayers much more than $300. With all the government bureaucracy involved in qualifying her, tracking the expenses, and reporting them, the cost of those food stamps was probably closer to $500 or $600. And that $500 or $600 was taken from taxpayers that would have spent it elsewhere, providing food and clothing for others.
So the net effect is actually negative. That wasn't part of the report.
PBL: So how does this idea affect you personally? I mean, how can a person use this knowledge to better his life?
Ford: Well, for one thing, I'm very careful about my charitable expenditures. I don't give to major charities, because I'm afraid they may be as inefficient as the government.
I do spend a good amount of money every year on charitable projects, but they are all my projects – ones that I feel responsible for and that I control. I want to know that if I spend $60,000 to build a library in Nicaragua, it will do more good than spending $60,000 on a new BMW. This makes me work much harder to make sure the investment pays off.
This idea has also been important in my business thinking. When I discuss capital expenditures with my client companies, I always stop to think, "Is this the best use of this money? Or would we get a higher return for the whole company if we spent it elsewhere?"
But the most important benefit for me is that it allows me to spend very little time worrying about government policies that attempt to regulate the economy. I know that most of them – regardless of what party favors them – will be wasteful. That gives me extra time to focus on my investing.
PBL: Thank goodness for that.
N.B. The Broken Window Fallacy was first introduced via the Parable Of The Broken Window by Frédéric Bastiat in his 1850 essay "Ce qu'on voit et ce qu'on ne voit pas" (That Which Is Seen and That Which Is Unseen) to illustrate why destruction, and the money spent to recover from destruction, is actually not a net-benefit to society. The parable, other than the Broken Window Fallacy is also known as Glazier's Fallacy, and demonstrates how opportunity costs, as well as the law of unintended consequences, affect economic activity in ways that are "unseen" or ignored.
Saturday, January 15, 2011
Early To Rise - Controlling Your Emotions During Tough Markets
(By John Nyaradi)
All year, investors have been fleeing the stock market for the perceived safety of the bond market, letting fear take control of their investing and financial future. But if you can learn to control your emotions, today's equity markets offer enormous opportunity.
Your biggest enemy for successful trading is not the "market," other traders or investors, the economy, or any outside force. You face your biggest danger in the mirror every morning, because your biggest danger is you -- your emotions and the human frailties that can easily lead to your financial ruin.
How many times have you read that the average investor has an uncanny knack to buy at the top and sell at the bottom? It's true -- and it's sad. People tend to chase bubble fads and the latest "hot" investment. And when they do, they invariably get burned.
More of us need to be like Warren Buffett and train ourselves to "be greedy when others are fearful, and be fearful when others are greedy."
Greed, Fear, and the Herd
Greed and fear are the two primary driving forces behind most investor decisions. Because though much has been written about markets being rational and investors making rational decisions based on earnings reports, price-to-earnings ratios, or technical analysis, the fact is that markets are not rational, as witnessed by the stock market's recent wild gyrations.
We've seen incredible global volatility, a flash crash, strong short-term rallies and declines -- and there's no rational reason for any of this in terms of corporate profits, economic reports, or political events. The explanation for what's happening in these crazy times is very simply that greed and fear are driving today's markets in very powerful and extreme ways.
Greed is simple to understand. People want to make money. But fear is a little more complex in that there are really two types of fear: fear of loss, which we all understand, but also fear of being left behind.
I believe a key to investment success is learning to control your greed and your fear.
You can control both of those emotions by following these rules:
• Do not overtrade. In the search for better results or to limit loss, investors tend to overtrade and so wind up paying too much in commissions or getting whipsawed by short-term market gyrations.
• Do not take on too much risk. Greed causes investors to take on too much risk, either through options, leverage, investing in risky companies, or by taking positions that are too large.
• Do not look back. Successful traders don't go back and look at trades they have sold to see how they "would've done." When a trade is over, it's over. They don't do a postmortem to see if they were "right" or "wrong" about the market.
• Do not sell your winners too soon. When you sell too soon, you miss out on further gains.
• Do not hang on to losers too long. Most investors find it's hard to admit they were "wrong," and so lose more than they should or could. Ego plays a big role here. People want to be right. But "Hang on, it'll come back" is not an investment strategy. Just ask anyone who still owns some of the darlings of the dot.com boom and bust.
