Podcast

Capitalism, Free Markets And Innovation with Connor Boyack

TWS 14 | Capitalism

 

Lawmakers oftentimes don’t understand the principles of capitalism. Connor Boyack, president of Libertas Institute – a Utah-based organization whose mission is to clear the path of opportunity for each Utahn by removing obstacles that limit freedom – talks about capitalism, protecting free market principles, and fostering an environment in which people can innovate. He explains why lawmakers should be comfortable with innovation and shares the factors that create the desire for regulation in our society. Connor also expounds on the importance of playing defense and offense against the forces that are trying to undermine what we’ve built and protected.

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Capitalism, Free Markets And Innovation with Connor Boyack

I’m here with Connor Boyack. We are going to get an interesting perspective on the theme that we’ve been discussing all season, which is capitalism. For those of you who are new, Connor is the President of the Libertas Institute, which is a Utah-based organization whose mission is to clear the path of opportunity for each Utahn by removing obstacles that limit freedom. They do a lot of legal research, public advocacy and advertising. They also do lawsuits against government events, publications and more. Connor is also the author of a popular series called The Tuttle Twins Series, which are children’s books that teach the principles of liberty in a variety of different contexts. You had surpassed the half-a-million mark in books?

We’re approaching half-a-million and it’s amazing.

You’re the publisher. You’re the writer. I know you have an illustrator as well.

It’s been a labor of love and it’s awesome.

I hear about it all the time in speaking to people that know you and know those books.

There's been some pain, there's been some loss, but no one can argue that we haven't benefited as a society to innovation. Click To Tweet

You sat next to Ron Paul once. That was your in to get them to liven up in the conversation.

This was late at night and we were at dinner. He was pretty tired and he beamed when I talked about you and what you were doing. You struck a chord a number of different ways. You got off a legislative session, which is one of your busiest times in Utah. It’s going to be interesting this interview around capitalism because the perspective that you have creates a unique way to look at some of the principles we’ve been discussing. Number one, you’re in front of lawmakers which oftentimes don’t understand the principles of capitalism and vote to protect people, but at the same time violate individual freedoms. You also write at a children’s level about principles that most adults don’t understand. It’s unique because the way you would speak about it is different than how others speak about it. I want to express my appreciation for what you do. You face lots of adversity standing for principles of freedom. I know it’s not easy sometimes, but you’ve taken a huge responsibility and you’re making a difference.

I think about it this way for your topic, we’ve got capitalism and we can write books about it and we can read books about it. There’s capitalism in theory and there’s capitalism in the trenches. It’s one thing to read Sun Tzu’s The Art of War and be like, “I would totally do that strategy and I would do this.” When you actually get in the war you’re like, “How does this work?” Capitalism is a lot that way at a high level. They are very important principles that I subscribe to. By no means am I saying the theory is bad, it’s spot on. The problem is the real world is messy and you have to interact with people who have political power or economic power and don’t necessarily subscribe to the same principles. How do you do that in a way that preserves capitalism, free markets and liberty and all that stuff? That’s where the rubber meets the road and it’s tough to see how it plays out.

I liked the way you approach things is when certain things inhibit individual rights, that tends to be where you go on the attack, on the offensive.

That’s important because often we’re on the defense. I’m always trying to figure out like, “What are the ways we can strategically pivot?” An example is when Uber and Lyft came to town. People have heard the story play out all over the country. Taxi’s fighting and so forth. We found a single mom who was driving with Lyft in Salt Lake City. She was cited with $6,500 ticket for picking someone up at the airport. It’s insane. You’re going to speed 100 miles an hour over the limit and not get a ticket that much. Here she was doing this consensual whatever thing. She can play defense or Uber and Lyft, on behalf of their clients can play defense and try and fight the ticket, get it stopped. We can use that as leverage to go on the offense and shame the airport, use the court of public opinion and use lawsuits. With us, it’s always, “What are those stories that we can find where the free market is being undermined? Where people are trying to do business and the government is standing in the way. How can we proactively try and fight it?” The benefit with a lot of these cases that we might dig into is there are a lot of sympathies for Uber, Lyft, Airbnb or for food trucks. We did this event called the Rally for Food Truck Freedom. We had about 2,000 people come up in the rain and a dozen food trucks.

