HELPING PHYSICIANS ATTAIN FINANCIAL SECURITY
By Robert M. Doroghazi, M.D., F.A.C.C.
Only about one-third of my study time is spent reading on investing and finance; mostly periodicals, such as Barron’s, the Wall Street Journal, Forbes, and The Economist. I also read books on current financial and investing topics or financial history.
Two-thirds of my study time is spent on non-financial topics. I read some natural history, science, art and archaeology, etc., but the vast majority of my time is spent reading history. Not only do I find this most interesting, but as it relates to this discussion, there are rarely, and I mean rarely, truly new things that happen. The vast majority of our current problems are just variations on themes that have been played out worldwide, in every epoch of the course of humanity.
I just finished Conquest, Tribute and Trade: The Quest for Precious Metals and the Birth of Globalization (Howard Erlichman, Prometheus Books). “(This) is a very modern tale of business and economic history that just happens to be set in the 16th Century, when Europe’s spectacular geographical conquests laid a foundation for western dominance. (It) draws almost unbelievable parallels…to our modern world, including…Spanish state bankruptcies of the…1500s and the colossal government bailouts of 2008-9”.
“The basic problem for (the Spanish Emperors) the two Felipes, following in the footsteps of…Maximilian and Charles V, was that they spent (and over-spent) their metallic windfalls as fast as they were received. Soaring royal revenues were somehow always exceeded by soaring royal expenditures”.
RMD comment: The US used to be the richest nation in the world. Now we are the greatest debtor. The more revenues that came in, the more we spent. We could afford everything; a huge military so we could be the world’s policeman, interfere where people don’t want us, and social programs that cover everything, and that seem to be expanding exponentially.
Well, we couldn’t afford it then and we can’t now. If general accounting methods (including the un-funded liabilities) were applied to our budget, we would be bankrupt (we are, we just don’t want to admit it).
As I have been stressing since the beginning of my financial writing, thrift is the most important factor in building wealth and debt is the greatest destroyer of wealth. This applied to monarchs in the 16th Century and it applies to governments in the 20th and 21st Centuries.
“”Charles financial position deteriorated so badly in 1537 that he even resorted to currency devaluation….the official gold-to-silver ratio (was widened) from 10.1 to 10.6:1…14% debt was exchanged for 6% juros (at least initially low risk, high quality government certificates)…as debts mounted and went unpaid, outstanding loans were consolidated and converted into even larger amounts of juros…with severe cash flow problems, (his) solution was to convert as much short-term debt as possible into lower coupon juros…the juros exposure was beginning to get out of hand”.
RMD comment: Currency devaluation is the time-honored way for governments to repudiate their debts. Even with just 2% inflation per year, your money has lost half of its value in 20 years, and that doesn’t include the taxes you paid on the gains. Lenin, a man well versed in creating havoc, said the way to destroy a society is to destroy its currency.
The debt consolidation tricks sounds like what the governments of Greece, Iceland, Ireland, Portugal and Spain have been doing.
And it sounds like us; just rolling over and rolling over the debt and issuing more and more paper. When these debt spirals start, you are just throwing good money after bad.
“The emperor’s borrowing costs had risen with his debt burden”.
RMD comment: Even then there were “bond vigilantes”, really just a semi-pejorative term for rational investors who demand a higher rate of return for a shakier investment.
As it pertains to the present time, the Federal Reserve is buying government bonds to keep interest rates (artificially) low. Housing is already dead. Any significant rise in rates would cause it to collapse. Same with states and municipalities (the muni-bond market is in big trouble, see p 4, the chart of MLN, Market Vectors Long Municipal Bond ETF. Supposedly low-risk municipal bonds have lost more than 10% of their value in barely three months. That is the chart of an asset that is crashing).
Last year an obscene 40% of the Federal budget was borrowed money. Any significant rise in interest rates would just require more borrowed money, which would lead to higher interest rates, etc. Play this out for yourself and see where it ends!
“Over-taxed Spaniards on both sides of the Atlantic did not need an increase in the alcabala (sales tax) during the recession of 1570-8”.
CNN.Money, 1/12/11. “Illinois lawmakers OK massive tax hikes. Legislature, facing $13B budget gap, passes a 67% hike in personal income tax and a 46% boost in corporate levy”. CNN.Money, the next day. “Illinois tax hike will hurt companies”.
RMD comment: This is one of the main points of this letter: revenues are not the problem; spending is the problem. Gutless politicians (the people we voted into office) will try to raise taxes, sell assets, borrow more (mortgaging the future), and anything else they can think of, rather than address the real problem; that they are spending too much.
We will not see a viable solution to our budgetary problems until we address how much we spend.
RMD
Should you think my comments are alarmist, consider these from Roundtable members in today’s Barron’s.
Bill Gross, head of bond giant PIMCO. “The developed world is coping with the excesses of the past 20 to 30 years…The question is, can a debt crisis be solved with more debt?...Printing your way out of this…is possible…but the solution isn’t to create paper. It is to create goods and services…
I don’t know if the US has reached a desperate point, but it is employing instruments and vehicles and policies that smack of desperation (RMD comment: read that again and think about it. Bill Gross uses the word desperate)…We are looking at a currency that almost certainly will depreciate relative to stronger currencies…
Americans are amazingly unsophisticated when it comes to currencies…(it) is the critical question for 2011 in terms of where to invest”.
Felix Zulauf says “Other industrialized countries…have focused on cutting deficits. The US alone hasn’t addressed this problem…Public deficits have been supporting this country for the past decade. The country has been suffering from under-saving and under-investment…
It will take several years…to realize the Fed’s current policies are highly inflationary. They will lead to a debasing of the currency…
At its 1980 peak of $850 per ounce, gold represented 3% of global market capitalization. Today it is 0.6%. The price has a long way to go.
Marc Faber says “the Fed will keep real interest rates negative as far as the eye can see. (This) amounts to expropriation and destroys one function of money: to store wealth….People shouldn’t value their wealth in dollars (see Interim Bulletin #130A, 11/11/10)…
My preferred assets are equities and hard assets; real estate, commodities, precious metals and collectibles”
Wall Street Journal, 1/10/11. “Market for Vacation Homes is on the rise. Sales in many vacation communities across the US soared to levels not seen since boom times, driven by deep discounts, cash purchases and buyers’ rising stock portfolios”.
RMD comment: In general, volume (increased sales) leads price. But it’s going to take more than this to get me interested in real estate any time soon. And also consider that last year there were more than one million foreclosures nationwide, a record.
What do you think will show greater appreciation over the next 1, 3, and 5 years; the average vacation home or gold?
The market has been up 7 weeks in a row. That’s a stretch.
Be sure to look at the chart on the next page. It’s pretty scary.
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