A Simple Man

I am a simple man with simple tastes living in a complex world. Once upon a time the world was a simpler place. We knew the food we ate and the road we traveled. We trusted the news and those who brought it to us. But simple is not in the nature of man.

Take the United States for example. The premise in the beginning was simple: freedom. But it wasn’t simple as soon as the words left the Founding Fathers’ mouths. Men wanted to be free while holding slaves. It led to Civil War. Women waited until 1920 for the right to have their voice heard.

But this story isn’t about morality. This story is about complexity and how quickly it enters life. A simple thought—freedom—was not as simple as it sounded. The nation needed to declare independence, fight a Revolutionary War and write a Constitution. And that was the simple part.

The Tax Code is the same. A simple concept—raise money to pay the government’s bills—turned into a colossus might quickly. For those reading thinking the tax situation was mucked up only recently, let me enlighten you.

President Franklin D. Roosevelt struggled with preparing an accurate return in the spring of 1938 (preparing his 1937 return) so badly he gave up and sent the Bureau (this was before the IRS) a check for $15,000 with a note that said, “I am wholly unable to figure out the amount of tax for the following reason:”

The President then gave an account of the income he didn’t know how to put on the return. He concluded his letter with, “As this is a problem in higher mathematics, may I ask that the Bureau let me know the amount of the balance due? The payment of $15,000 doubtless represents a good deal more than half what the eventual tax will prove to be.”

If you are ready to allege I am making the whole matter up, see for yourself with your own eyes. You can stalk more tax returns of the Presidents here.

Try to pull the stunt President Roosevelt pulled with the IRS and see how far it gets you. Needless to say, penalties would be applied by today’s kinder and gentler IRS.

To top it off, this was back in the days when taxes were simpler! Sure, Form 1040 was four pages, but there were no schedules or additional forms to attach. The instructions for the entire return was two pages! It was so simple even the President of the United States couldn’t figure it out. And he signed the tax bill into law!

The Growth of Complexity

Nature is simple in its most basic components. Keep chopping stuff into smaller bits until you get to the smallest indivisible piece of matter, the atom. But, wait! The atom can be chopped up smaller still into electrons, neutrons and protons.

Whew! That could have gotten out of control with complexity. Oh-oh! Scientists have been busy busting up the itty bitty parts of the atom into even smaller elementary particles. Now it get complex.

Humans love adding complexity, too. It must be in our nature. (Go ahead and make a face.)

Complexity isn’t always a bad thing. Building an automobile or airplane is complex. Modern medicine uses complex procedures to find novel cures to disease.

But complexity can get out of control. When nature gets too complex we end up with cancers.

When people get too complex we get the modern Tax Code, economic system and monetary policy.

Original ideas start very basic, dare we say, simple. Within seconds the complexity is mixed in. This isn’t a character flaw. Riding a horse to church is a fairly simple process. Once automobiles entered the scene complexity followed. Not only are cars complex pieces of engineering, society now needs to deal with the millions of vehicles on the roads. Traffic lights are not there to annoy you, but to keep traffic flowing. How else do you get endless traffic to all its destinations?

Complex Opportunities

I have made a living in the imaginary world of tax complexities. It’s paid the bills and gave me a good life.

At first it might seem a waste of an intelligent man’s life. Before you go down that road, consider: How would the government function without tax revenue? Our national defense, roads, bridges, public works projects and schools need funding to function.

I don’t work for the government; I work for you, protecting you from overpaying the government. And complexity is my greatest friend. The Tax Code is such a massive muddled mess you can drive a Mack truck through it. Given enough time you can find the answer to pay no tax for virtually every situation. Major corporations do.

Taxes aren’t the only area where complexity works in your favor. Machines and computers have made our lives so much easier that nearly everyone could work half the hours and not notice a change to their lifestyle.

You can see this in action within our own FIRE (financial independence, retire early) community with the plethora of side gigs and people retiring in their 30s. Our society is so rich a large number of people with very little effort can retire really young and travel the planet.

This brings up another complex area we can exploit: travel rewards. Once upon a time it cost money to travel. Today you can hack the system and get massive travel rewards to see the world for pennies on the dollar.

Get Rich by Getting Complex

You would think adding to the already complex mix would be your ticket to wealth. It isn’t. The trick isn’t more complexity; it’s breaking down the complex into small, easy to understand, components.

Complexity leads to error. How many product recalls do we hear of? How many times have governments and corporations been hacked? We can be too complex for our own good.

Take investing. You can go through all the hoopla trying to be the next Warren Buffett. You could be the next one! Or something as simple as an index fund can work miracles for your net worth without any effort on your part.

Credit card rewards are a massive mix of options sure to cause problems for those less than astute in the tracking of their credit card activities. Don’t pay the bill in full each month and trouble is sure to follow.

Yet, a simple spreadsheet can solve the problem. Several credit cards can be tracked simply to serve all your financial needs. Travel rewards are only the beginning. In a few weeks I have a side gig you are sure to want to hear about. I will show you a program where your credit cards could sprinkle $1,000 or more every month on you. You have to come back to learn this little side gig nugget. (Notice my talent at creating a cliffhanger? Hahaha!)

Taxes are the ultimate in complexity. Even this can be segmented into easier to understand parts. Maximizing retirement accounts is a simple and easy way to lower your tax burden. Investment property owners can take advantage of new tangible property rules to modify their tax outcome. Business owners can expense certain assets versus depreciation.

Play the Game

It’s all a game. The Federal Reserve manipulates money supply to manipulate the economy and prices. Congress can’t keep its fingers off the Tax Code for more than fifteen minutes.

Since life is a series of complex systems, both natural and manmade, why not use this to your advantage? Complexity isn’t going away. If anything it will get worse. Those who can break the whole thing down into the simplest parts will control the pot of gold.

Diet and exercise is a simple way to benefit the complex system called your body.

Investing regularly into broad-based index funds is the only proven way to match market returns over long periods of time. Forget Peter Lynch and Warren Buffett. Yes, you could be the next guy to perform miracles in the investment world, but odds are strong you will end up another schmuck who massively underperforms the markets with his dazzling displays in Fibonacci programs of complexity.

The index fund wins.

When I consult on tax and financial matters people always want more. The simple answer isn’t satisfying. Complexity always seems to be the right choice. It looks better. Lots of moving parts must be better. Complex must trump simple.

And then it ends in tears.

Complexity isn’t better. We live in a complex world. Simple solutions solve most problems.

The simplest answer—to stop worrying about things you can’t control—doesn’t seem right. But it is!

You will do wonders for your net worth when you find a way to break down the complex into simple components. This is where you will find massive financial opportunities.

When you get right down to it: I am a simple man who happens to enjoy seven layer cake.

 

Higher Interest Rates Will Cause Inflation

Fed funds historical rates.

There was a time not that long ago when people believed higher interest rates slowed the economy, caused higher unemployment, dampened demand and put pressure on prices. The Federal Reserve in the United States and Central Banks around the planet held this belief tight to the chest. When the economy overheated, causing inflation to creep up, the Fed would start increasing interest rates until demand weakened as consumers faced higher borrowing costs.

The opposite also held true. Low interest rates were thought to spark strong economic growth as lower interest rates freed cash in family budgets for more spending while encouraging businesses to ramp up production with cheap credit. Since the Great Depression this theory held true and worked, even if slowly, in controlling economic activity. Then we had the twin recessions of the early 1980s.

All Downhill from the Peak

Stagflation in the 1970s proved difficult to contain. Two OPEC oil embargoes ramped up prices on oil, causing virtually all goods and services to increase without growing real wages to fund the price increases until wages started getting cost of living (COLA) increases each year. Inflation for the first time was chained with a weak economy.

High inflation encourages spending because the money in your pocket will be worth less in the morning. Businesses faced an opposite effect. Funding capital expenditures became more costly as Paul Volcker, the chairman of the Fed, racketed up interest rates at a steep rate. Killing inflation would require painful medicine. A weak economy was crushed. Housing suffered most. Mortgages rates were comfortably in double digit territory if you could get a loan at all.

The medicine worked. Demand dried up from the higher interest rates causing inflation to abate. It was the last time interest rate changes were so effective on economic performance.

