An Asset for the Keeping...and Nurturing!

Recently, a money manager that I otherwise greatly respect, said this rather despairing, if not delusional, statement:

"Ultimately, there may be no such thing as a safe asset anymore and investors may want to take a diversified approach to something as mundane as cash." [Emphasis added] The Rising Dollar Myth by Axel Merk.

 I know what he means, but it reminded me of the fool's remark you may have heard:


"I don't believe a word that anyone says...except my words."

An "asset" either is an asset, that is, it has value, or it isn't...and doesn't.  So whence comes this danger of assets becoming non-assets?  What makes an asset "unsafe"?  Can "cash" be a danger?  To all appearances, it seems Mr. Merk has lost trust even in his "hard currency" views.

In fact, there are two issues here that are being conflated.  The first is the curious deterioration of the value of our money and assets.  And the second is the idea of trust and its relationship to investing and society at large.  For the first issue, I have provided below links to resources that will help you understand the real cause of our economic woes.  However, I first want to address the second and more insidious problem, the idea of saying, "You can trust nothing and no one." 

Let's face it, when it seems that lying and cheating are the order of the day, even we might be tempted to deny such foundational realities as the necessity of trust.   And here I use the word "necessity" in its strict, philosophical sense, that is a condition that must be.

Indeed, trust is so fundamental to society's well being that it is easy to see that if its opposite were to rule, then society would cease to exist...at least any "society" that we would recognize or that would be worthy of the name, society.

Society-Derived from the Latin word "socius" which means ally or friend.

So is there a growing distrust and, if so, what is its cause?  Further, how do we combat it?  Or are we damned to live without allies or the ability to make alliances?

To the first query it is obvious that distrust is on the ascendancy.  Society is breaking down because we no longer trust the people and institutions we heretofore relied upon.  Even more troublesome is that this distrust is justifiable to a point.  In other words, we properly trusted, but the powers-that-be gave us ample reason to trust no more. 


The causes of this are many, varied and complex.  No single, simple answer will suffice, but in the financial world I believe the beginnings of this trouble started with the creation of our dishonest money system.  Just as you would have a healthy skepticism of your neighbors after your house was burglarized, it is natural to
have reservations about your government (or banking/financial institutions) when there is an ongoing theft  being perpetrated against your production and savings through inflation.  [For a full treatment of this scandal, I recommend The Creature From Jekyll Island.]

Similarly, just as your trust in the neighborhood would be resurrected as soon as the burglar was apprehended, I believe we can combat the growing distrust of our societal institutions by ridding ourselves of the dishonest money mechanism, the Federal Reserve.   

And for those who would say that this is whacked out, crazy talk, I can only respond that our Constitution says that our Congress has the power "to coin Money [and] regulate the Value thereof..." not some private, banking cartel.

Until that happens (and we should all join the growing movement to make it happen), we must all be on alert.  However, we should not fall prey to the temptation to go beyond "alert" and move toward distrusting everything and everyone.  For that would be the end of the very thing we truly desire: a peaceful, loving, trustworthy society. 

Instead, we must recognize the dangers around us, form plans that take into account the dishonest money system and prosper with allies worthy of the name.  We may even be called to create the enterprises into which people may place their trust.  Now who can conceive of a more noble mission than that?

Seek out good groups and companies.  Work with people you know and trust.  Oppose those who have shown themselves untrustworthy.  Be honorable in your own business dealings.

In doing this we will maintain the society and the value of the assets we work hard to produce. 

A Simple Recipe for Wealth and Freedom

It is always dangerous to quote someone since one is likely to get labeled with the same calumnies that are heaped upon the principal author.  This is even more the case when one quotes G. K. Chesterton, a writer whose incisive views and powerful reasoning always cause distress (or rapturous joy) in the reader. Chesterton, it might be argued, was the last great writer to both ascertain and articulate the truth about the modern world.  He did this as plainly as he could, but the truth is not always so plain or readily explicable.  Thus, Chesterton became known as the master of the paradox for which he is most loved and reviled...paradoxically!

Today, I will quote at length from Chesterton's essay, The Servile State Again.  Considering the recent revelations about our ever-growing spy-State, I think his warnings about a "gradually solidifying slavery" to be most current and apropos.

Because he is so often MISunderstood, I simply ask that my dear readers keep an open mind and meditate on his reasoning since the evidence of today seems to vindicate his views.

While I will make a few editorial comments within the essay, I will try to keep those interruptions to a minimum.  My additions will be in RED, but let me make one prefatory remark so as not to destroy the continuity of the great first sentence of the quote below.  It would be too great a diversion to try and define exactly what Chesterton means by "Capitalism".  And, in this land that considers itself fiercely capitalistic, it may be off-putting that he is condemning it.  Suffice it to say that he is not opposed to free enterprise. In fact, Chesterton would say that the "capitalist" is.  Rather, he sees a similar danger in the aggregation of wealth as in the aggregation of state power.  If you understand that notion, then you understand Chesterton's "capitalist".