TWS 14 | Capitalism

Capitalism: Fear and laziness are what creates the desire for regulation.

 

The whole thing happening was in our state, food trucks were being heavily regulated. Many were going out of business because here in Utah, we have this valley where all the cities are clustered together and 80% of our state’s population is within that valley. There are all these cities pegged together rather than being separate. The food trucks catering to the market are going everywhere in between. They’ve got lunch here, dinner here and the next day they’ll be in another city. What was happening before is that the government was requiring inspection in every city. Fees in every city governments. You had to do these redundant regulations, inspections and costs.

The costs alone, if you’re selling food, you’re on a razor-thin profit margin. If you have to pay all this money to the government for permission to go operate, it was ridiculous. These guys were going out of business. We do this big food truck event. We had all the media coming. We had all these TV crews come out and these reporters were eating food on cameras and saying how much they love food trucks and leveraging that public opinion to shame these cities. When we went to the legislature to fix the law, there was no question. That law passed super easy because we had got on the offense in a way that built public support and pressure to get the law changed.

Let’s talk about why they wanted to impose those regulations, having to do inspections, get licenses or whatever. What’s the driving force behind that?

It’s fear and laziness. Let me break those down. I’ve answered the question like this a time or two because we deal with this problem all the time. With fear it’s, “We don’t know. Are they going to sell unhealthy food? We’ve got to inspect it. We’ll get it regulated.” That’s the fear-based approach to regulation in the mind of the elected officials and the bureaucrats justify as all these regulatory issues. To some extent, we can agree. We want certification and we want an inspection. Maybe the market can do that rather than the government, but that’s a separate question. On the surface level, we all want healthy food only to be sold. We’re fine there at that superficial level.

Fear is what creates the desire for the regulation, and laziness is the other one. What I mean by that is it’s not within the past few years when food trucks exploded, all these cities said, “We need to regulate these things. We need to make this redundant patchwork.” No, that didn’t happen. This was decades-old laws on the books that weren’t dynamic enough to apply to this new business model. That’s what we see time and again with Tesla trying to do business and Airbnb. You’ve got these regulations and you have inertia in the system that does not respond. It’s not agile enough. You’ve got these new innovative business models that are being crammed down these regulatory frameworks and mazes that were built for a totally different system.

It's not the answer across the board, but accountability is essential. Click To Tweet

Laziness plays a big part when we go in and shine a big spotlight at this arcane maze and say, “Why are we making these entrepreneurs go through there?” It’s a bit easier for elected officials to be like, “That looks awful. I wouldn’t want to do that.” There’s a lot of inertia and unless you have people stepping forward and making the case and raising an opportunity to say, “Let’s fix that.” It doesn’t get fixed because these food truck owners didn’t know how to change the law. They didn’t know what to do. When we came on the scene and said, “We’re going to help shine the spotlight,” they were immensely grateful. I eat free at every food truck I go to because I say, “We’re the group that did that.” They’re like, “Let me serve you.” They’re happy. The layperson doesn’t know how to do this stuff, so you get this inertia and silos where this business is regulated this way. This entrepreneur slogs through the system because they don’t know how to change it and very few politicians are enterprising enough to find those problems and then come up with a solution.

What would you say the general consensus is of lawmakers with these issues? It’s interesting you have new businesses, entrepreneurs that are disrupting and finding better ways to do things, which oftentimes may not be perfectly in line with the existing laws. You also have a big business or established businesses that they believe they’re operating in a free market. That’s how they were created, but maybe they haven’t innovated and they’re starting to get disrupted and then use political influence to block certain businesses from competing with them. Where do you see the general consensus of lawmakers when it comes down to those two opposing forces?

This is such a relevant, compelling question because it happens over and over again. We have a problem that is the average lawmaker is ignorant. I don’t mean that in a pejorative way, especially in a citizen legislature that meets part-time. They’ve got jobs. They’ve got families. They’ve got hobbies. Now within a 45-day session, a 60-day session, they’re bombarded with information. You’re talking to elected officials in bullet points. The most effective way to get someone to pay attention, change your mind or go the way you want is a one-pager little summary with bullet points. That’s the level to which the average lawmaker can go on any issue.