• Keep your ego out of your trading. Pride in a good trade is as harmful as shame or anger or grief over a bad trade. Some trades will go well. Some trades won't go well. It has nothing to do with the investor's intellect or self worth.
• Find a good plan and stick with it. A great batter in baseball only succeeds four out of 10 times at the plate. Investing is a marathon, not a sprint.
To be successful, you must use a trading system that suits you. It must fit your personality, your lifestyle, and your goals. A day trader, for example, is a totally different animal than a buy-and-hold investor.
Once you recognize who you are, you must apply discipline to your trading activities by having a written plan that you stick to unrelentingly. You must learn your market inside and out and become a specialist, not try to be an expert in all things. Today's markets are much too fast complex for anyone to be a generalist. Be a one-trick pony, and make it a very good trick.
I can tell you from personal, painful experience that if you violate the above rules, your chances for investing success are slim at best.
I've made all of the mistakes I mentioned at one time or another -- and, almost invariably, it's cost me money. The "trading gods" just seem to know when you violate the rules, and then smack you down for your transgression.
When I look around at people I know and have worked with who've made these mistakes, they, too, have usually lost money.
I know one guy who has lost money for three years running who spends his weekends watching the talking heads on financial television. By Sunday evening, he's so confused that he doesn't know where to turn. Recently, I watched one of the weekend talk shows for a few minutes at SeaTac International Airport between flights -- and I could almost feel the paralysis start to set in.
I know a woman who skips from advisor to advisor, managing to lose money with each one of them -- and she can't figure out why. I know more people than I care to count who trade by the seat of their pants or on a hunch or based on a tip that they read or heard about in the financial media. Frankly, they'd have about the same odds of winning and a lot more fun if they went to Las Vegas instead.
The bottom line is this: Trading and investing in our current climate is tough. Like the old saying goes, "Trading isn't rocket science, it's harder."
You can be like the herd, the "sheepies" who have fled to the bond market and are in the process of creating another bubble there. Or you can be different, a contrarian, and deploy a professional, unemotional trading plan that can take advantage of today's unique opportunities.
The choice is yours.
P.S. John Nyaradi is the publisher of Wall Street Sector Selector, an online newsletter specializing in exchange-traded funds (ETFs), and the author of Super Sectors, How to Outsmart the Market Using Sector Rotation and ETFs.
All year, investors have been fleeing the stock market for the perceived safety of the bond market, letting fear take control of their investing and financial future. But if you can learn to control your emotions, today's equity markets offer enormous opportunity.
Your biggest enemy for successful trading is not the "market," other traders or investors, the economy, or any outside force. You face your biggest danger in the mirror every morning, because your biggest danger is you -- your emotions and the human frailties that can easily lead to your financial ruin.
How many times have you read that the average investor has an uncanny knack to buy at the top and sell at the bottom? It's true -- and it's sad. People tend to chase bubble fads and the latest "hot" investment. And when they do, they invariably get burned.
More of us need to be like Warren Buffett and train ourselves to "be greedy when others are fearful, and be fearful when others are greedy."
Greed, Fear, and the Herd
Greed and fear are the two primary driving forces behind most investor decisions. Because though much has been written about markets being rational and investors making rational decisions based on earnings reports, price-to-earnings ratios, or technical analysis, the fact is that markets are not rational, as witnessed by the stock market's recent wild gyrations.
We've seen incredible global volatility, a flash crash, strong short-term rallies and declines -- and there's no rational reason for any of this in terms of corporate profits, economic reports, or political events. The explanation for what's happening in these crazy times is very simply that greed and fear are driving today's markets in very powerful and extreme ways.
Greed is simple to understand. People want to make money. But fear is a little more complex in that there are really two types of fear: fear of loss, which we all understand, but also fear of being left behind.
I believe a key to investment success is learning to control your greed and your fear.
You can control both of those emotions by following these rules:
• Do not overtrade. In the search for better results or to limit loss, investors tend to overtrade and so wind up paying too much in commissions or getting whipsawed by short-term market gyrations.
