Yearly Archives: 2010

Sorry Beck & Ramsey, Now Is The Time For Debt

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Media personalities Glenn Beck and Dave Ramsey rail against debt because it is risky. Beck sees a storm on the horizon of government collapse and hyperinflation. Ramsey once fell to bankruptcy and now sleeps well knowing that no bank can take his home. Both men are correct that trouble is brewing and too much debt is bad, but now is not the time to de-lever for most people. Now may be the time to take on as much fixed rate long term debt as can be afforded.

Contrary to the absolutist Ramsey, debt can be either good or bad. Running up one’s credit cards to finance a vacation is irresponsible, but using debt to fund a reasonably sized home or a business expansion is generally good. With the signs of inflation on the horizon, holding large amounts of the right kind of debt may be the wisest strategy.

As Shout Bits has argued in the past, surprise increases in the rate of inflation act to transfer real wealth from savers to borrowers. Deflation does the opposite, which explains why the government – the world’s largest debtor – is still afraid of deflation even though all signs point toward inflation. Conspiracy theory alert: when the government keeps on talking about deflation while actively pursuing hyperinflation policies like QE2 and fiscal stimulus, it may be an ambush of the nation’s savings. All this would sound like truther babble except that the US government has done this intentionally in the past, including twice in the 20th Century. Devaluing currency to effectively default on sovereign debt is an age old trick, and it looks like the Obama administration is using the financial crisis as cover for this abuse of public trust.

If one owns assets that are largely protected from inflation (e.g real estate, commodities, TIPS, certain companies that can pass rising costs on to their customers), financing them with fixed rate debt doubles the inflation protection. As the value of the assets rises nearly as fast as inflation, the value of the debt will fall – making the debt easier to repay. Long term fixed rate debt is best because its value falls with inflation the most (i.e. its duration is long making it more sensitive to inflation changes). Should the inflation rate increase, this strategy will preserve the value of assets while reducing the real cost of the debt used to secure them – a win/win scenario.

To protect from increases in inflation, do not follow the Beck / Ramsey extreme austerity plans. Do not buy a house that is unaffordable, but do own a house. Do finance that house with long term fixed rate debt, and the inflation hedge is in place. Do not hold credit card debt, but do consolidate any debts into a fixed rate home loan if possible. Save, but do not hold pure cash in excess of a few month’s expenses, as cash is vulnerable to inflation and the Dollar’s value is uncertain. The Government’s policies of monetary and fiscal stimulus can work to the advantage of savvy investors.

IMPORTANT NOTICE: Nothing in this article is meant to be specific investment advice, and investors should not rely on this article as the basis for investment decisions. There is no such thing as a ‘typical’ investor. Never take investment advice from a source that has not evaluated your specific investment goals and risk constraints.

The TSA Should Be More Like Ford

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The Thanksgiving TSA opt-out protest was a fizzle. Rather than make a quixotic statement about government overreach, Americans chose to get to their cranberry sauce on time. The average Old Time Media report concluded with a traveler saying he would do ‘anything’ to make travel safer. This view is based on two untruths: first, that naked body scans reduce the opportunities for terrorist attacks, and second that any amount of intrusion is justified for even the smallest increase in security. In fact, the TSA’s efforts are often pointless because they are not focused on real security. The TSA needs to treat security like Ford treats safety.

Ford is infamous for its exploding Pinto compact car in the 1970′s. In 2009, leftist Time magazine called the Pinto one of the worst cars of all time, stating that Ford executives we willing to “let ‘em burn” to save $11 per car in gas tank reinforcement. The Naderites moaned that Ford placed a monetary value on a human life, and if a safety improvement was not justified by saving more lives than it cost, it was scrapped. ‘Who can put a dollar figure on a life?’ the Mother Jones’s types begged. Well, people who seriously care about safety do. People cannot and will not pay for every possible safety feature in their cars, or anything else they buy. If everyone drove a $100,000 tank at 10 mph, safety would be improved, but people want affordability, style, and performance as well as safety. By establishing a dollar value for safety by monetizing a life, Ford was able to build as much safety as the real world’s budget could afford. Like Ford, the TSA needs to assess the value of safety measures against their increase in cost and inconvenience to the public.

In the government’s world everyone can have everything, so Ford’s analysis seems foreign to Washingtonians. For example, though airbags have been proven to save almost no lives compared to seat belts, and actually kill a fair number of children as well, the government mandates their use. Airbags are clearly a bad safety investment compared to simply fastening a seat belt, but the government does not consider cost vs. benefit. Governments and their bureaucrats do not benefit from avoiding costs or saving consumers money. Bureaucrats only consider the harm from even rare accidents, so their decision making is biased toward avoiding risk at all costs. TSA administrator John Pistole will not get a dime of any savings from relaxing security screenings, but he will be vilified if a tragedy is tied to any TSA inaction. The TSA, like most bureaucracies, cannot afford to balance risk versus reward in its mission, so it avoids even the appearance of reasonable compromise.

