HELPING PHYSICIANS ATTAIN FINANCIAL SECURITY
By Robert M. Doroghazi, M.D., F.A.C.C.
The US Constitution; Article I, Section 10, Clause 4 and 5 say “(No state shall…) emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts”. The framers of the Constitution defined our money as gold and silver because they were well-aware of the perils of paper money.
Later the Treasury began to print paper money. But gold and silver were still in circulation. People had faith in this paper money because the dollar was still “as good as gold”. This paper money was convertible on demand at the Treasury for specie (coined gold and silver).
The first chink in this wonderful system established by our forefathers was the establishment of the Federal Reserve in 1913. The politicians had discovered a way to free themselves from the discipline of “hard money”.
Then in 1933, Roosevelt pulled the trigger. He closed the banks and called-in (confiscated) the gold. It was made illegal to own gold and paper money could no longer be converted to gold on demand (Although foreign governments retained this privilege until 1971. DeGaulle wanted gold for France’s rapidly depreciating dollars and Nixon basically told him to stuff it. The last link to the discipline of the gold standard was broken). Silver still circulated, and paper dollars were “Silver Certificates” (Remember the dollar bills with the blue seal? They were backed by a silver dollar on deposit at the Treasury) but in 1964 we went off the silver standard.
Now gold and silver no longer circulate and paper money is not convertible into specie. You have to be at least 85 years old to remember when gold was in circulation and almost 50 to remember when silver circulated. (When silver was going out of circulation in the late 60s, the quickest way to pick out the silver coins was to look at a roll of coins from the side. The silver coins were a uniform white, whereas the clad coins were a darker, non-uniform color). Unless they collect coins, I doubt if many of the younger generation have ever seen a gold or silver coin, much less held one in their hand.
If you buy a US Treasury Bill or Bond it is backed by the full faith and credit of the Treasury. You have a claim on the revenue stream of the United States of America. Now take a dollar bill out of your pocket. It is a Federal Reserve Note. Legally, I’m not sure what that means. In a practical sense, it really doesn’t mean jack.
Consider this; the only reason you will accept paper money in payment is because you think you can pass it onto the next person. If the other person won’t take it; you will quickly discover it is intrinsically worthless.
The framers of the Constitution were well aware of the seductiveness and manipulability of paper money. That’s why it was proscribed. I honestly believe that if they saw the perverse system and the financial problems we have now they would have every right to say “I told you so”.
I again recommend that the core of your entire investment portfolio be US-minted gold coins that you keep in your personal possession.
RMD
A bonus is a bonus. I’m surprised I haven’t made this point before; either in my book or in this newsletter. You may have every right to expect a bonus, but it is not salary, it is, by definition, something extra. I make this in the context of not putting yourself in the position that you have already spent the bonus before you receive it, or that you must have it to pay a bill, such as your taxes, a mortgage payment, or the kids’ college tuition. As Jesse “The Body” Ventura says in “Predator”, “You would be in for a world of hurt”. You haven’t received a bonus until it is in your hands.
As a corollary, don’t use a bonus to buy something you never would have otherwise purchased; such as a boat. That is just stupid. A great use for a bonus would be to pay off debt. $10K would be about a year of principal on many people’s mortgage. This same advice applies to any unexpected large amount of cash, such as a tax refund, inheritance, or proceeds from sale of an investment.
This last Thursday we talked with a couple who are recent subscribers to this newsletter at Wine Club at the University. Their son is a high school senior. He was interested in the recent issues of this newsletter on the economics of Advanced Placement Courses and on helping your children save and introducing them to compound interest by opening and helping them fund a Roth IRA.
RMD comment: To be truthful, I was really flattered. This epitomizes the goal of this newsletter: to provide advice that, over the course of a year, should address just about every financial/investing issue you should encounter; advice you will find nowhere else.
Wall Street Journal, 9/1/10. There is an editorial by Robert Rubin and Julian Robertson entitled “Bring back the Estate Tax Now”. They suggest that the 2009’s regime, with a top rate of 45% and a $3.5M individual exemption ($7M for a couple) be brought back. Their reasons are 1) the government needs the revenues and 2) to preserve our meritocracy and the potential for upward mobility.
RMD comment: I will address only #2. I completely agree. With no tax on huge estates, our country could quickly be controlled by a hereditary financial aristocracy. Say that Warren Buffett or Bill Gates weren’t as charitable as they are. At a 7% annual return, money doubles in 10 years. In just one generation (20 years), $50B has grown to $200B. If this wealth were passed on for another generation, the power it wielded could (would) have a perverse effect on our financial system, our society, and our government.
I also believe we should have an inheritance tax rather than an estate tax (the money would be taxed dependant upon how much you receive, rather than how much is in the estate), and the limits should be increased so family farms and similar businesses can be passed on. But I also believe that mega-estates must be taxed.
The signer of the US Constitution with the coolest name has to be Daniel of St Thomas Jenifer (note there is only one “n” in Jenifer). I read a lot of history, have an excellent memory (at some time I will write a newsletter on this subject) and when interesting facts come along, I do my best to remember them, but I must admit I do not ever remember seeing this name before. Rather than trying to summarize his bio here, I suggest you go to Wikipedia or some similar source, and read about him.
In two hundred years, Daniel of St Thomas Jenifer will still be noted as a contributor, admittedly in a very small way, to the greatest governmental document as yet written. I don’t think history will be as kind to Presidents Bush and Obama or Alan Greenspan. It’s usually better to be the least talented guy on the best team than the best guy on the worst team.
In Issue #108, I suggested that a portfolio that was long gold and short an equivalent amount of the S&P 500 would outperform the S&P 500. On that day (June 7), the S&P 500 closed at 1050; gold closed at $1215/ounce.
In Interim Bulletin #111B (June 30), I proposed what I called the “RMD Index”. This was a $1M portfolio with A) 100% cash, B) fully invested in the S&P, and C) 50% short the S&P 500 and 50% long gold.
Currently:
A) Cash $1,000,000
B) Fully invested S&P 500=1104 $1,051,428
C) 50% short S&P 500 50% long gold ($1246) $987,043
RMD comment: Gold is up, but the S&P 500 is up even more. Right now, buy and
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