• Do not take on too much risk. Greed causes investors to take on too much risk, either through options, leverage, investing in risky companies, or by taking positions that are too large.
• Do not look back. Successful traders don't go back and look at trades they have sold to see how they "would've done." When a trade is over, it's over. They don't do a postmortem to see if they were "right" or "wrong" about the market.
• Do not sell your winners too soon. When you sell too soon, you miss out on further gains.
• Do not hang on to losers too long. Most investors find it's hard to admit they were "wrong," and so lose more than they should or could. Ego plays a big role here. People want to be right. But "Hang on, it'll come back" is not an investment strategy. Just ask anyone who still owns some of the darlings of the dot.com boom and bust.
• Keep your ego out of your trading. Pride in a good trade is as harmful as shame or anger or grief over a bad trade. Some trades will go well. Some trades won't go well. It has nothing to do with the investor's intellect or self worth.
• Find a good plan and stick with it. A great batter in baseball only succeeds four out of 10 times at the plate. Investing is a marathon, not a sprint.
To be successful, you must use a trading system that suits you. It must fit your personality, your lifestyle, and your goals. A day trader, for example, is a totally different animal than a buy-and-hold investor.
Once you recognize who you are, you must apply discipline to your trading activities by having a written plan that you stick to unrelentingly. You must learn your market inside and out and become a specialist, not try to be an expert in all things. Today's markets are much too fast complex for anyone to be a generalist. Be a one-trick pony, and make it a very good trick.
I can tell you from personal, painful experience that if you violate the above rules, your chances for investing success are slim at best.
I've made all of the mistakes I mentioned at one time or another -- and, almost invariably, it's cost me money. The "trading gods" just seem to know when you violate the rules, and then smack you down for your transgression.
When I look around at people I know and have worked with who've made these mistakes, they, too, have usually lost money.
I know one guy who has lost money for three years running who spends his weekends watching the talking heads on financial television. By Sunday evening, he's so confused that he doesn't know where to turn. Recently, I watched one of the weekend talk shows for a few minutes at SeaTac International Airport between flights -- and I could almost feel the paralysis start to set in.
I know a woman who skips from advisor to advisor, managing to lose money with each one of them -- and she can't figure out why. I know more people than I care to count who trade by the seat of their pants or on a hunch or based on a tip that they read or heard about in the financial media. Frankly, they'd have about the same odds of winning and a lot more fun if they went to Las Vegas instead.
The bottom line is this: Trading and investing in our current climate is tough. Like the old saying goes, "Trading isn't rocket science, it's harder."
You can be like the herd, the "sheepies" who have fled to the bond market and are in the process of creating another bubble there. Or you can be different, a contrarian, and deploy a professional, unemotional trading plan that can take advantage of today's unique opportunities.
The choice is yours.
P.S. John Nyaradi is the publisher of Wall Street Sector Selector, an online newsletter specializing in exchange-traded funds (ETFs), and the author of Super Sectors, How to Outsmart the Market Using Sector Rotation and ETFs.
Saturday, September 11, 2010
Financial Journals - US Dollars (Part 2)
(By Porter Stansberry)
- Reproduced from The Daily Crux: First published on 29 June 2010
Porter Stansberry: U.S. is headed for one of the worst inflations in history
"It could never happen here"... That's the refrain we hear from our friends and colleagues. They say it after we've gone over all of the numbers involved in the government's financial position and explained our out-of-consensus view that the U.S. is not only heading toward a period of massive inflation, but such an outcome has long since ceased to be avoidable. People respond – "Oh, that could never happen here." – in the same way they repeat a catechism.
We don't think our view is shocking or even surprising. Much like with our GM analysis (we predicted bankruptcy as early as 2005), when you simply look at the numbers, the outcome is unavoidable.
And then there's history. Not a single brand of paper money has ever lasted. Or you might say, in all of recorded human history, gold remains undefeated. We expect that trend to continue. Likewise, we can't recall any nation that ever repaid its debts (in sound money) once they'd grown to 100% of GDP. And watching our neighbors "strategically" defaulting on their mortgages in record numbers, we see no reason to expect Americans will prove to be any more honest about their government's obligations.