Good Medicine Going Bad

Lower interest rates followed the brutal twin 1980s recessions. The stock market and economy rallied strongly. Pent up demand for housing lifted housing stocks and the building boom was off. The 1981 Tax Code overhaul gave businesses additional deductions for capital expenditures. It might be hard to believe expensing of assets worked this way. Back then the limit on Section 179 expensing of assets was raised from $10,000 to $25,000. Small business was ecstatic.

Increased tax deductions for capital expenditures caused a boom in production which required more workers. Increased production reduced inflation while employment skyrocketed. The world was good with only one warning cloud on the horizon: debt.

Current chairman of the Federal Reserve, Janet Yellen (left). Former chairmen (from second left to right) : Alan Greenspan, Ben Bernanke and Paul Volcker.

The tax cuts were funded with massive amount of new federal government debt. The annual federal deficit broke $200 billion and kept climbing. The credit card was getting a workout.

The smart money believed the excessive government spending would pay for itself with higher economic output increasing revenues. That promise has never been realized.

Lower interest rates were the perfect medicine for housing and housing creates lots of job, most good-paying jobs. By 1984 the economy was on fire with 7.4% growth that year while inflation was still easing.

The Fed was concerned by the heady growth and started increasing rates until it triggered selling by program trading. The economy barely missed a beat. In 1987 the economy expanded 3.5% and another 4.2% in 1988. The 1987 stock market crash be damned.

High interest rates took some time to reduce economic production, but not real long. Lower interest rates had an almost instantaneous reaction in the markets and marketplace. From Wall Street to Main Street, these were the good times.

The first warning signs something was fundamentally wrong showed up in the next recession which began in July 1990 and lasted for eight months.

Interest rates trended down from 1982 onwards. Periodic rate increases gave the economy indigestion causing the Fed to resume lowering rates again. Each peak in the rate cycle was lower and the lows were lower.

And the recoveries were longer, less steep and left more people behind as many high paying jobs never returned.

As the economy began climbing in April 1991 it was like watching water boil or grass grow. Growth was a heck of a lot slower than the liftoff from the 1982 recession. Some blamed it on the first Gulf War. There was merit in the observation. People stopped spending as they sat around the television absorbing their newfound entertainment: bloodshed.

One More Party

The slow growth out of the 1990/1 recession eventually broke loose with several years of 4%+ GDP expansion at the end of the millennium.

The terrorist attacks of 2001 set the tone for the next recession. President George W. Bush came on television and encouraged Americans to keep spending to show the terrorists our nation could not be deterred. The Fed added liquidity to the system (lowered interest rates) to unheard of levels. People began wondering what would happen when rates went to zero. What weapon to spur the economy would the Fed have then?

Lower interest rates did the trick. The 2001 recession was so short and mild the U.S. GDP still expanded 1% for the entire year.

But the economic expansion lower interest rates should have caused didn’t work as well this time. What was a concern in the post 1990/1 recession expansion turned into full-blown panic. The stock market lost half its value. The new money the Fed created stopped the pain on Wall Street. Main Street was not nearly as happy. Job growth was steady, but low. Only two years of the first decade of the new millennium had GDP growth over 3% in the U.S.

The stock market climbed from depressed levels and eventually made new highs. It was an unconvincing multi-year rally.

Then all the printed money that disappeared into derivatives and sub-prime mortgages came home to roost.

Current Economic Cycle

When the first cracks appeared the Federal Reserve had very few weapons in its quiver. Interest rates were already the lowest in recent memory prior to a recession.

Housing was in bad shape after the 2008 recession. My house could’ve used a few new shingles.

The 2008 recession was fast and brutal triggered by a cascading set of events which culminated in money-center banks and investment banking houses on the verge of collapse.  Low interest rates were not enough to stop the bleeding. Rates were now touching 0% and the economy was still in dire straits.

The Fed toyed with negative interest rates and the Japanese, Swiss, and European Union Central Banks all sent rates into negative territory where the borrower gets paid (!) to borrow money instead of paying to borrow. The lender took all the risk for a guarantee to lose money to boot.

In the U.S. the Fed started early in experimenting with alternative methods of pumping more liquidity into the banking system. It worked, sort of. The economic recovery from the 2008/9 recession never exceeded 3% in any calendar year, the slowest recovery in the nation’s history. The growth once again was steady, but painfully slow.

Wages were slow to increase as family budgets struggled to pay the bills. Low wage growth kept a lid on demand, inflation and job growth.

The current economic cycle started from the lowest interest rates in this nation’s history. The federal government kept spending at a rapid pace, all put on the credit card. The current federal national debt is over $20 trillion and growing at around a half trillion more each year. And we couldn’t manage 3% growth.

Where is the Inflation

There have been more predictions all the money printing would cause rampant inflation soon than there have been calls for the world ending. Prices fooled the experts. A basket of goods followed by the Bureau of Labor and Statistics (BLS) hovered slightly above zero with a few extended periods of deflation.

For eight years the Fed kept interest rates at 0% and the economy slowly clawed forward a few percent per year. And I think I know why.

Typical human blaming a bovine again.

Low interest rates were the medicine our parents and grandparents used to spur economic growth. But this time WAS different! Technology had finally advanced so far it was hurting the economy! Or more accurately, technology was increasing faster than demand could absorb.

Low interest rates no longer increases demand. Even businesses didn’t spend aggressively in the low interest rate environment until the last few years. What business did spend went further than ever. $4,000 computers two decades ago now cost under $1,000 and do a thousand times more and faster. Business spent less because the cost of capital expenditures had declined for many technologies and the cost of capital was nearly free. If technology costs would have remained unchanged, businesses would have created and capital expenditure boom.

Low interest rates after all these years seem to cause deflation instead of spurring economic growth like the good ol’ days. And higher interest rates, if the economic model is truly turned upside down, should cause the economy to overheat and inflation to expand. Here’s why.

New World Order

Keeping Interest rates so low for so long must have caused a few academics to rethink the classical model. Low rates caused bubbles and imbalances in the markets without any money trickling down to Main Street to create jobs and more demand for goods and services. It was a Wall Street pile-up where average people paid the price for the sins of a few with control over the newly created money.

It’s called pushing on a string. More money pushed into the banking system either didn’t find its way into the general economy or people refused to spend it if they did get it. This isn’t all bad if the savinga rate climbs as households save and invest a larger portion of their income.

This wasn’t the case either. The savings rate climbed slightly, but not anywhere near the levels money creation would dictate if the money weren’t spent. Where was the money going? Nowhere. The money supply was larger than ever as the Fed’s balance sheet bloated, but it all sat in money-center and Central Bank vaults around the world.

None of this matters since it was a wasted exercise carried out by central bankers. The money was created, yet most never entered the economy. No wonder the GDP was anemic.

Low Rates Caused Deflation, Now Rising Rates will Cause Inflation

Most businesses today have plenty of capacity. Here is an example from CNBC showing how low interest rates caused a glut in domestic milk supplies. Low interest rates allowed factory farms to add capacity at virtually no cost, over supplying the market and driving down prices. Industry after industry is in the same boat.

Low interest rates encouraged the over production. Higher interest rates will increase the cost of capital expenditures for businesses, eventually reducing supply and increasing prices. This is the opposite effect we might expect in the past. Higher interest rates usually slowed the economy and if raised far enough still will. But the initial effect will be to decrease supply as marginal production is taken offline.

The experiment isn’t over and my supposition could be 100% wrong, not that my batting average is any worse than that of economists. Interest rates are slow on the takeoff this economic cycle. Eventually a trigger point will be reached, causing the economy to overheat and prices to climb faster.

The higher interest rates will not work any better controlling inflation than low interest rates encouraged economic growth.

My concern is the trend. Since 1980, interest rates have been cycling lower. We went negative this time around and the fed funds rate peaked at 5.25% during the prior economic expansion. This cycle the Fed worries the current 1-1.25% fed funds rate might slow the economy. Crazy!

If lower rates don’t encourage inflation and rapid GDP growth, then higher rates probably will. At no time in history has this amount of money ever been created and hyperinflation hasn’t followed. There are no indications of rapidly increasing prices on the horizon, however.

Higher interest rates might do the trick or we could head still lower this interest rate long cycle. Only time will tell.