Finally, I will sum up a practical response to Chesterton's conclusion at the end of this blog entry.  Now for a little G. K. Chesterton:


But Prussia is Capitalism; that is, a gradually solidifying slavery; and that majestic unity with which she moves, dragging all the dumb Germanies after her, is due to the fact that her Servile State is complete, while ours is incomplete. There are not mutinies; there are not even mockeries; the voice of national self-criticism has been extinguished forever. [Now if one makes a "national self-criticism", he has to flee to Hong Kong.] For this people is already permanently cloven into a higher and a lower class: in its industry as much as its army. Its employers are, in the strictest and most sinister sense, captains of industry. Its proletariat is, in the truest and most pitiable sense, an army of labour. In that atmosphere masters bear upon them the signs that they are more than men; and to insult an officer is death.

If anyone ask how this extreme and unmistakable subordination of the employed to the employers is brought about, we all know the answer. It is brought about by hunger and hardness of heart, accelerated by a certain kind of legislation [see my last blog here], of which we have had a good deal lately in England, but which was almost invariably borrowed from Prussia. [We have had a good deal here, too.  Think of Social Security and our other retirement plans.] Mr. Herbert Samuel's suggestion that the poor should be able to put their money in little boxes and not be able to get it out again  is a sort of standing symbol of all the rest[IRA? 401(k)?] . I have forgotten how the poor were going to benefit eventually by what is for them indistinguishable from dropping sixpence down a drain. Perhaps they were going to get it back some day; perhaps when they could produce a hundred coupons out of the Daily Citizen; perhaps when they got their hair cut; perhaps when they consented to be inoculated, or trepanned, or circumcised, or something. Germany is full of this sort of legislation; and if you asked an innocent German, who honestly believed in it, what it was, he would answer that it was for the protection of workmen. 

And if you asked again "Their protection from what?" you would have the whole plan and problem of the Servile State plain in front of you. Whatever notion there is, there is no notion whatever of protecting the employed person from his employer. Much less is there any idea of his ever being anywhere except under an employer. Whatever the Capitalist wants he gets. He may have the sense to want washed and well-fed labourers rather than dirty and feeble ones, and the restrictions may happen to exist in the form of laws from the Kaiser [government] or by-laws from the Krupps [corporations]. But the Kaiser will not offend the Krupps, and the Krupps will not offend the Kaiser. Laws of this kind, then, do not attempt to protect workmen against the injustice of the Capitalist as the English Trade Unions did. They do not attempt to protect workmen against the injustice of the State as the mediaeval guilds did. Obviously they cannot protect workmen against the foreign invader--especially when (as in the comic case of Belgium) they are imposed by the foreign invader. What then are such laws designed to protect workmen against? Tigers, rattlesnakes, hyenas? 

Oh, my young friends; oh, my Christian brethren, they are designed to protect this poor person from something which to those of established rank is more horrid than many hyenas. They are designed, my friends, to protect a man from himself--from something that the masters of the earth fear more than famine or war, and which Prussia especially fears as everything fears that which would certainly be its end. They are meant to protect a man against himself--that is, they are meant to protect a man against his manhood. [End of quote].

 Now "them there is fightin' words!"  Is he saying that the modern man has lost his manhood?  That he is a coward?  Perhaps.  But he is most assuredly saying that the modern man has been duped into trading his freedom, his faith, his community and individuality for a paternalistic and enslaving collective that falsely promises a security and prosperity for all. 

So what do we do about these encroachments on our liberty and the sacrifice of our self-reliance?  To keep this a financial commentary rather than a general social one, I will limit my answers to some specific, achievable individual assertions of manhood.

• If you are rightfully indignant about the unjust searches and spying by our federal government, then throw away your cell phone.  Seriously!  Save yourself $40, $50 a hundred bucks a month and be free from spying.
• If you sense the injustice of a government that seizes an entire segment of our economy (Obama-(non)care) with the full complicity of the insurance bureaucrats, then drop out of health insurance and look into alternatives (here are two: 1 and 2) or go with nothing...we're all going to die at some point, right? Here you might save $500 to $1,000 per month, will stop supporting a broken and enslaving system and will assert your self-reliance big time.
• Finally, if Google, Twitter, Facebook and the host of Internet Service Providers are going to destroy your privacy, then cancel your internet service.  Yes, you will lose access to my wise words...what a loss?!?....but with the saved time and money you could get involved with your family, community and church and build a truly free economy and society.