Since America isn't the first powerful democracy to default through inflation, it may pay for investors to be familiar with the most famous such event...
In 1915, just after World War I began, you could exchange 4.2 German marks for one U.S. dollar – and that was when the U.S. dollar was still backed by gold. As you know, Germany lost the war. Its people were literally starving by the end, thanks to the British blockade. With no alternative except starvation and annihilation, Germany accepted an armistice that demanded $12.5 billion in reparations. The debt was equal to 100% of Germany's GDP prior to the war. At the time, the exchange rate stood at 65 marks to the dollar, a devaluation of roughly 95%. Most people believe Germany's hyperinflation was caused by this war debt. Not exactly.
After the war, Germany was broke... That's true. But the mark was cheap. It seemed like a terrific investment opportunity. Most people believed Germany would find a way to finance its debts. We imagine foreign investors at the time said, "Oh, hyperinflation could never happen in Germany..." And so speculators pumped another $2 billion of additional credit into Germany. Then came trouble. Germany's main creditor (France) refused to renegotiate the terms of the armistice. And the German people lost confidence in their own government. The people didn't want to pay the debts. Assassinations began to occur, most notably the murder of Walther Rathenau – the foreign minister. Investors lost confidence in the country. They abandoned the mark.
German prices rose forty fold in 1922. The mark fell from 190 to 7,600 to the dollar. When Germany failed to make a foreign debt payment in 1923, 40,000 French and Belgian troops invaded. To appease its creditors, the German government printed more money. It issued 17 trillion marks in 1923 (compared to 1 trillion in 1922). By August 1923, a dollar was worth 620,000 marks. By early November 1923, the exchange rate hit 630 billion to one.
Could something like this happen in the U.S.? Not exactly. We doubt, for example, China will ever attempt to invade the U.S. to force debt repayment. But we think what will likely happen could easily be worse than Weimar Germany. You see, the mark wasn't the foundation of the world's economy. Today, more than 60% of all bank reserves around the world are U.S. Treasury obligations. As the U.S. continues to run massive annual deficits and as the Fed engages in "quantitative easing," the world's supply of money is growing, by large amounts. Sooner or later, people holding paper money of every variety, not just Uncle Sam's, will come to doubt its most important quality – the stability of its exchange value. The resulting massive inflation will not merely strike the U.S., but the entire world.
- Reproduced from The Daily Crux: First published on 29 June 2010
Porter Stansberry: U.S. is headed for one of the worst inflations in history
"It could never happen here"... That's the refrain we hear from our friends and colleagues. They say it after we've gone over all of the numbers involved in the government's financial position and explained our out-of-consensus view that the U.S. is not only heading toward a period of massive inflation, but such an outcome has long since ceased to be avoidable. People respond – "Oh, that could never happen here." – in the same way they repeat a catechism.
We don't think our view is shocking or even surprising. Much like with our GM analysis (we predicted bankruptcy as early as 2005), when you simply look at the numbers, the outcome is unavoidable.
And then there's history. Not a single brand of paper money has ever lasted. Or you might say, in all of recorded human history, gold remains undefeated. We expect that trend to continue. Likewise, we can't recall any nation that ever repaid its debts (in sound money) once they'd grown to 100% of GDP. And watching our neighbors "strategically" defaulting on their mortgages in record numbers, we see no reason to expect Americans will prove to be any more honest about their government's obligations.
Since America isn't the first powerful democracy to default through inflation, it may pay for investors to be familiar with the most famous such event...
In 1915, just after World War I began, you could exchange 4.2 German marks for one U.S. dollar – and that was when the U.S. dollar was still backed by gold. As you know, Germany lost the war. Its people were literally starving by the end, thanks to the British blockade. With no alternative except starvation and annihilation, Germany accepted an armistice that demanded $12.5 billion in reparations. The debt was equal to 100% of Germany's GDP prior to the war. At the time, the exchange rate stood at 65 marks to the dollar, a devaluation of roughly 95%. Most people believe Germany's hyperinflation was caused by this war debt. Not exactly.