The results of the TSA’s imbalanced incentives were predictable: ridiculous security measures targeted at people known not to be threats. Even though alert citizens have foiled every passenger cabin threat since 9/11, the TSA continues to escalate the severity of its searches while underutilizing the intelligence resources that could actually make flying safer. The TSA, which has never stopped a terrorist, is all show with little real security improvement to show for unprecedented intrusions into personal privacy.

If the TSA were to use Ford’s logic, it would assign a value to every life potentially lost to terrorism, even a very high value. The TSA could then consider which security measures are justified based on the number of lives they are expected to save versus the total cost to implement them. The result would be a focus on the real threats facing travelers, not the most visible. The engineering approach to security policy may seem cruel, but it is the most effective way to save lives. The TSA should be in the business of security, not putting on a show.

Obama Isn’t Carter, He Is Nixon

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Pres. Obama’s detractors in the media compare him to Pres. Carter, whose watch included economic malaise, foreign policy failures, and leftist politics, but Obama’s attitudes and policies are closer to Pres. Nixon. From enemy lists in the media, to manipulating the legal system, to attempting to half win / half exit a war, to disastrous monetary policy, Obama is Nixon part II.

It is hard to believe now, but Nixon, like Obama, ran on a platform of bringing America together. Neither president advanced that goal, of course. Nixon taped himself committing to “screw” his enemies both in the media and in politics. Obama is no better, publicly denigrating targeted media outlets and referring to whites as “enemies,” who should be “punished.” Nixon did his fair share of spying; Obama is more open about his intrusions into personal privacy via federal control of the internet. Both men turned out to be polarizing, largely due to their personal styles.

Both Presidents inherited protracted wars without a clear definition of victory. Both promised to end their wars once in office. Nixon simultaneously sued for peace in Paris and expanded Vietnam War’s theater to include Cambodia and bombing of Hanoi. Obama has promised a withdrawal timeline from Afghanistan while also escalating drone assassinations against the Taliban. Sending mixed signals was bad strategy in Vietnam, and seems to also be encouraging the Taliban to persevere in Afghanistan. The fact that Pres. Karzai is negotiating with the Taliban for a future without the US shows that he is not optimistic about Obama’s strategy.

The greatest parallel between Obama and Nixon is in their common belief in central economic planning. While Nixon was a Republican, he was also a left wing Keynesian and a command and control regulator. Nixon destroyed the oil industry’s incentive to increase production through regulation. In moves repudiated since FDR, Nixon instituted wage and price freezes four times. Nixon took the US off the gold standard and created a monetary system based solely on government fiat. While Carter often gets the blame for the hyperinflation of the 1970′s, Nixon’s destruction of confidence in the US Dollar and his return to FDR’s communist economic central planning were the real causes. Carter was mostly a hapless observer to the wreckage he inherited.

Nixon followed the standard Keynesian central planning economic model, and whenever Keynesianism is applied, economies fail. Whenever an economy gets into trouble, the academics prescribe Keynesian currency devaluation. In theory, devaluation makes sovereign debt more affordable, imports more expensive, and exports more marketable – good things for an economy. In reality, devaluation causes hyperinflation, a collapse in capital investment, unemployment, and economic stagnation. The reason for the difference between theory and reality is that investment relies on confidence in a currency’s value. If devaluation can wipe out savings at any time, capitalists have no foundation for investment that fuels employment and economic growth. Devaluation is just a kind word for stealing private savings to pay for public debt. Devaluation always causes economic destruction (e.g. Argentina in 1999, the US in 1933, Japan in the 1990′s, the US in the 1970′s, Mexico in 1994). How many times must a theory fail in real world trials before it is abandoned?

The current Obama policies of currency devaluation through quantitative easing and deficit spending, if not reversed immediately, will result in the same economic failures as before. By taking the Keynesian prescription, Obama is repeating Nixon’s mistakes. The parallels are probably coincidental, but like Nixon, Obama is polarizing and thuggish, he seeks to regulate the economy to his tastes, he fights a war without absolute victory as a goal, and most strikingly, he has waged war on the US dollar by pursuing a discredited economic model. So, the next time someone compares Obama to Carter, give the Georgian a break; Obama is much more like Nixon.