The earnings stream from a company is worth more in a low interest rate environment. If inflation starts the rear its ugly head the Fed will worry and jack interest rates, causing business investment to slow, marginal production to be taken offline, causing prices to increase. Remember, you heard it here first. And earnings are worth a lot less as rates rise.

Just a few things to consider as you plan the family budget.

 

Side Notes

Ever wonder how your favorite accountant takes notes for a new post idea? Below are my notes used to prompt the writing of this post, unedited. Writers might find the evolution of an article of interest.

The old world paradigm hasn’t worked for a few decades now. The old school says lower interest rates spurs demand and eventually inflation. At no time in history has so much money creation taken place for this long without a massive upturn in inflation. What is different this time?

Lower rates lead to a muted economic expansion with slow growing demand and modest job growth. The economy should have overheated by now. Why?

Instead of inflation, technology made it easy to increase production and the cost of capital was near zero encouraging this capacity expansion. Everything seems to be in a glut. From oil to food, there is plenty enough to satiate 100% of demand. Low interest rates now seem to fund capacity expansion faster than demand.

Higher interest rates will increase the cost of capacity expansion and will lead to higher interest rates.

What worked in the past is turned on its head! The Fed reduced rates for a decade and printed money with reckless abandon to further spur demand. It didn’t happen the way the textbook said it would. Higher rates, the traditional fix for inflation, may also have an inverse effect from the expected norm. When inflation does show up as the Fed increases rates the Fed may overreact and keep raising rates to kill inflation. It will work if rates go high enough. Demand can be quashed by high interest rates.

It would be easier and less painful to consider doing the opposite of what we always did in the past. It might just work this time.

https://www.cnbc.com/2017/09/22/dairy-glut-in-us-leads-to-problem-of-spilled-milk.html

 

The Mistake Obama and Trump Both Made

Eight years ago Barack Obama was hitting full stride in his first term as President. The economy was in tatters. The banking industry was only beginning to come to terms with the level of bad loans they had on their books. The largest insurance company (AIG) required a bailout to survive; the largest domestic automakers needed a bailout to preserve jobs; nearly every bank required assistance and every money center bank actually took assistance to weather the storm. This easily could have been another Great Depression.

So what did President Obama do in this desperate environment? Why, tackle health care reform, of course.

Every President has a short window of opportunity to build a coalition at the beginning of their Presidency to pass a key piece—or if lucky, several pieces—of legislation. These are the tough issues, things like major infrastructure investments and tax reform.

President Obama chose health care reform. The country needed, and still needs, major health care reform. The country also needed economic stimulus. Badly! Unemployment was high, income inequality was expanding at a rapid pace, while the nation’s bridges, roads, sewer lines and water works crumbled.

It was an honorable effort, but a tactical error that prevented any additional large, and necessary, legislation. (Yes, I am aware banking reform was passed along with other legislation. This will all become clear in a minute as I illustrate why the most pressing legislation never happened.)

And President Trump is making the exact same mistake.

A New Man

Presidents get two terms max in the United States. After eight years it is time to bring in some new blood. If you loved the old guy, wave goodbye nostalgically; if you hated him, bid him good riddance. President Obama served his two terms and it was time for the new guy. The American people choose (well, the electoral college chose) Donald Trump.

Break out the confetti. A new guy on the job means another opportunity to pass significant legislation early in his first term. And what did President Trump choose as his key legislation? Why, health care, of course.

You would think Trump would have learned from Obama how easily healthcare can bog down your agenda. A litany of problems to solve devolved into a serious fight extending longer than anticipated when Congress went to work on a health care replacement plan.

Obama was lucky. He was able to pass major health care legislation, the Affordable Care Act. It was an improvement, but far from perfect. Many more people now have insurance and pre-existing conditions no longer leave you uninsured regardless of ability to pay.

The ACA also has serious flaws which need addressing. Insurance premiums are exploding and many markets have few, and in some cases no, insurance choices.

Eight years ago I explained to anyone who would listen that President Obama was making a mistake when he addressed healthcare first while the economy is what really needed attention. Fix the economy and the money would be there for healthcare reform, even a single payer option so coveted by the Democrats.

Donald Trump ran on a platform promising four key things: immigration reform, repeal/replace the ACA, tax reform and infrastructure investment. All four areas need attention, no doubt.

President Trump addressed immigration with executive orders which ended up bogged down in the courts. And there was no wall erected. The wall was a stupid idea anyway. We don’t need a wall. Remember President Reagan? “Mister Gorbachev, tear down that wall.” The Republicans should have been listening to their leader.

Then came the real first attempt at legislation. Tax reform and infrastructure would have to wait (and wait and wait) regardless how necessary legislation was needed. Health care, and more to the point, repeal of President Obama’s key piece of legislation, was first on the list. Once again it was a stupid idea with expected results.

Obama was lucky. With the economy in dire straits he was able to muster the votes to pass the ACA. With a large part of his political capital spent and the midterm elections costing the Democrats the majority in the House, any additional major legislation was impossible. To hell with the American people, not to mention the world economy.

Time to Play Trump

Time to let President Obama enter the history books and play the Trump card. Obama is no longer President and has no hand in passing future legislation.

The issue here isn’t politics. Your opinion of Trump doesn’t matter. He is the President and if things are going to get done he has to take the lead.

Contractors install conduit lines at Kirkuk Regional Air Base, Iraq, as part of a foreign military sales effort being managed by the Electronic Systems Center’s 853rd Electronic Systems Group at Hanscom Air Force Base, Mass. (Courtesy photo)

By picking repeal and replace (or just repeal) of the Affordable care Act it was inevitable the President’s agenda would struggle in the deep quagmire of mud the runs down the halls of Congress. It was also the worst choice Trump could make.

Trump watched Obama spend every drop of political capital on health care while the Federal Reserve was the only game left in town to deal with the economic issues punishing the country. It was a bad choice then; it’s a bad choice now.

Since it is always easier to play armchair President, I will share what Trump should have done to save his Presidency. (Obama should have taken the exact same path and he would have kept the House and passed serious additional legislation of his liking.)

Trump has it all backwards. He is right about the issues needing attention. Health care and immigration are important. Tax reform is beyond desperate need. And infrastructure is embarrassing the nation as our roads and bridges crumble like those of a Third World nation. We can do better.

If Trump would have hired me I would have advised a different approach, one that would have given his entire agenda a fighting chance of being passed.

My advice to the new President would be this: Turn the whole process around. Attack infrastructure first. A trillion dollars of infrastructure spending would have caused an economic boom with plenty of good paying jobs here at home. The increased economic growth would not stop at the jobs dealing with the infrastructure. High-speed transportation (once again so we can join the 20th Century—you read that right), better roads and updated airports would increase productivity.

Business would boom for decades. Trump would be an easy two-term President with this single change of policy. The advantages to the economy would continue into the foreseeable future.

The tax revenue would pour into the government coffers! Now you have the money to fund health care initiatives and tax reform. Who would argue with a President who produces such success? He would have been a demagogue! (Opps! That part he covered himself already.)

Think about it. The only way to move forward in this country is to start doing things differently. President Clinton wanted to tackle health care out of the gate and went nowhere. Obama managed massive legislation on health care at the expense of the remainder of his agenda. Trump is nearly out (if he isn’t already) of political capital.

Trump’s only chance to save his Presidency is to do a 180 degree about face, dropping all issues save infrastructure.

The Republicans might actually go along with it; the Democrats would salivate over the prospect. The Republicans are so desperate for a win (or any legislation to pass Congress) this crazy idea might just work.

An Open Letter to President Trump

Mister President, it is time to stop screwing around. Stop hiring idiots with no training or idea on how to run the U.S. government, the largest organization on the planet. Stop draining the swamp! The swamp is there for a reason. Get rid of all the wetlands and the wildlife dies! Time to let the swamp do what it does best. Use that to your advantage.

Focus on infrastructure. Provide massive financial support to each state to fund projects of their choosing. Also demand certain projects get attention. The trillion dollars of spending is spread out over many years. The increased tax revenue will lessen the impact on the deficit, but make no mistake, the deficit will go up to pay for this.

We need high-speed rail and other advanced forms of transportation to compete with the world. It is time to pull out heads out of our arses in this matter. Time to act like a world leader instead of playing catch-up all the time. Use your unique way with words to get Congress to do the right thing this time.