After the war, Germany was broke... That's true. But the mark was cheap. It seemed like a terrific investment opportunity. Most people believed Germany would find a way to finance its debts. We imagine foreign investors at the time said, "Oh, hyperinflation could never happen in Germany..." And so speculators pumped another $2 billion of additional credit into Germany. Then came trouble. Germany's main creditor (France) refused to renegotiate the terms of the armistice. And the German people lost confidence in their own government. The people didn't want to pay the debts. Assassinations began to occur, most notably the murder of Walther Rathenau – the foreign minister. Investors lost confidence in the country. They abandoned the mark.
German prices rose forty fold in 1922. The mark fell from 190 to 7,600 to the dollar. When Germany failed to make a foreign debt payment in 1923, 40,000 French and Belgian troops invaded. To appease its creditors, the German government printed more money. It issued 17 trillion marks in 1923 (compared to 1 trillion in 1922). By August 1923, a dollar was worth 620,000 marks. By early November 1923, the exchange rate hit 630 billion to one.
Could something like this happen in the U.S.? Not exactly. We doubt, for example, China will ever attempt to invade the U.S. to force debt repayment. But we think what will likely happen could easily be worse than Weimar Germany. You see, the mark wasn't the foundation of the world's economy. Today, more than 60% of all bank reserves around the world are U.S. Treasury obligations. As the U.S. continues to run massive annual deficits and as the Fed engages in "quantitative easing," the world's supply of money is growing, by large amounts. Sooner or later, people holding paper money of every variety, not just Uncle Sam's, will come to doubt its most important quality – the stability of its exchange value. The resulting massive inflation will not merely strike the U.S., but the entire world.
Friday, September 10, 2010
Financial Journals - US Dollars (Part 1)
(By Porter Stansberry)
- Reproduced from The Daily Crux: First published on 11 May 2010
Porter Stansberry: The U.S. dollar is about to implode
Dear subscribers... we hope you pay special attention to today's Digest. The world has officially entered what we believe will be the final chapter of the U.S. dollar's reign as the world's reserve currency. The dollars in your wallet now not only back bankrupt U.S. money center banks and subprime home "owners"... they are also officially backing all of the economies of Europe. The world's monetary system has evolved into a new kind of global socialism. We don't think that can be bullish for long.
Here are the facts we've been told so far... The European Central Bank (the ECB) will spend $1 trillion (750 billion euro) bailing out Europe's sovereign borrowers (like Greece, Spain, and Portugal). It will also purchase billions of troubled assets from Europe's largest banks – like UniCredit. The mechanisms for these purchases will likely be convoluted. The EU treaties contain a no-bailout clause, forbidding any member to "be liable for or assume the commitments of" another EU country. And the European Central Bank cannot lend to countries or buy their debt directly. To get around the technicalities, the EU created an off-balance-sheet entity that will "borrow" the money and lend it to countries in trouble. Whether this matters to the EU's creditors or not, we can't say... but we certainly wouldn't lend to an off-balance-sheet entity of a central bank that's not represente d by any country. Buying euros used to be a game of "who owes me nothing." Now, it will be a game of "whose off-sheet entity owes me nothing." We doubt that will make Europe more creditworthy in the long term.
What does any of this have to do with the U.S. dollar? More than you'll ever hear anywhere else. On paper, the money is supposed to come from Europe's biggest governments and the IMF. But in reality, most of the money will be borrowed from the U.S. Federal Reserve, which just happened to re-open its trillion-dollar swap account with the ECB this weekend. Ironically, the Federal Reserve says these loans are risk-free because the counterparty is a central bank (or at least the off-balance-sheet entity of a central bank). But if the ECB is truly creditworthy, why couldn't Greece, Spain, Portugal, Italy, or Ireland raise the money for themselves?
At the beginning of the year, we declared rising interest rates in the U.S. as "the single most important trend in finance." We believe interest rates on long-term U.S. government bonds will rise to compensate investors for the increased risk of owning paper-backed sovereign debt. Our logic is simple: The more money the U.S. prints to bail out banks and other sovereign borrowers, the riskier the U.S. balance sheet becomes. By the first half of 2010, the Fed had already spent $2 trillion to bail out Wall Street's banks and the U.S. mortgage market. And as we reminded subscribers just last Friday, because the world's banking system uses the U.S. dollar as its reserve currency, the Fed would eventually be forced to bail out Europe's economy. Indeed, that's exactly what happened over the weekend. The U.S. Federal Reserve has officially become the world's lender of last resort. We would humbly suggest these policies will likely lead to a permanent loss of value for holders of U.S. dollars.