If these ideas cause you fear (admittedly, they do me), then you are beginning to sense the great loss that Chesterton warned us about, the loss of our manhood.   Why do we feel it absolutely necessary to our existence to have a phone, an insurance policy or a computer monitor (that's an interesting word, "monitor")?  And the fact that we do feel this way points indeed to two great truths:

1. The loss of our manhood; and
2. The loss of faith in God.

 Perhaps a few sheer acts of defiance of the dominant propaganda will help melt this "gradually solidifying slavery"!

The State of Corruption

I apologize ahead of time for this somewhat "downer" blog, but today, I am fighting with my own industry and product providers about a new "interpretation of the rules" that could have deleterious effects on my clients.  If we continue to allow the "rules of today" to mean something different tomorrow, then we will soon find that we have no laws, no rules, no society and no order.  God help us if we continue on that path...

I have been inundated lately with news about rules, changes to rules, re-interpretation of rules and how-to articles for protecting oneself from all these RULES.  It is tiresome...and I am just referencing the financial world.  Lord knows what it is like in banking, medicine, education and the other fields of endeavor.

But as bad as the rules and regulations that emanate from our leviathan government are, I do not believe they are the fundamental cause of our decline.  Rather, it is the RULERS and the RULED that continue down this path that are the real culprits in the loss of our peace, prosperity and liberty.  For it is our leaders who perennially legislate, regulate and dictate all of these damnable rules.  And it is us, the falsely-obedient citizen-servant class, who either supinely accept their out-of-bounds mandates or who legalistically escape their purview...for a time...without rightfully contesting their usurpations.

Tacitus said: "The more corrupt the state, the more laws."  If he would have said, "the more corrupt the state, the more PSEUDO-laws," I would have been in 100% agreement with him.  What we suffer under today is not a proliferation of laws properly speaking, but a metastasizing of bureaucracies and errant regulations.

Proper laws establish a moral right and wrong while having a definite beginning and end.  If you are on the "wrong side of the law" you know it!  But rules, regulations and interpretations establish the will of a regulator and, while having a definite beginning, have no end in sight.  You might be on the right side of the "bureau" today, but who knows tomorrow?  It is a bit like playing a game with a guy who makes up the rules as he goes along.  We all know how frustrating that can be.

In short, the government is in a state of corruption.  But notice, Tacitus didn't say "government", he said "state", the body politic and that includes the citizenry.  We, as citizens, share in the responsibility of the corrupt state of our State.  So long as we go along with (or try to navigate through) this unjust growth of "pseudo-laws", allow the usurpation of the limits on governmental power or fail to oppose on principle each abuse of any and all citizens, then we deserve the government we get.

So what can we do?  Admittedly, solutions at any level higher than the family seem bleak.  However, we can start with our family and associate with other good families to begin to repair the cells of the body politic.  Actions we could take are:

• Restoring faith in God and reversing our faith in government or any other creature;
• "Seeking first His Kingdom" rather than anything else, especially "security";
• Getting involved in any level of government (or in other societal institutions) and standing firm against the growth in regulations, bureaus or other misguided attempts at utopia;
• Creating real communities at the local level; and
• Withdrawing from those things that lead us into the "game with the ever-changing rules."  

 As our conditions worsen, we will be called to act in more drastic ways.  Perhaps the best approach we can take at this juncture is to strengthen ourselves now, morally, physically and intellectually, so that we will have the courage, strength and knowledge to do the right thing when the time comes.

In the meantime, let's do what every society has been called upon to do when their societies became corrupt: Repent and pray!

Mortgage Myths and Real World Finance

Perhaps the most important thing to know about finance is what are the unintended consequences of a proposed course of action.  Unfortunately, these are very rarely discussed.  What is discussed, rather, are over-simplified, numerical projections often with faulty inputs to boot. Then, armed with this false information, the consumer draws erroneous conclusions...often with devastating results.  All the while the financial services industry stands by, profiting from the darkened minds of the buying public rather than correcting the faulty notions of their clients.

Now I don't want to join in the chorus of offering over-simplified or faulty projections.  And I have already written on this blog my disdain for the typical "rate of return" discussion.  Finance is more complex than that.  However, to prove my earlier assertions, I do think it will be helpful to make a comparison of two oft-debated courses of action for paying off one's home.  I believe it will be illustrative of both the poor method by which courses of action are proposed and analyzed as well as offer an insight into how real world finance and unintended consequences are the more important issues in making these type decisions.  So please pardon my use of numbers and projections.  I promise to keep them simple, accurate and easily verifiable if you choose to do so.

So first let's state the issue:  Which is better a 30-year mortgage or a 15-year mortgage?  The widely held belief (at least by the number of people I encounter holding it) is this: If you can afford it, a 15-year is better because you will have a lower interest rate, pay less in interest and get out of debt quicker.  All the answers are true, as far as they go, but not dispositive of the issue especially as it pertains to real world finance.  So let's examine the facts in greater detail.