Part of infrastructure is rolling out an overhaul of the electric grid and converting our society to renewable sources of energy. We can always sell our oil to countries less enlightened. We will lead the world once the transformation is complete with the lowest costs of production. Jobs will be outsourced around the world to the United States as we will be the best choice for business.

Solar and wind energy must be part of the mix. Considering the entire infrastructure program, solar and wind installations will be a small part of the expense. Battery storage and transmission lines must also be including in the process. This will bring down energy costs for the American people and businesses.

Tax incentives for businesses and homeowners to invest in battery storage technology and energy production will power the economy forward without the government footing the entire bill. Citizens and businesses will be partners with the government in transforming this great nation of ours.

The rapidly growing economy will be the envy of the world. The expanding tax base and increased government revenues will allow for tax reform, and (gulp!) dare I say it, tax cuts.

Health care will be easier to tackle once the real problem has been addressed. Hard to get emergency medical care when the road is so bad you can’t drive on it or the bridge is out.

Immigration is the least issue, but does require attention. We don’t need a wall; we need an effective partnership with our neighbors so they have opportunities at home. There is nothing wrong with allowing people from around the world (even Mexico!) to dream of coming to America. Isn’t that what it is all about?

Gives you that warm and fuzzy feeling, doesn’t it, Mister President? And it is all yours if you can find a way to put the swamp to work productively. You do know how to make deals, don’t you?

Or, if you prefer, we, the American people, can sit around all day and complain about your performance.

Why Trade Wars Never Work

An old nemesis has returned to the United States and other nations around the planet: protectionism. These leaders, and the voters who bought their snake oil, falsely believe protecting their borders by building walls, taxing imports, claiming currency manipulation and threatening to dissolve trade agreements will bring jobs back home. They’re wrong.

What these well-intentioned people forget are the lessons of history. They forget about The Tariff Act of 1930, also known as the Smoot-Hawley Tariff, the one piece of legislation that hastened, accelerated and prolonged The Great Depression. People forget about the jobs created that did not exist before due to current trade agreements and the lower prices consumers paid for goods and services.

The misguided perception that jobs will be created for nations with trade deficits by preventing trade does not work. And we are dangerously close to poking the sleeping giant again. Once a trade war begins it is hard to stop the cascading effects. The damage is swift and painful with few options available less painful. Best to leave the sleeping beast where she is. But politicians sometimes have an agenda we all pay the price for.

But why do trade barriers cause job loss? If the U.S. has a massive trade imbalance, curtailing imports should bring the jobs home to create those products, right? It’s not that simple. Today we will explore why curtailing trade destroys jobs in all countries involved. Open trade is beneficial to everyone.

The Truth of Trade Wars

Conventional wisdom says if you deny products from entering your market, local businesses will begin producing those products to meet demand. If conventional wisdom were correct, countries with trade surpluses would suffer the most in a trade war and countries with trade deficits would actually benefit from restricted trade.

But history is clear this is not what happens. Restricted trade hurts all economies involved. The 1930 tariff in the U.S. hurt domestic businesses and foreign. Foreign nations instituted their own trade barriers to protect their local markets. It didn’t work. Even countries with trade surpluses suffered economic decline and significant job losses. It took World War II to really kick production back into high gear. Unwinding the devastating trade barriers were too difficult for any nation to handle unilaterally. Voters demanded trade barriers decline in tandem or that the other guy go first. The fear open trade would do additional harm to local economies froze everyone in their tracks. The lesson is clear: It is easy to set up barriers through unfounded fear and nearly impossible to tear down the barriers once erected.

Open trade took decades to develop. Large numbers of trade agreements fueled economic growth, jobs, and lower prices over the preceding decades. Decades of work with all the accompanying advantages are now threatened. Decades of work can be undone in a few months or even days, requiring additional decades to return to previous levels.

What is so amazing is how Americans cheered President Regan when he said, “Mister Gorbachev, tear down that wall.” are the same people cheering as America plans to build its own wall on her southern border. The same political party screaming FREE TRADE 30 years ago is the same party screaming PROTECTIONISM today. It is a dangerous time.

#trade wars #tariffs #trade #freetrade #deficit | trade wars | free trade | tariffsWhy Restricted Trade Never Creates Jobs

The logic jobs will come home if trade is restricted is wrong-headed. The reason production went to another location is due to costs or other considerations. Restricted trade reduces competition, thus increasing prices as supply is reduced or eliminated.

Think of it this way. Suppose Japan was sick of paying for imported oil. They decide to slap a massive tariff on oil imports or restrict foreign oil entering their market. What would happen? Would the oil industry expand in Japan? It might. But Japan is oil poor and no amount of investment will bring much additional domestic oil to their market. Alternatives would be explored. Solar, wind and nuclear could make up for some of the losses.

Still, with any amount of investment, Japan would struggle to bring additional energy supply to their market to offset the trade barrier losses. Even if Japan reached energy parity it would takes year, or more likely, decades, to replace the losses and at significantly higher costs. All Japanese products would suffer a competitive disadvantage as higher input costs would make all Japanese products more costly. Japan, in our example, would put an end to the trade deficit they have in the oil trade, but at a massive cost to the local economy. Higher energy costs would reduce demand for goods domestically and for export. Jobs would be lost from the trade barrier even though they eliminated the huge oil trade imbalance.

I use Japan as an extreme example. It is easy to see how Japan would have a hard time offsetting self-imposed oil import restrictions. It is easy to see how jobs domestically would be lost by such a strategy.

The same applies in other industries in other nations. The idea restricting trade with Mexico would bolster the U.S. economy is idiotic. Don Quixote had more sanity when he chased windmills.

What will happen if the North American Trade Agreement were scraped and trade between the U.S. and Mexico curtailed? Production of automotive parts and accessories would be brought home. But the reasons (efficiencies) for outsourcing the production would be lost. Price would be higher and it would take time to build the production facilities so the production jobs would be at minimum temporarily lost. Higher prices would shrink demand. That is the simple law of supply and demand. Higher prices, even if consumers demand more, will reduce demand consumers can actually afford. Their pocketbook will run dry before the same number of items is purchases. Therefore, fewer jobs are neded.

Worse, Mexico will now have fewer jobs and fewer resources to buy goods and services from the U.S. Even with a trade imbalance, the country with the surplus will suffer job losses and economic decline! The market for all parties involved is smaller since they are limited to their local market which is smaller than the world market.

Fewer domestic jobs slows the economy. Fewer foreign jobs due to reduced trade will reduce international trade, which means less demand, which must lead to fewer jobs and a declining economy. The idea of a trade barrier to protect a domestic industry will do exactly the opposite.

Fair Trade

The problem starts when one country feels as if trade between them is unfair. Regardless the care taken to create a trade agreement, one side will have an advantage, even if slight. In most trade agreements there are multiple areas of trade that favor one side and other areas of trade favoring the other side. As time goes on and economies evolve, disparities can become acute.

Trade agreements work. This is not the time to scrap free trade policies; it is time to review trade agreements and make modest changes so all parties win. And trade is like that. Everyone can win! Yes, some industries will see job losses, but more jobs (usually better paying) will develop. Guarding your job like a mouse defending his stash is short-sighted and self-defeating.

Of course, you can always buy domestically produced goods and services whenever possible. It’s not always possible. But do you really want to do every darn thing yourself? I personally find no issue with Mexicans (in Mexico) producing auto parts or legal immigrants working in the U.S. I love doing many things myself, but I also have no problem with non-white middle aged men doing the work. My eye doctor is black and he is darn good at what he does. I’m not changing doctors due to his skin color. Are you nuts? Racism hurts the racist most of all.

We need to be careful our desire to erect borders is not really jealousy somebody else might be improving their life and their skin color, or religion, or gender, et cetera, et cetera is not the same as ours.

These are dangerous times. We need to tread carefully and think before we step. This is NOT an “us versus them” situation. Trade agreements do need adjustment. Immigration is an important issue for many countries. Planning is needed.

We can make our world, our nation and our local community a better place if we think as we move forward. Building walls are an unproductive use of resources. Regardless your nationality or political affiliation, President Regan was right, “. . . tear down that wall.”

 

More Wealth Building Resources

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. Quickbooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

A cost segregation study can save $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Amazon is a good way to control costs by comparison shopping. The cost of a product includes travel to the store. When you start a shopping trip to Amazon here it also supports this blog. Thank you.