Why are we so concerned? Printing money to bail out borrowers around the world will not solve the problems of over-leveraged governments or debt-ridden economies. It simply shifts the risks from private balance sheets to the U.S. government's. The U.S. dollar has assumed all of these risks. Our currency has become a ticking time bomb.
You can watch the dollar die, one day at a time, by keeping your eye on the growing spread between the value of long-term U.S. bonds and the price of gold. Over the last year – even as the U.S. economy apparently improved – the spread widened by about 35%.
- Reproduced from The Daily Crux: First published on 11 May 2010
Porter Stansberry: The U.S. dollar is about to implode
Dear subscribers... we hope you pay special attention to today's Digest. The world has officially entered what we believe will be the final chapter of the U.S. dollar's reign as the world's reserve currency. The dollars in your wallet now not only back bankrupt U.S. money center banks and subprime home "owners"... they are also officially backing all of the economies of Europe. The world's monetary system has evolved into a new kind of global socialism. We don't think that can be bullish for long.
Here are the facts we've been told so far... The European Central Bank (the ECB) will spend $1 trillion (750 billion euro) bailing out Europe's sovereign borrowers (like Greece, Spain, and Portugal). It will also purchase billions of troubled assets from Europe's largest banks – like UniCredit. The mechanisms for these purchases will likely be convoluted. The EU treaties contain a no-bailout clause, forbidding any member to "be liable for or assume the commitments of" another EU country. And the European Central Bank cannot lend to countries or buy their debt directly. To get around the technicalities, the EU created an off-balance-sheet entity that will "borrow" the money and lend it to countries in trouble. Whether this matters to the EU's creditors or not, we can't say... but we certainly wouldn't lend to an off-balance-sheet entity of a central bank that's not represente d by any country. Buying euros used to be a game of "who owes me nothing." Now, it will be a game of "whose off-sheet entity owes me nothing." We doubt that will make Europe more creditworthy in the long term.
What does any of this have to do with the U.S. dollar? More than you'll ever hear anywhere else. On paper, the money is supposed to come from Europe's biggest governments and the IMF. But in reality, most of the money will be borrowed from the U.S. Federal Reserve, which just happened to re-open its trillion-dollar swap account with the ECB this weekend. Ironically, the Federal Reserve says these loans are risk-free because the counterparty is a central bank (or at least the off-balance-sheet entity of a central bank). But if the ECB is truly creditworthy, why couldn't Greece, Spain, Portugal, Italy, or Ireland raise the money for themselves?
At the beginning of the year, we declared rising interest rates in the U.S. as "the single most important trend in finance." We believe interest rates on long-term U.S. government bonds will rise to compensate investors for the increased risk of owning paper-backed sovereign debt. Our logic is simple: The more money the U.S. prints to bail out banks and other sovereign borrowers, the riskier the U.S. balance sheet becomes. By the first half of 2010, the Fed had already spent $2 trillion to bail out Wall Street's banks and the U.S. mortgage market. And as we reminded subscribers just last Friday, because the world's banking system uses the U.S. dollar as its reserve currency, the Fed would eventually be forced to bail out Europe's economy. Indeed, that's exactly what happened over the weekend. The U.S. Federal Reserve has officially become the world's lender of last resort. We would humbly suggest these policies will likely lead to a permanent loss of value for holders of U.S. dollars.
Why are we so concerned? Printing money to bail out borrowers around the world will not solve the problems of over-leveraged governments or debt-ridden economies. It simply shifts the risks from private balance sheets to the U.S. government's. The U.S. dollar has assumed all of these risks. Our currency has become a ticking time bomb.
You can watch the dollar die, one day at a time, by keeping your eye on the growing spread between the value of long-term U.S. bonds and the price of gold. Over the last year – even as the U.S. economy apparently improved – the spread widened by about 35%.
Subscribe to:
Posts (Atom)