HELPING PHYSICIANS ATTAIN FINANCIAL SECURITY
By Robert M. Doroghazi, M.D., F.A.C.C.
How Fiat (Paper) Money and Debt Destroy Wealth
There was a post on http://www.321gold.com on 7/13/11 by Kenneth Gerbino entitled “The Gerbino Principle of Liquidity”. He notes that leading up to the 2008 financial crisis in the US, the great western industrial societies were awash in cash, money, credit and liquidity, yet there was a liquidity crisis resulting in a massive destruction of asset values (i.e., wealth). His basic conclusion is “more money actually leads to less liquidity—not more—in a modern fiat paper money economy”.
Gerbino notes that in 1960, the value of stocks, government and commercial debt, and residential real estate (The value of commercial real estate was not available. It is the smallest of the assets classes, and makes no difference in the totals) was $1.7T. The money supply (M1) was $144B, resulting in an 11.8 to 1 ratio of assets to liquidity.
Since 1960, a 1,250% increase in money supply to the current $1.9T has been accompanied by a 4,000% increase in asset values (including commercial real estate of $6.5T) to $75.9T. The asset to liquidity ratio is now 40 to 1. (With that degree of leverage, a mere 2.5% drop in asset values results in a total wipeout of equity. Think Bear Stearns, Lehman Brothers and Merrill Lynch).
That is what caught my eye, why I think he is right, and why I feel the point is worthy of discussion. I have continually pointed out that debt destroys wealth, and recently devoted two issues to the causes of wipeouts, noting that debt is the most common denominator. I believe Gerbino’s real insight is to explain how paper money, created from nothing, causes the whole system to be leveraged, and if people lose confidence, and the leverage is unwound, the system collapses.
The more bailouts (see below), the more paper money that is created, the more fragile our financial system (because of the greater leverage) will become, and the greater the ultimate destruction of wealth. I suggest:
1) You must own gold. Think of your wealth in terms of ounces of gold, not in paper dollars. Remember: gold is not going up: the value of your paper money is going down.
2) Do not take on any debt, and pay off what you have. Debt makes you vulnerable.
3) Un-leveraged assets will preserve wealth. A home, a car, a side of beef will still be a home, a car, and a side of beef. How they are measured in paper dollars is only relevant if you don’t own them free and clear.
4) Do not loan your hard-earned money to others: If they can’t repay, or if repayment is in depreciated paper money, you lose. Decrease your allocation to fixed-income. I cannot think of a more dangerous investment than a 30-year government bond.
RMD
Gerbino provides an excellent example to illustrate my point that inflation is the most insidious and destructive of taxes.
In 1960, the average teacher’s salary was $5,175 and the average home was $12,700 (My parents purchased the home where my mother still lives in 1956 for $14,950, and had it paid off in 1959). The average home was about 2.4 times the average lower middle class teacher’s salary.
Since 1960, the average teacher’s salary has increased 9.7 times, while, even after the sell-offs of the last few years, the average home price has increased 21 times, making the current average home price about 4.5 times the average teacher’s salary.
This is how inflation (really, paper money) destroys the standard of living. The rich can buy gold and silver and find other ways to protect their wealth. The poor have little to nothing to start with; so little to lose. It is the middle class that is crushed by inflation.
I received a great letter from a new physician subscriber which contains so many points worthy of discussion that I will “syndicate” them in the next few letters. I have found that stories and anecdotes are often more useful than statistics in making a point, and more likely to be remembered.
“My husband and I moved to LA to complete his (surgical sub-specialty) fellowship. I became irritated with my husband operating in the middle of the night with his senior attending on “add-on” elective cases. I was mystified—why would a senior attending at a prestigious university be operating in the middle of the night by choice? He also gives talks for big pharmaceutical companies and consults on the side.
After we had dinner at his beautiful $1M+ home—the pieces gradually fell into place. Despite being in one of the most highly compensated medical specialties he is short on cash. He is a great person and a great physician and he is in his 50s operating in the middle of the night to make extra cash. I have to tell you this shocked me.
A junior attending is paying $70K per year in rent (to save a down payment for a home) and drives a Porsche. One of my husband’s co-fellows (whose wife is also a physician) just purchased a $1M+ home and are worried how they will pay their nanny. Witnessing all of this scared me.