 

Kill the Economy and You Will Not Even Notice

It does not take long when you wander the blogs of the ‘retire early’ community before you hear the common refrain: If everybody did this stuff it would kill the economy. To which I promptly call foul.

Bill Gates and Warren Buffett managed to not spend over $100 billion of their money over the last few decades and the economy has done fine. In the 1950s the savings rate was much higher and the economy more vibrant. When the research is reviewed there is no doubt excessive debt, a low savings rate and excessive spending have more to do with an anemic economy than any responsible spending will do.

People look for any excuse they can to remain married to their poor habits and lack of self-control. It is easier to complain about successful people than it is to take responsibility for your own actions. Somehow these people have been lied to for so long they actually think poverty is the only way to keep the economy going. Really? They think the only way to survive is to spend every nickel they have. They think living on the financial edge of ruin from the first light breeze is what makes the economy purr and provides job security. Where does this nonsense come from?

 

No Help from People

In my office most payments are made automatically. Services are handled without much human intervention. Billing/invoicing is on automatic, payments are made by automatic transfer, personal and business bills are set up for automatic payment by either credit card (for the rewards) or from the checking account and the credit card is set to pay the balance in full on the due date from the checking account. The process keeps flowing without any human intervention in one big circle. All parties can focus on their tasks instead of wasting time playing around with financial transfers.

Think about what this really means. If the rapture were to happen this very second and God thought we were all worthy of the instant removal from earth to heaven and no one had a chance to turn off the electric generators, the economy would keep humming just fine. The automatic transfers would keep going round and round. In fact, the economy might actually start growing at a faster rate without people around to mess it up!

Now, if the economy will do fine without a living human on the planet, how bad will saving and investing half your income harm the economy? The arrogance it takes to even assume responsible spending behavior will destroy jobs and the economy blows the minds of intelligent people everywhere.

The economy will be fine if you save/invest a significant portion of your income. Look back at the most stable and productive times in human history. These times are marked by large levels of saving and investment. Without an ample pool of ready money there is no opportunity to move from concept to reality. Money for investment comes from savings—money people earned, but decided not to spend.

 

The Economy is Bloated

The economy is too big as it is. Most of the economy, the sales of goods and services, is mostly wasted material. If you don’t believe that statement, I invite you to join me on a short trip to your local landfill. That enormous pile is a testament to all the stuff people wanted and then threw away. If it was so important to spend money on, why are landfills so ungodly huge? All the resources wasted to produce junk we didn’t want in the first place end up as a credit card payment for the next 28 years at 17% interest. And you want me to believe this is good for the economy?

The stuff that really makes us happy and fulfills our lives is about a third of the economy. Yes, I mean two-thirds of the economy is nothing but fluff, waste. We keep buying junk until our homes are so full we can’t move. Then we buy bigger homes to store the stuff. The basement and attic are loaded. Don’t worry. In the name of ‘keeping the economy going’ and jobs we can always rent a storage unit. Let me ask you this. When was the last time you looked at your stuff in the storage unit? Thought so.

All that stuff and the debt from buying it harms the economy! A ‘healthy’ economy does not have so much waste. You, me and everyone else in town can easily live on a third to half our income without any problems. The economy will keep humming along. Debt loads will be modest. Stress will be low.

There are a few losers. The government is in trouble without all the tax revenue they need to service the massive pile of debt. The world governments have over $63 trillion in debt as I write this and it is growing at a rapid pace. The United States has nearly $19 trillion of government debt alone! World government debt interest is accruing at over $500,000 every seven seconds! At least it is good for the economy. Right?

Another loser in a world of modest spending is landfills. These tremendous piles of dirt covering the junk we bought on credit and decided we did not like after all would be mere molehills. Other than governments straddled with debt and landfill companies, there are few losers if the FIRE community ran the place.

A quick look around the internet gives a few different answers to the total worldwide government debt load. The numbers are all large and the differences are semantics at best. Debt in and of itself is not bad. What is bad is the level of leverage and what the money was wasted on to create the debt. Governments can print their way out of debt crises if they are willing to risk economic dislocation and/or inflation. You on the other hand need to engage financial responsibility.

The current world environment would seem to indicate high levels of debt are NOT healthy for the economy. More debt does not automatically translate into a larger economy, dollar for dollar. As more debt is added it has less affect on economic growth.

 

More is not Better

The sickness affecting Western societies is spreading to other cultures around the world that more equals better. But does more make you happier? Research tends to indicate it does not. Having more stuff is a responsibility increasing stress levels protecting, insuring, maintaining, and using said stuff.

Modern technology has made stuff cheap compared to our earning level. The more we have the more we want when it makes no sense to add more to the heap of crap already in the stable. Happiness declines instead of increasing after we reach a certain level of saturation. More things then start to eat into our happiness and overall satisfaction with life. You can have more, but does it matter?

The FIRE community is on to something and it boggles my mind more people have not climbed aboard. Where people got the idea financial independence and fulfilling labor are a scourge on our society is beyond me.

I am only a country accountant; I don’t have the answer for such an ignorant mindset.

 

Happiness Dust

Problems will not magically disappear if people start saving and living more financially responsible lives. The problems will change, however. The problems will also be less critical. Money is the leading cause of divorce so reduced money issues will lead to better family life. Children will have more nurturing formative years which translates into lower levels of crime and higher levels of overall life satisfaction.

Issues of resource usage will be reduced, but still an issue to apply our efforts toward solving. Moving from a carbon economy to a more green, renewable framework will increase further the quality of life. Technology will still be a vital part of a smaller, more efficient economy.

The real question to ask is: If we are happier spending at a much lower level, why do we waste so much of our most precious resource, time, so we can have stuff which ends up making life less pleasurable? Sure, we will still work, especially for things that interest us. I can’t imagine myself sitting around all day and there is no doubt I will find something constructive to do. But this idea of working ourselves to death for just a little bit more needs to stop.

With most of our time freed from required work to meet our basic needs and a modest amount of wants we can explore what truly drives our passions. It is easy to say what we really like, what we really want. But until we are in a position to really have the opportunity to live that dream we cannot be certain of our choices here.

Happiness dust is not fantasy. Happiness is possible. Living on $20,000 or so a year is easy. All the rest is play money. And we have enough toys. The Earth can’t take anymore waste. The place is starting to look like a dump. Even the oceans are filled with waste from garbage and stuff spilled from ships headed for markets around the world.

It is time for less trade and more living. And the economy will be fine without us.

 

 

More Wealth Building Resources

Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

In Support of Law Enforcement

l_camden_mentor_cops-2-1It breaks my heart when I hear reports of police shooting and killing an unarmed black man. This morning I read a report where a police officer in West Virginia was fired because he did NOT kill a man demanding to be shot, a so-called suicide-by-cop incident. Readers of this blog are aware I live in the county where the trial of Steven Avery took place; the topic of the Making a Murderer documentary on Netflix.

Black people are incensed by the killing of unarmed black men by police; they should be. White people are also killed by police, but there does seem to be a bias toward “shoot first, ask questions later” mentality when black men are involved. For a while it looked like retaliation killings of police officers at random would accelerate. It seems to have died down (or I miss the news reports).

Police have been the target of criminals for longer than the Black Lives Matter movement. I agree, black lives do matter and police need to act appropriately regardless the color of skin a suspect has. The moment police are targeted for harm, however, you have to stand up and just as loudly proclaim: Blue Lives Matter, too.

I have been critical of the police most of my life. I am critical of all government. With authority comes responsibility. Police are highly trained professionals asked to run into harm’s way when shit goes down. There is no doubt in my mind 99% of law enforcement officials are men and women of high moral character, values, and ethics. Unfortunately, the 99% of law enforcement officials who are honest are asked to make some very difficult decisions without all the facts, where lives are at stake, and given limited time to make the call. Some days you are damned no matter what you do. There have to be days it sucks to be a cop.

A World without Police

Imagine a world without men and women dedicated to keeping our communities safe. Now imagine waking each morning and going to work not knowing if this is the day a fucktard tries to put a bullet in your head because he wants to get away with stealing a package of Twinkies at the local mini-mart. Can you image working such an uncertain job where half the people like you for what you do and the other half think you are a “pig”? I wouldn’t do it.  Maybe an IRS auditor is loved less. Maybe.

