In Economics Made Simple – Part One, we saw that governments just love to mess with the money supply.
One school of economic thought, the Keynesian School, think that’s a great idea.
(Before you attribute Keynesian manipulation to the “right” or the “left,” understand that they ALL do it. It was Ronald Reagan who kicked off the bubble that’s dominated the US economy since 1980.)
The other school of economic thought thought, the Austrian School, says the government should stay the heck out of manipulating the money supply.
Why?
Because it doesn’t work in the long run. The piper always has to be paid and in the meantime, the waste and excess that is spawned during bubble times is not good for society or real wealth building.
I’m in the Austrian school, all the way.
Who cares?
Does the broader economy matter to the individual entrepreneur?
Does a bear s*** in the woods?
True, during a bubble time, the state of the economy might not matter that much. In fact, a lot of loony ventures that wouldn’t work in normal times, thrive during bubbles. Ignorance can be bliss – and profitable.
But when the bubble goes the other way and things tighten up, intelligence (i.e. being interested in the wider world around you) pays obvious dividends again.
First, the little question
Let’s take care of the little question first…Is the recovery real?
To quote a sage friend of mine: “This recovery has everything going for it – except customers.”
Sorry to be the bearer of bad news, but there is no recovery. Bogus pyrotechnics on the stock market does not mean that the marketplace – the place where real people buy and sell – is in good shape.
Sure some businesses are flourishing. Well run, well positioned business, in “fortunate” niches are doing great, but the vast majority of of business activity – and buying – is down across the board.
…And the problem is structural: heavy debt overhang taken on when blue skies looked like they were going on for ever and ever.
If you get your business news from CNBC, you’re going to argue with me on this point. OK, I give up. Larry Kudrow and Jim Kramer are financial geniuses. You win.
The real question
The real question is will the insane excesses of recent years lead us to inflation (or hyperinflation) or deflation (price crashes.)
The average thinking person assumes that the bailouts are inflationary. It’s a reasonable position to take – unless you include one variable: scale.
Here’s what I mean…
If someone turns on a garden hose and just sprays water in the air all day and night, that would seem pretty wasteful, wouldn’t it?
But step back and look at the bigger picture.
What if that same person is spraying his garden hose in an attempt to fill up Lake Mead after Hoover Dam has collapsed? (Thanks Robert Prechter for this analogy.)
Now a completely different picture emerges.
It won’t work
Yes, it’s a shame to waste all that good water AND it’s nowhere near enough water to work.
Yes, it’s obscene that first Bush and then Obama have been shoveling untold trillions of dollars down a black hole trying to “shore up” the banking system AND as big as these bailout numbers are, they are absolutely dwarfed by the size of the problem.
The problem: Money is disappearing from the economy faster than it can be replaced. Where is it going?
Well, a $1 million house in Miami is now worth say $395,000. $695,000 in value just went up in smoke. No one else made it. It’s just gone. Poof!
The bank that made a loan based on the $1 million valuation counted on getting its money back some day and with a profit no less. The owner counted on being able to sell the property and capture the profit or borrow against it.
No more.
Multiply that by tens of thousands of properties in Florida, mix with fifty states, throw in commercial real estate, and a countless number of enterprises that are selling less, earning less and therefore worth less and you’ve got a massive exit of dollars from the economy that even reckless bailouts can’t fill.
It’s all supply and demand.
A dollar shortage means cash is more valuable, NOT less. When cash gains in value, prices go down. Inflation is the opposite. Dollars become less valuable so the prices people demand go up.
The 1980’s, 1990’s, and 2000’s were a massively inflationary period – in real estate, in stock prices, in commodities, in business valuations – now we’re coming down the other side.
Why you’ll never hear this on TV
This is not simple stuff which is why most people get it wrong.
You’ll rarely hear this scenario being discussed intelligently or in depth.
Why?
It’s not profitable for TV channels to talk about it.
Take CNBC as an example (please). It sells its airtime to one-million-and-one financial services companies, all of whom want you to turn your cash into their financial products.
Even if the smartest thing in the world right now (and for the time being it is), is to keep your cash in US dollars and in safe places, CNBC will NEVER tell you that because its advertisers would have a fit.
They’re pitching, not reporting or teaching
Speaking of “fits,” notice that CNBC’s stock picking rock star Jim Kramer tells people to BUY-BUY-BUY and SELL-SELL-SELL, but he never tells us about the third option which is to go to and stay in cash until things blow over. And you know what, he never will.
To translate this into practical advice: Don’t borrow to buy things at TODAY’S prices and only make big purchases (like real estate) if you absolutely have to – and you don’t, you can always rent.
If you continue to “play” the market – and anybody who owns stock is “playing the market” even if it’s in a conservative mutual fund – it’s best to realize you’re playing with a grenade whose pin has been pulled. Play if you must, but be ready to move fast or face an unpleasant outcome.
If you own a business, tighten up. If you can expand without taking on obligations, go for it, but the theme of the day is batten down the hatches. Get smart. If you’re going to invest, invest in improving your game.
The good news is that flexible, well run, marketing-savvy enterprises are going to be the best place to be.
Guiding lights
I’ve mentioned before that my guide to these times is Robert Prechter. (Not-so-coincidentally, you will see my name on the cover of the latest edition of his prophetic book “Conquering the Crash.”)
I’m also a big fan of Hugh Hendry, a hedge fund manager from the UK who was not fooled by the bubble and not only survived the 2008-2009 crash, but made money during it.
This is not simple stuff, but when you wrap your mind around it – and you can if you want to – you’ll be living in totally different (and better) world than people who are getting their info from CNBC and other totally unreliable sources.
It’s worth taking the time to get it right because fortunes will be made by people who get this right.
This video which I found on YouTube explains it as well as I’ve seen it explained anywhere (and after you watch the video, take advantage of the free report link at the bottom of this article.)
P.S. If you’re still following this, you’re probably interested in turning all this into some practical advice. Last summer I wrote and gave away something called the Independence Day Blueprint.
I was motivated to write it because I noticed that a lot of my successful students were spending like there was no tomorrow. Others were doing “smart” things with their money like piling it up in mutual funds. Ouch!
So long before the crash starting in 2005, I started beating the drum and warning about the coming inevitable credit contraction.
Some listened, some didn’t. Those that did were happy, I know at least three families that saved multiple six figures because they considered what I was saying seriously, told their broker to stuff it, and put all their money in cash (cash money market funds, treasury bills, savings accounts in highly rated banks.)
This summer I put all my ideas into the Independence Day Blueprint and planned to give it away on the 4th of July to anyone who asked for it. I did – for that one day. Then I took it down and planned to come back later and market it.
Then the reality of my schedule hit me. I’m never going to find the time to market this report for what it’s worth.
So rather than have it sit in my digital filing cabinet where it won’t do anybody any good, I’m making it available to anyone who wants it for free.
But this is it. Get it, read it, use it.
To get your free copy:
Click here for Independence Day Blueprint.
– Ken McCarthy
P.S. For over 25 years I’ve been sharing the simple but powerful things that matter in business with my clients.
If you’d like direction for your business that will work today, tomorrow and twenty years from now, visit us at the System Club.
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