"Thus, our national circulating medium is now at the
mercy of loan transactions of banks, which lend, not money, but promises
to supply money they do not possess.”
[Irving Fisher]
Below is the inverted pyramid structure that we use to illustrate our investment philosophy. At the base of the pyramid are the safest asset classes: being debt free and owning gold and silver.
These two asset classes are outside of mainstream analyses. Conventional thought would not even consider being debt free as an asset. To be debt free is to invest in your own freedom – in yourself.
Both categories are contrary to what most advisors would advocate: hence they are contrarian ideas. The reason why we stress both is exactly because they are outside of the “box” – outside the literal rules of “engagement”.
It doesn’t get any safer than being debt free and owning gold. Yet neither of these choices is employed by the majority of investors. Professional advisors do not promote either as being part of the recommended investment landscape. Which begs the question: why not?
We are reminded of Rodney Dangerfield’s admonition: “I can’t get no respect here.”
Owning precious metals is almost looked down upon with scorn. The 21 st century motto is: “borrow, borrow, and borrow some more. Shop till you drop.” To be debt free is to go against the crowd. It takes courage and confidence in oneself.
The New World Order in paper fiat land touts consumption over production – savings is unheard of. Once again the honest money system has been turned upside down, and with it the financial and economic systems as well.
Now debt is money and money is debt – a perverted situation at best. Illusion can easily lead to delusion, however. What first appears to be benign soon becomes maliciously unkind.
The reason why gold and silver are not recommended by most advisors is because it is “outside” of the established system – the legal/financial system. Gold and silver are not anyone’s debt – they represent true wealth without any strings attached.
To be debt free is even more unconventional. Debt is forced fed to us from the day we are born to the day we die, as if it were manna from heaven – when in truth it is a scourge from hell.
The United States has become the largest debtor nation in the world. We were once the largest creditor nation in the world. What happened?
The financial system of elite collectivists is what happened. Who do we borrow money from: the bankers. Who actually owns the title to most real estate, motor vehicles, and other assorted goods and loans: the bank.
It is in the best interest of the elite bankers to not only have us believe in debt – but to go into debt as far and deep as we can. And like lemmings we have responded in kind. We are up to our eyeballs in debt. The bankers are up to their eyeballs in the interest we pay them.
Bankers do not care if loans are paid off – including mortgages. What’s the worst that can happen – their clients who they have leant money to go bankrupt. The bank then repossesses the house and keeps all the money paid in to date on the mortgage.
Then the banker turns around and sells the mortgage to another unwary buyer. It is important to remember that it didn’t cost the banker anything to lend the money.
The bankers create the money out of thin air – out of nothing. In truth it is all just double-entry bookkeeping – one of man’s most infamous discoveries.
The bankers want us all to believe in debt – as it makes them wealthy. The tax man wants us all to believe in debt as it increases the amount of taxable “property” that gets assessed.
The government wants us to believe in debt because without it they wouldn’t be able to get away with profligate deficit spending. Special interest groups would not be able to be pandered to.
The government would actually have to get their financial house in order. I mean really - who couldn’t run a business if you were allowed to print your own money? Isn’t that what counterfeiters do?
To be debt free is to be “out” of the system – the system of debt servitude to the overlords of Lucre. Freedom from debt is freedom in deed – freedom with deed in hand.
To own silver and gold and to have no debt allows one to be free from the encumbrances placed on most individuals by the established system.
It also allows one not to leave a legacy of debt servitude to one’s children. Instead they are left free without any debt AND in possession of real wealth they have saved over time. That is a true legacy – debt is a curse.
So the first goal to accomplish is to try to pay off our debts. They all don’t have to be paid off at once – that is most likely not feasible. Consolidate your debts. Shop around for the lowest interest payments you can find.
Have a payment plan that allows you to pay off the debt earlier without any penalty. Then try to live below your means. Don’t go out to dinner or to the movies as much. Don’t go for a drive in the car just for something to do. The less you spend the more you will have to pay off your debt with.
The next thing to do is to save up an emergency fund that will cover all major bills and living expenses for six months. This can be put in a treasury only money market account where it will earn a good rate of interest while still giving you complete access by taking the check writing option.
Once you have paid down your debt and have an emergency fund then it is time to start thinking about investing. One of the first things one should do is to open up some kind of retirement account.
The earlier you start saving the more time it has to grow. This is where compounding can be very powerful and effective tool. The best expose on compounding I have read is by the venerable Richard Russell: Rich Man, Poor Man.
After an ira account has been set up you can then begin investing in your own personal account. No one accomplishes financial independence immediately, it is a learning process that takes time. All good things mature slowly. Haste makes waste.
As you can see the pyramid has different asset classes listed from the safest at the bottom to the riskiest at the top. We are providing a picture of it once again so the different levels can be clearly seen.
The soundest and safest investments are gold and silver and being debt free. The next category or level up from that is cash. By cash we are referring to Federal Reserve Notes – dollar bills that you have in your wallet or purse.
Now we are going to say something about cash or dollar bills that you will not hear very often – if at all. It is your choice to decide if it makes sense or not.
We strongly suggest that you read the series Honest Money on the homepage via the weekly installments. They will continue for months providing a complete theory and history of money.
The many articles in the archives will also fully explain in more detail then is possible here exactly what we mean when we say: a dollar bill is not a dollar.
The paper Gold's Hidden Secret: The Moral Hazard of Fiat Money explains the issue in detail.
Suffice it to say that a dollar bill is a Federal Reserve Note – a piece of paper that is a debt obligation. The dollar of the Constitution and the Coinage Act of 1792 is an honest weight of silver – 371.25 grains of silver known as a silver dollar.