Several years ago my office building was burglarized. The two geniuses who sodomized my building thought there was a soda machine inside and they were looking for some of that lucrative soda machine money to commandeer. When they discovered no soda machine they did the next best thing; they stole two computer monitors, a debit card, and forged a blank check from my business account.

The next morning the break-in was discovered and the police were called in. The police were assholes and elbows gathering information to catch the criminals and provide the district attorney’s office with charges. Before the day was out the police had a good idea who did the dirty deed and caught the guys a week later. Seems they were on a crime spree molesting soda machines all over town. Dumbasses.

The police were 100% professional the entire time. No doubt about it. The police were prompt, courteous, and respectful. I am certain the perps were not treated with the same dignity, but the situation is different when working with suspects. From what I gathered, the police still acted completely professional when arresting the two men.

Now think about this for a while. Imagine if there were no police. How often do you think my building would be vandalized, broken into, or damaged? Shit, some of these idiots look to the left, then to the right, see no cops and say, “Fuck it!” and break in anyway, or steal a car, or rape a passed out college girl. Once again, 99% of people in our society are good people; it is the 1% of idiots who fuck it up. It is this very small minority of people eager to do harm that makes me grateful the police are around and willing to drop everything and run to my rescue when the boom is dropping.

I am married to the beautiful and wonderful Mrs. Accountant, plus I have two awesome daughters. I have three more reasons to love the police and the work they do. How many reasons do you have?

Critical

Of course I am critical of police behavior. I wish the local police would acknowledge the errors made in the Steven Avery case. No matter the outcome of the appeals (Brendon Dassey’s conviction has been overturned by a federal judge and is being appealed by the state as I write) the people of our community have lost. If Avery did not commit the crime, the real criminal went free and my tax dollars were wasted, not to mention the damage to Avery’s life. If Avery is guilty, then the appearance of impropriety by the police could allow a murderer to go free. There is no way for justice to prevail in this case. As a community we were asked to reach for our ankles and smile as we reached. We must demand more professionalism from law enforcement.

Am I too vulgar as I discuss this? I hope not. I am passionate about the topic because it affects my clients, my business, my family, and my community. This is my home, too, you know. Earlier this year I was asked how I could live in such a corrupt community. The truth is, my community is no more corrupt than any other in the U.S. We are a small town with a big time crime and we did not have experience in these types of matters and it showed.

Support

All that said, I still support law enforcement 100%, even when they make mistakes. I know I never did anything wrong in my life, but for the rest of you so prone to indiscretions, need watching. Police work is not the most dangerous job in America, but it ranks up there. Police officers volunteered to take the job they do so I expect a level of professionalism even if part of the job description is getting shot at.

All police are highly trained. Most police officers are a credit to their uniform and profession. Pride causes police officers to defend an officer who crossed the line due to pride. It does not make them bad officers; it makes them human. It is easier to denigrate the accountants at Enron than for a police officer to chastise another officer in public. Public trust is the one thing that helps keep officers safe. Hence, the blue code of silence. You know as well as I we would both act the same way in the same circumstance.

Gunning for a Cop

Is there any legal job outside law enforcement where people actively try to kill you due to your profession? The military, sometimes. Drug dealers, sure, but that is not a legal job. There are people who want to kill cops just because they are cops! That is really messed up.

Minneapolis Police Squad CarThere is a logical reason for these people to want to kill law enforcement officers. They want to kill the defenders so the rest of us are more vulnerable. Think about that. When the manure hits the fan we all want the police to show up. We know police are our best chance at safety when things go wrong. When police are busy staying alive, we are at greater risk.

The recent news of so many killings of unarmed black men by white police officers has caused some to retaliate. A small number of bad white police officers who think black people are niggers and deserve to die stand out due to their devastating behavior. We can’t let the bastards win! I am white and so I enjoy white privilege. I like white privilege and refuse to give it up. Rather than me give up my privilege, how about we extend the same privileges to our black brothers. Just a thought. Maybe I am all fucked up in the head, but I personally think black people would be a lot happier with my privileges in life rather than bringing me down to their privilege level. Ah, must be my mental illness talking.

Let’s think about this a bit more. You read the news and learn another unarmed man has died at the hands of the police and it really looks bad. The cocksucker also looks like he is going to get away with it. Fucking police! So you get a gun and gun down a random police officer to send a message. But what did you really do? Remember, ninety-nine percent of police officers are courageous, dedicated, honorable, and professional men and women. The odds are you killed a good one. Did that really make your life better? What message did you really send killing an honest family man?

baltimore_police_officers_at_camden_yards

I’m not saying the Baltimore police did everything right. What I am asking is for you to think of the situation from their perspective. Then realize they are human. They look like a serious group of guys trying to keep a community safe under less than ideal conditions to me.

Environment

In America we have more guns per capita than anywhere in the world. I doubt war zones have as many weapons per person. Now with many states legalizing concealed carry and assault rifles legal, police are asked to walk into dangerous situations woefully outgunned. Ask yourself, Would you walk into a violent situation with that little pop gun most police carry at their side when the bad guys are sporting AK-47 assault rifles? I’d quit. And so would you.

Unless you are a police officer. They stay on the job, ask for some leeway, and keep showing up for work—and keep getting shot at! Now that I think of it, they are fucking insane. They must have medication for that by now. Must be one of those medications Martin Shkreli got his hands on and jacked the price 12,000%. Can’t afford that on an officer’s wage.

I have a suggestion when dealing with the police. Always show your hands so there is no question as to your intentions. Act professional even if the officer is not. Everybody has a bad day. If somebody shot one of my co-workers in another state I would be having a bad day too! I’d also be a bit trigger happy. Put yourself in the officer’s place and look at it from her viewpoint. What do you see then? I’m not tell you to answer any questions asked because that may be a bad idea. I would recommend following orders. The police have a job to do and once you start pushing they get nervous. How could they not? The officer does not know all the facts and does not have adequate time to figure it out. Taking you into custody is the one thing she can do to get more time to figure out what the heck is going on.

I also empathize with black people and other minorities. I wish I could say I understand, but no white person in America can truly understand what black people experience every day. All I want is for the police to stop killing—or even shooting or beating—unarmed black people. I want a safe neighborhood where the police are tough with suspects while maintaining professionalism just in case the suspect is innocent. I want police to get home safe to their families, too. The best day is a boring day at the office for them. Welcome to my world, officer, isn’t it great?

Black communities have suffered disproportionately. Regardless, I think 99% of black people respect and trust police, even if with guarded caution. Black communities want the same thing white communities want: safe, crime-free neighborhoods where their kids and family are safe.

What does this have to do With Money or Wealth?

Wealth creation and preservation is easier in a safe society with laws and rules. People forget how powerful a force police are in keeping our nation safe AND prosperous. My business exists because people don’t blow my building up or rob me daily. The police have something to do with that crime prevention. Even when the police are not around, people intent on harm know the police will be relentless once the crime is discovered. Without police Mrs. A and the girls would be at constant risk; even with police it is a concern. I can’t imagine the world my girls would live in without the threat of police action against those who harm women or children.

Without police I would probably be kidnapped and murdered when I refused to shut-up. (Who needs money when the shrill whine of this damn accountant never stops?) The next time you are critical of the police and their activities, also realize the vital role they play in our society and in our local communities. The men and women in blue are less than perfect, but they bust their asses every day to keep our world a safer and happier place. That allows me (and you) to run a business successfully, make a lot of money, preserve wealth, invest, create jobs, provide goods and services, and live a comfortable life.

I lift my glass to the men and women who dedicate their life to making mine better. Now I need to remember not to drive after lifting that glass or I’ll be sent to the slammer for drinking and driving. Damn cops.

How Fast Does Inflation Rise?

U.S. Yearly Inflation Since 1900Media continually warns of impending inflation due to all the money printing by central banks around the world. The concern is real. If inflation spikes bonds will suffer massive loses and stocks will also suffer a painful decline. It is past time we look at the facts about inflation, how fast it rises, and what causes prices to spike.

Planning for retirement and when reviewing investments, inflation is a consideration. A review of historical inflation data will help in the decision-making process. By reviewing the historical data also clearly shows why inflation accelerates, including solutions to protect yourself. We will focus on inflation data in the U.S. I have reviewed price data for other countries and further back than the U.S. data. The conclusions are the same.