We have kids and I want financial security. I searched for books and found yours. I couldn’t believe how helpful (and amusing) it was (RMD comment: We don’t use testimonials in medicine, but when writing an investment newsletter, they are encouraged). It helped me understand that although we are coming out of our fellowships the decisions we make in the next 5 years are truly the ones that will determine whether we can retire early or will be up in the middle of the night in our late 50s”.
RMD comment: Again, I emphasize to you—Thrift is the most important factor in building wealth. It is because of situations such as these that I wrote my book and write this newsletter. Unfortunately, but not surprisingly, the people who could most use my advice are the ones who won’t.
When we went to the Lake of the Ozarks in 1996 to look for a condo, I was amazed by the amount of money in real estate and boats. I was at the top of my earning capacity, and wondered how so many people could “afford” so much more than I was willing to spend. Then I asked myself: “How much do they own, and how much does the bank own”? When you see people, such as the physicians above, who appear to be living above their means—they probably are
Years ago I came to the conclusion: What is obvious to some people is not obvious to most people. It sounds elitist, but as time has gone by, I believe it is one of my more original observations.
Wall Street Journal (7/20/11). “Goldman’s (Sachs, GS) nimble traders routinely put the firm at the top of the heap over the last decade, notably during the financial crisis. But executives said Tuesday that economic and political turmoil around the world has caused the firm to lose much of its appetite for taking chances”.
RMD comment: Pros really don’t care the direction of the market. They can make money if it goes up or down by going long or short. This tells me that “The Masters of the Universe” don’t know the direction of the market and, more importantly, they are scared; unwilling to expose their capital to a fragile financial system.
Same WSJ. There is a picture (p A15) with a leopard on the back of a forest guard, with its gigantic jaws clamped around the poor man’s neck. There are 3 soldiers less than 10 feet away, their rifles being held casually, none aimed at the leopard. The caption reads “Before being caught, the leopard mauled six people”.
RMD comment: There is not an animal on the face of this earth more important to me than a single hair on the head of any human being. Would you stand by idly with a gun in your hand while a wild animal tried to kill someone?
Wall Street Journal (7/22/11). “Euro-zone leaders agreed Thursday on a…bailout for Greece and new steps to prevent its debt crisis from metastasizing across the Continent…
The meeting also produced a stark and open-ended declaration: The wider euro zone is committed to financing countries that take bailouts…for as long as it takes them to regain access to private lenders”.
RMD comment: I again suggest you read The Creature of Jekyll Island: A Second Look at the Federal Reserve (Griffin, American Media). This bailout after bailout after bailout is exactly what Griffin describes as the standard M. O. of the central banks. Rather than make people take their lumps, the farce is propagated until the system falls apart.
This might be your last chance to buy the precious metals. If gold takes off from here, it could be difficult to find a good entry point.
Also consider this: If anywhere along the way, you purchased just a single one oz US Gold Eagle because of my advice, it has more than funded your subscription to this newsletter. If you made 5 or 6 or 7-figure investments in the precious metals, as I know some of you have, you have made a very, very serious amount of money.
I had already written this when I received this email just yesterday.
“Your newsletter’s mention of TNH (Terra Nitrogen), and my buy, along with GLD, covered the subscription cost for the foreseeable future”. LH, MO
Son John gave me this idea. When I was in practice, I wore a suit to work every day. I had 6 winter suits and 6 summer suits. Physically and stylistically, the suits lasted 6 years, so I bought 2 suits (one winter and one summer) each year. I usually had 1 or 2 premium suits for special occasions.
Now that I am retired, I only wear a suit once or twice a week. “Dad, since every time you wear a suit now is a “special occasion”, just buy 3 or 4 premium suits.
RMD comment: The fewer suits you need (you can really apply this to almost anything), the higher the quality you should buy. You will always look sharp.
Diane and I were at the Lake (of the Ozarks) this last weekend. We ate at the bar at a place we’ve not been to before. We both noted that the bartender really busted his chops. I asked “Are you related to the owner, because you work really hard”. “No Sir” he replied with a smile of satisfaction.
RMD comment: Times are tough; folks like this, who work hard and have a good attitude, will always have a job.
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