One is an honest weight of silver – the other is a mere piece of paper – a promise to pay. There is no question in regards to this statement as the Constitution is quite clear – the Coinage Act of 1792 is quite clear; and the Federal Reserve Act is very clear.
The present system of paper fiat debt-money known as Federal Reserve Notes is questionable at best and arguably counterfeit at worst.
One thing is certain: Federal Reserve Notes lose purchasing power. Since 1913 when the Fed took over the dollar bill has lost 95% of its purchasing power – even the Fed admits this.
Another certainty is that the actual cash in your pocket is not the same as the cash BALANCE in your bank account. Cash in hand is more liquid then cash balances in the bank.
Banks only have at most 10% of the money supply on reserve (physically on deposit in the bank).
In aggregate, the banks do not have the remaining 90% of the money supply on deposit as reserves ANYWHERE. They do not physically exist. They are only entries on the ledger.
If more than 10% of all depositors went to the banks at the same time to withdraw their money – they would find their money is not there. That’s because it doesn’t exist.
In 1933, President Roosevelt had to call a bank holiday closing down the banks and all access to our money. Moreover, this was at a time when paper money was supposedly redeemable in gold and silver.
The banks closed because there was a run on the banks. Too many people were redeeming their paper money for gold. The bankers did not have enough gold to meet minimal obligations let alone complete (100%) obligations.
This is why it is called fractional reserve lending – because they only have a fraction of the money on reserve. The rest is just computer entries on the “ledger”.
So remember – cash in hand is different then cash on deposit. One is liquid; the other is solvent – but not liquid.
Either one: cash in hand or cash on deposit – is subject to the same debasement and loss of purchasing power. As we said – caveat emptor – now you know why.
Oh yes, one other little item we almost forgot: Roosevelt made it ILLEGAL for private individuals to own gold. Why – because he had to give the gold to the bankers to keep them from declaring bankruptcy.
If you have faith that Federal Reserve Notes are going to retain their purchasing power and that whenever you want to withdraw your money that it will be there – then cash is next up on the list as the safest of assets. This is why gold is the sovereign of sovereigns – it is no one’s liability.
You also might want to consider why the government finds the need to insure our money. Insured against what? In addition, where would the money come from to pay off a loss of money? Think about it long and hard.
Bonds are next up on the rung of our pyramid. A bond is a piece of paper – a debt obligation. The “safest” bonds are government bonds known as Treasury Bonds. The government sells these bonds to raise money. The two main ways the government obtains money is by selling government bonds and collecting taxes.
We direct your attention to our latest market wrap for the Week ending 4/13/2006 in which we said:
So there you have the long and short of it regarding Treasury Bonds. Franz Pick who was a very wise man referred to government bonds as “notes of confiscation.”
Next on top of Treasury Bonds are government agency bonds, and corporate and municipal bonds. Government-backed agency bonds are paper debt-obligations of entities like Fannie Mae and Freddie Mack.
Government-backed agency bonds are backed by the full faith and credit of the U.S. government - so that should make you feel much better. However, perhaps you should read the following - just in case:
Washingtonian Online - Fannie Mae
What Exactly Does Freddie Mac Do? By Brendan I. Koerner
Corporate bonds are paper debt-obligations of large businesses that borrow money from the public. The bonds are a claim on the money that individuals have lent to them. The borrower (the corporation) pays the lender (you) interest on the loan you extended to them.
Municipal bonds are mostly state and city bonds, and are tax exempt. Certain hospitals and other non-profit organization's bonds qualify as tax-exempt as well.
Note - the further the distance or "layer" you get away from gold at the bottom of the pyramid the more risk there is.
Stocks
Next up the rung on our pyramid are stocks. Stocks are paper receipts for buying part ownership in the corporation selling the shares or stocks of the company.
To raise money companies sell stock in an initial public offering (IPO). After the initial public offering, stocks can be bought and sold in the secondary market. Only the big players get to feed at the IPO trough
There are also American Depository Receipts (ADR's) or stocks of foreign companies listed here in the States, as well as closed-ended mutual funds, and exchange traded funds. There is also the large universe of mutual funds, where professionals do the work and you supply the money.
A very good rule regarding buying stocks is: Only buy stocks that pay dividends.
One exception is the stocks of companies that mine precious metals - like gold and silver. If gold and silver are in bull markets, the stocks are leveraged to the price of the underlying metal the companies mine. As the physical metal goes up in price the mine’s profits go up and the stocks go up even more.
After stocks comes the trading of currencies, the various types of money throughout the world. They each have a different exchange rate between one another, and especially with the U.S. Dollar. Collectively they make up the FOREX market (foreign exchange). The FOREX market is the largest market in the world.
Do not trade foreign currencies unless you already are a professional or are extremely experienced. This is very risky stuff and best left to the professionals.
Exchange is a complicated subject. Money is difficult enough to understand. Put together a bunch of different currencies exchanging for different rates and you have the elite bankers dream come true: confusion, misunderstanding, and lack of full disclosure.
The subject of exchange will be covered in detail as the weeks go by, as it is one of the secrets of the Temple the keepers do not want you to know. Money is a secret – exchange is the Holy Grail.
Last but not least comes the world of derivatives. What are they you ask? How do they work? Well that is one of the problems - nobody really knows for sure.
Sometimes they work and sometimes they do not. It all depends on how they are used. Long Term Capital had a bit of a problem with them and recently it was REFCO’s turn.
Derivatives involve futures, options, and other derived paper contracts on just about anything you care to place a bet on. They are supposed to be hedges to hedge various other positions in the market – similar to a bookie that off loads risk to other bookies. If you like the action of a casino, then these babies are for you. We recommend not giving them a second look.
Next week we will go into the paradigm themes and a brief discussion of the three (3) model portfolios.
"Because of 'fractional' reserve system, banks, as a whole,
can expand our money supply several times, by making loans and investments."