Anyone can go to bankrate.com and find the national averages for 15 and 30 year mortgages and quickly establish that the 15-year rates are better.  As of today, 2.91% for the 15-year term and 3.66% for the 30-year term.  Score "1" for the 15-year mortgage!

Similarly, it is quite easy to run two amortization schedules and see that indeed, less interest in paid on the 15-year mortgage. I ran an imaginary $200,000 loan and found that the 15-year mortgage at 2.91% interest would result in a total cost of $247,054.24, while the 30-year loan at 3.66% interest would result in a total cost of $329,776.06.  Clearly, $47,054.24 in interest is lower than $129,776.06. Score another one for the short-term loan.

Ordinarily, this is where the analysis stops...and hence the faulty conclusion drawn.  Add to this the "fact" that you will get out of debt 15 years faster and the case is a slam dunk.  Or is it?

Not if we take a look at what actually happens to the person who takes this 15-year mortgage.  Remember the conditional statement that prefaced the argument in favor of a 15-year mortgage:  "If you can afford it...."  In fact, the short-term mortgagee is paying a note 49.8% higher than the 30-year borrower, $1,372.52 versus $916.05.  This is a $456.47 per month increase.

But that is not a problem since we assumed the person could pay the higher note.  The real question rather is: Who is more likely to have additional resources to save and invest?  If we assume that these people are of equal means (and we will assume this or the comparison will have no value), then clearly the longer term mortgagee is MORE likely to save money.  This is real world issue number one: People have limited resources and must make the resources stretch to cover multiple items.

So, let's assume that the 30-year borrower does indeed save some money, the $456.47 per month that he is not paying in mortgage expenses.  And let's assume he does this for 15 years at 5%.  How are the two borrowers positioned now?

Well, the 15-year mortgagee just got out of debt by spending $247,054.24.  Let's hope he never hit any bumps in the road and never needed cash along the way since all of his available money was going to pay off debt...and he wouldn't want to incur any others!  

But the 30-year mortgagee over that same time frame would have accumulated $122,632.43.  Yes, he would still be in debt, but throughout the first 15 years of the mortgage he would have had money available for any issue that arose as compared to his counterpart who would not have.  This is a big deal in the real world because it will keep you from getting into a cycle of debt.  That is why I advocate "becoming your own banker", but I digress.

At this point, if we compare net costs, the short term borrower is out $247,054.24, the total cost of the loan, while the long term borrower is out $42,256.57 in net costs (this total is derived from taking his total payments over 15 years, $164,889, and subtracting his accumulated side fund, $122,632.43, but we must recall that he still has outstanding debt which we will address in a moment).  

But now we are starting to see the unintended consequences and real world dilemmas and why they are so important.  In fact, if we revised the mortgage question to more accurately depict the likely outcome of the arrangements, then the "better" of the two choices begins to shift.  For example, if I proposed to you:

Which would you prefer a lesser note that allowed you to save money on the side to create an emergency fund, invest for retirement and handle all future financing needs (this is a biggie because it keeps you from incurring new debts!) OR a higher note that will keep you from saving anything, disallow an emergency fund, may propel you into new debts, but IF IT DOESN'T then you will be debt-free in half the time?  Which would you choose?

It is at this point that the 15-year mortgagee throws out their last hoorah, "But I will be able to save my entire house note after I've paid it off!"  That's true, but rarely done since they are usually further in debt or not disciplined enough to start saving the note...and wasn't the alleged point of the short-term mortgage the thrill of being "debt free" so you could spend all that money!

In any case, let's compare the claims.  So flash forward another 15 years.  The 30-year mortgagee has continued to save his $456.47 per month, but now the 15-year mortgagee got serious and started saving $1,372.52 per month over that same time period.  Both earned the same 5%.  So what are the side funds worth for each person: $382,378.35 for the long-term borrower, $368,731.89 for the short-term borrower.

It is still true that the short-term borrower experienced less costs, around $70,000 less, but the pre-paying of those costs came at a price.  And again, let's pose the mortgage question in a different way and see which one you'd opt for:

Would you rather have:

1. A 30-year note of $1,372.52 with an end value of $382,378.35? (The net effect of the 30-year mortgage); or
2. A 30-year note of $1,372.52 with an end value of $368,731.89?  (The net effect of the 15-year mortgage).

Now be honest!

But what is proposed to me repeatedly is option number "2" despite the poorer performance, the pitfalls along the way and the real world dilemmas that it presents.  But that's the power of bad financial information and the failure to address unintended consequences.

Finally, my experience tells me that the short-term borrower will never achieve even the value specified here ($368k) because they will end up in a cycle of debt that forever prevents them from "saving that house note" once the place is paid off.  On the other hand, it is quite likely that the long-term borrower will both achieve this value ($382k) and exceed it because they have appreciated the value of cash flow, began regular savings early and, if they become their own banker, managed their debt for additional savings.