Recent Inflation/Deflation Dilemma

The current deflation started in the stagflation days of the 1970s. Back then unemployment and inflation were both high. Economists were beside themselves on what to do. How can you have high inflation (caused by excess demand) and high unemployment (caused by low demand)? Except they had it all wrong. Demand was high and businesses were not incentivized to increase production, thereby creating high unemployment and high inflation at the same time.

Paul Volcker at the Federal Reserve and President Reagan applied a two-prong approach. Volcker raised interest rates to kill inflation and Reagan pushed supply-side economics through Congress, providing tax incentives for businesses to ramp up production. It took time to steady the economy, but within two years inflation was down and the economy was humming.

Supply-side economics has been in vogue since the success of the early 1980s. Unfortunately, the medicine required by the economy back then is different from today. Supply-side policies puts downward pressure on prices as it encourages more production. The economy today needs the incentive of mild inflation. Worldwide production potential will keep a lid on prices for the foreseeable future. As much as we all like tax cuts, they will not salve the woes of low inflation or deflation. Supply-side policies have gone as far as they can and may do more harm than good if pushed further.

Where Did All the Money Go?

If central banks around the world have printed so much money, where has it gone? Trillions of dollars, euros, yen, et cetera, should have caused massive price increases. The reason inflation has not accelerated is because most of the money printed sits in bank vaults of money center banks and at central banks around the world. The additional money created was used to improve balance sheets of banks. Money not in the system cannot cause inflation. You can see this in the velocity of money numbers. Historically each dollar changed hands about 16 times per year. That number is now around 4, lower than during the Great Depression. If velocity increases to historical norms inflation is sure to follow since the Federal Reserve increased their balance sheet from $800 billion to $4.5 trillion.

InflationChartSpeed of Price Changes

Prices have fluctuated wildly in the past, oscillating between bouts of inflation followed by gut-wrenching deflation. The illusion of modest price increases over long periods of time is recent. The bout of inflation in the 1970s was not followed by deflation until now, 35 years later. Inflation has remained steady under 4% for most of the last 35 years.

Price changes tend to be orderly under normal circumstances. It takes a shock to the system to send prices rocketing higher. The backside of an inflationary spiral is a deflationary period allowing prices to find an equilibrium. The recent deflation in the U.S. is mild compared to price declines of a century ago.

Official inflation records began in 1913 in the United States. The numbers I use here are the change in prices from the same month the prior year. I’ll start at the beginning. The U.S. decided to start tracking prices due to inflation caused by World War I. In September of 1915 there was mild deflation at -1.0%. By October 1916 inflation reached double digits at 10.8%. In April of 1917 the U.S. entered WWI with inflation hitting 20.4% in June of that year. Then the war ended and the expected deflation arrived. It took a while for inflation pressures to subside. Inflation for 1920 was still a whopping 15.6% as the returning troops increased demand for consumer goods. The next year prices declined 10.5% followed by a 6.1% reduction in prices of goods and services in 1922.

The remainder of the 1920s inflation picture in the U.S. looks a lot like the last decade of price changes today. Inflation in the U.S. from 1923 to 1929 was modest; 1925 had the largest price change with inflation at 2.3%. 1925 was the only year with no month of data showing deflation during the 1920s.

Rising prices are new to people who don't remember the recent past or 1970s. Prices can climb rapidly once pushed by a catalyst. Once prices start climbing, it's hard to slow them down. #prices #inflation #yieldcurve #interest #inerestrates #wageinflationThe shock of the Great Depression kept prices falling. It took until WWII for inflation to make any kind of showing. WWII had inflation, but the real inflation came after the war, similar to WWI, when the troops returned home and ramped up demand. 1947 saw 14.4% inflation.

The 1950s and 60s were a time of modest price changes. The difference was the lack of any real deflation after WWII. Cumulative price increases became large as prices never adjusted back down due to the Federal Reserve providing additional liquidity to the system. This was done out of fear the Great Depression would resume after WWII spending ended. The recession of the early 1950s only pushed prices lower from September 1954 to August 1955. Vietnam War spending caused inflation worries toward the end of the 1960s.

The money supply growth, government borrowing, and Vietnam War spending only caused 5-6% inflation in the early 1970s. It took a shock to the system to ignite the inflation most readers are familiar with. The first oil embargo pushed consumer prices up 11.0% in 1974. Inflation pressures soon eased to 4.9% in November 1976. The second oil embargo reinforced the inflation pressures supported by past government money printing, borrowing, and spending. Double digit inflation for calendar years 1979-1981, were the worst since WWI at 11.3%, 13.5%, and 10.3% respectively.

That is where we came into this story. Fed Chairman Volcker and President Reagan broke inflation and stagnant economic growth with their one-two punch and for 35 years we have seen declining inflation and lower interest rates. Never have prices been so stable since records began in the U.S.

We fear deflation—and rightfully so—even having never experienced serious deflation in our lifetimes (unless you are a very old reader). Inflation pressures have not ignited for a long time. The charts on this page clearly show we are lucky to be living in such stable economic times. Those times could be ending soon and here is why.

The Rise of Inflation

Prices bounce around modestly as sellers try to get more for their goods and services and buyers try to get the best value for their money. Inflation arises when buyers become scared good and services will not be freely available in the future or the price will likely be higher later. This causes an inflationary spiral. It takes more than a nudge to get inflation feeding on itself. War is the biggest catalyst of previous inflation. Even the 1970s inflation sparked by the OPEC oil embargos was fueled by a decade of massive government military spending.

Your investment portfolio counts on prices remaining relatively stable. Slight inflation, say the Federal Reserve’s 2% target, seems to be a Goldilocks zone for maximizing economic growth incentives for businesses and consumers. Slight deflation is more painful than slight inflation as even modest price declines quickly feed into a ‘wait until tomorrow’ attitude for buying.

The real question centers on how to determine when inflation will rear its ugly head again and the steps necessary to protect your net worth from the consequences. Past bouts of inflation provide valuable lessons. Deflation of -1.0% in September 1915 turned into double digit inflation in thirteen months. WWII had similar results. The 1960s saw inflation pressures building slowly without a spike in prices; the inflation was annoying, but not destabilizing. Annual inflation in 1972 was 3.2%, by 1974 it reached 12.3%.

The lesson to learn is that inflation, when it happens, happens fast and then burns itself out after a few years as consumers lack the money to keep pushing prices higher. This time could be different as the amount of money created is larger than any time in modern history. Out of control money printing reminds us of Germany between the wars or Zimbabwe. I am unable to find any instance where a world power, along with most of the rest of the world, engaged in such massive money creation.

One thing is certain, inflation will come again. Will Durant, the great American philosopher, said history is inflationary. My research affirms his statement. Inflation has a tendency to recur. We are overdue. All the pieces are in place for a massive inflation spike. All we need now is a spark.

MoneyHiding Places

When you see the spark ignite the first one out the door wins; the rest get trampled. Bonds will get killed in an environment of rising prices. Stocks suffer, too. Until Chicken Little starts screaming about the sky, index funds are about the only game in town. Inflation, when it returns, will require a powerful response from central banks. Moving money from equities to short-term bonds of safe sovereign debt when inflation returns is the only alternative until price begin to ease and equities are the place to be again. Or you can ride out the storm in equities. Companies will bust tail to protect their interests. The stock price will not reflect all the value created by companies, but the dividend yield should expand, providing ample cover until the dust settles.

Perhaps the only choice is an index fund and wait. Nobody can predict the next inflation outbreak until it is well on its way and then it is too late. Since businesses will protect their interests, and hence investor’s interests, it is best to keep your money with the largest and most successful enterprises on the planet.

Source: www.usinflationcalculator.com/historical-inflation-rates/

 

More Wealth Building Resources

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant for a bonus. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

A cost segregation study can save $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Amazon is a good way to control costs by comparison shopping. The cost of a product includes travel to the store. When you start a shopping trip to Amazon here it also supports this blog. Thank you very much!

Living Without Money, the Spending Fast and Buy Nothing Day

51bWz-LER7L._SX322_BO1,204,203,200_The Western word is being destroyed by a select group of people determined to live within their means. From artist Ted Dave and his Buy Nothing Day movement to Daniel Suelo who decided to live without money to Jeff Yeager and his spending fast to Mr. Money Mustache and his grand scheme to keep spending low, even when income rises, we face the greatest economic crisis of our generation. Or are we?

All too often we act as if the economy were an actual living being. It is not. The economy is only a construct of the human imagination. Can you image any animal living in crisis because their local economy collapsed? Even humans, thousands of years ago, did not worry about this crazy thing we call the economy. Somewhere between there and here we convinced the vast majority of people they are duty bound to feed this imaginary beast.

Spending lubricates the beast. It does not matter if the spending is on stupid stuff. Buy a Hummer and save the economy, they say. That was the mantra a decade ago. Remember the government’s response the 9/11 attacks? We were encouraged to keep spending to show the terrorists we would not be affected by their actions. But the terrorists did win! They got us, as a group, to engage in insane spending habits sure to destroy the one thing we worship above all others: the economy.

The real question we all need to ask is: Why is the economy so important? The “recorded” economy is what the government really cares about. It is this recorded economy they can tax and tax hard. Taxes are highest on owning stuff like real estate and the movement of money (spending). The government so far has been unable to tax things like: inviting friends over for a beer and enjoying good conversation. Rather, the government prefers you go to the bar, spend 20 times as much, and don’t care one bit if you enjoy it or not. By spending more you lubricated the economy and that is good for the country, or so they say. During World War II the government told us our patriotic duty was to “Buy Bonds!” and spend less on yourself. Today we are told to spend like drunken sailors by the very same entity. Each bit of advice was self-serving, but the saving mantra created a world super-power. The 1950s and 60s were times of awesome economic growth fueled by a high savings rate. Today we fuel the economic flames with debt and each new obligation has less effect than the last.

The Daniel Suelo’s and Mr. Money Mustache’s of the world are not the problem; they are the solution. If you are happy, satisfied with what you have, does it matter if the economy grows? Once you cover the basics and few niceties it is time to move away from the “more is better” mentality. More is not better! One aspirin cures a headache; a thousand give you a bleeding ulcer and kills you. The same applies to everything in life. Everything in moderation. But moderation does not keep the economy humming or ever increasing taxes flowing to the government.

Inside your home there is also an economy. If you don’t spend money today your household experiences a Great Depression. Sounds stupid when you think of it that way. You stay home and prepare a nutritious meal, enjoying it with the wife and kids and somehow you created a massive problem; you destroyed the local economy! But the local economy means absolutely nothing. Your life’s mission is not to see how big you can grow the insatiable economy.

If you want to create a better community, less spending goes a long way toward that goal. Savings are what fuel the “real” economy. The real economy includes only the basis: food, shelter, clothing. Once the basics are covered we are only forcing the economy larger. There is no real value to spending a thousand dollars taking the family to see the football game. I argue you gain more pleasure playing ball in the back yard or in the park with the kids.

Economic recessions (all recessions are of an economic nature) mean nothing if you have ample savings. Think of it this way. I grow a garden and can and freeze my ample excess produce. When I enjoy my garden’s bounty in mid-January am I concerned? I hope not. My savings of produce allow me to live off the summer’s gift. This is a form of saving with a zero percent rate of return. So low interest rates are not an excuse to not save and invest more.

Enough complaining. We should all agree saving more is better than spending more than you earn. The stress of overspending destroys marriages and other relationships so it is important to learn to feel satisfied with what we have.

Your personal savings rate should exceed 50% during your working years. Your mindset must be: half for now, half for later. Unless your income is below $20,000 (in the U.S.) it is more than possible to live this way. Heck, Daniel Suelo lives without any money at all. Most people need to drop their savings into an index fund and let it ride. Today’s investment soldiers will reproduce like rabbits. Within 10 – 15 years you can retire from forced servitude and pursue your heart’s desires. This does not mean you suffer for 10 – 15 years. You can live very comfortably on $20,000, $30,000 or $40,000. When you start looking at the stuff you are buying you will realize how much of your life you have wasted chasing stuff of no value.

Living without Money

The world would not end if there was no money. Money is only an exchange of value for debts owed. Therefore, money is really a part of the debt transaction. Money is debt. Investments, on the other hand, are not. A small business (and what better way to live life than running your own business) should produce profits. Invested capital earning more than the cost of capital creates value.

We are so used to having money (cash, credit cards, checks) on us at all times (same with the dreaded cell phone) that we feel naked and vulnerable when without money on us. We justify our fear by saying if we have no money on us at any particular moment we are a vagrant. You are not a vagrant if you leave your wallet at home!

Train yourself to feel normal without money on you. Go for a bike ride or long walk without any money on you. Remove temptation to stop for a cup of coffee; bring a hot cup with you from home. Graduate to leaving your wallet home when you go to work or visiting friends. I have seen people freak out when they try this. It’s nuts! Just because you cannot buy something at the drop of a hat should not cause you angst. You are nowhere near the level of Daniel Suelo, living your life completely without money. You are not a consumer unit; you are human being with needs and desires that transcend money. There is more value in family and friendships than spending money.

Spending Holiday

Now I want to share a plan to living better without spending money. The idea of a spending holiday never occurred to me until I read Jeff Yeager’s “Cheapskate” books from the library. I practiced spending holidays without even knowing it! The goal is to bring your spending under control. Spending holidays train your wealth building muscles to accept as “normal”, days without spending any money.

Starting small is important; no ladder is climbed starting on the top rung. I recommend a one-day spending holiday to start. As you flex your financial muscle you can work up to a full week spending holiday. Once you get the groove you can go crazy insane with a one-month spending holiday. (FYI: I max out at around a week. A whole month causes serious challenges.)

The spending holiday needs clarification on what “spending money” is. Eating is not spending money; neither is turning on the lights (unless you want to take it that far). Here are some of the things you will do and avoid during the fast:

  • No buying fuel for your vehicle. When the tank is empty you walk or bike. Or enjoy time at home.
  • Eat homemade meals with food in the fridge, freezer and pantry.
  • Normal bills get paid, especially if they are on automatic. The mortgage payment is not spending; it is paying for past spending. We allow electric use and water. Utilities are a form of spending, but also a need. Food, water, and shelter are things only the hardcore can include in a spending fast and not a good place to start.
  • Entertainment: Spend time talking with family and friends. A refreshing bike ride to the library for a movie is acceptable; ordering a movie is not.
  • No cheating. Maybe you have a gift card. You cannot spend from so-called free sources. No spending a credit in your Amazon account for a movie. If you already have Netflix we will allow you the luxury (and it is a luxury).

A one-day spending holiday should not even be a challenge for you. I hope you strive for a one-week spending holiday or even a two-weeker. It is liberating to have large chunks of time where spending is not a part of your lifestyle.

Buy Nothing Day

When Vancouver artist, Ted Dave, founded Buy Nothing Day people did not notice until Adbusters magazine promoted it. In the United States, Buy Nothing Day is the Friday after Thanksgiving Day, Black Friday. This is traditionally the biggest shopping day of the year. When ads were purchased to promote Buy Nothing Day, retailers complained and had the Buy Nothing Day promotions shut down. (Gotta keep the economy going, ya know.)

A fun family event is to plan twenty Buy Nothing Days a year by putting them on the calendar in advance. Every month you can have one or two days where money is not the focus. Take the opportunity to spend time with your children and/or parents. Talk about current events or school, hobbies, good books, and similar interests. By taking an interest in yours children’s lives they will end up well adjusted and happy; by spending quality time with your spouse or significant other you can build a powerful relationship that lasts; by spending time with your parents you can enjoy the massive legacy of knowledge the older generation has gained through experience.

Of course, this is all only a start. In my household we don’t buy Christmas presents or presents for any commercial holiday. We share experiences and build gifts with our own hands. It has been a long time since we had a Buy Something Christmas. Birthdays are times to spend together. Gifts should never be an obligation satiated with cheap plastic junk pre-made for the landfill.

You can keep spending if you want. You don’t get a retirement then. You either save for future spending or you must keep working until the day you die. Spending holidays and buy-nothing-days grant you the ability to control your life. It is only a few days a month where you can do whatever you want. The rest of the month you can return to your spending servitude. It is good for the economy.