Then the problem to your question becomes when they get confused. I’ll give you a very precise example that we’ve dealt with this session. There’s a newer company called Turo. You rent cars. It’s car sharing between you and the person. You want to do Tesla. You want to get a Hummer. You want to get a Lamborghini for a day. People in your area who have that car can share it with you. Who doesn’t like that? The rental car companies have a ton of influence and a ton of money. They hire lobbyists and this happened in Utah. We had a bill that was trying to deregulate and protect the ability of Turo and companies like them to innovate because they’re getting shut down. Like Uber and Lyft where you have Turo drivers being criminally charged and prosecuted for picking people up at the airport.

TWS 14 | Capitalism

Permissionless Innovation: The Continuing Case for Comprehensive Technological Freedom

What happens then is the rental car companies get their lobbyists to go up to the capitol where these superficial, ignorant voters are that can only understand things in bullet points by and large because there’s so much information to absorb about every bill. You get them going to a committee or going to talk to a legislator and say, “We’re the free market approach and all we want is fairness. We want a fair playing field.” They’re not paying all these taxes that we are and they’re not doing all these other things that we are. It’s unfair. That’s persuasive to a lawmaker. I believe in a fair playing field. It’s because the lobbyists for the big companies know well how to spin things in a way that sounds good to an ignorant lawmaker who can’t dedicate a lot of time. When you have the ability to go in there and counter and say, “They’re claiming they want a fair playing field,” what they didn’t tell you are all the cars that they buy for their fleet, they don’t pay sales tax on. They get a sales tax exemption saving a profound amount of money.

We’re totally fine to talk fair playing field if they’re willing to give up that exemption or give it to our group. That’s the problem is there are not a lot of great opportunities for lawmakers to dig in and say, “What do you say to that? Let’s try and get into.” It’s talking points. It’s superficial one-pagers and bullet points. The average lawmaker can’t simply by virtue of how the process works dedicate the amount of time to fully understand the issues. That’s when you get these big companies who are protected by the status quo being able to divert lawmakers into saying, “We want a fair playing field so we’re not going to pass this bill that helps Turo.” Turo and freedom fighters like us on the sidelines are like, “That’s not how it works.” By then the bill’s dead and they have a year head start to keep doing whatever they’re doing.

What ended up happening with Turo, with that bill?

What the bill did that we said by and large is, “If you’re a government and you want to regulate a company like Turo or any other peer-to-peer company, you have to treat them differently than the type of business they’re disrupting.” For example, you have to treat the company Turo differently than you treat Enterprise, Hertz, or rental car companies that own vehicles, own parking lots and buildings because peer-to-peer apps like Turo are a matchmaking service. It matched you with the model X guy. That’s all they are. They don’t have inventory. The same thing, Airbnb is not a hotel. Uber’s not a taxi service. We have this model framework saying, “Treat them differently. We’re not telling you how.” What we’re saying is you can’t go to Turo or whatever new peer-to-peer app comes online and say, “You have to abide by these old regulations.” We’re trying to say in law, create a separate path because they’re different. Everyone freaks out, loses their mind, they narrowed the bill, amended it down to nothing and then it ended up not passing. In a free market, a pro-business state no less.

As societies, as the world continues to innovate, Turo is like you rent your car out to somebody else. It’s not this revolutionary life-changing idea. When those are presented, how have you been able to think through that as far as how you would approach some life-changing treatment? I know stem cells and that type of therapy is getting big, but yet it freaks a lot of people out. It could be revolutionary for health purposes. How do you reconcile your ability to have conversations with legislators who can’t necessarily understand the principles of a simple service like Turo?

It’s tough and to the latter point you bring out with stem cells, I’ve got a friend who’s flying down to Mexico because that’s where you’ve got to go to get this innovative therapy. We have a choice in America as a once in theory or to some larger degree free market capitalist society that embraced innovation that has veered far more towards socialist, redistribution and pro-regulation. We have to make a decision. There’s a fantastic book called Permissionless Innovation. This is by Adam Thierer at the Mercatus Institute. It’s all about documenting how our society has been improved, especially through internet technologies where you had a bit of this Wild Wild West. The lack of regulation stimulated this innovation where people could experiment, fail and succeed that have benefited all our lives collectively.

There’s been some pain. There’s been some loss. No one can argue that we haven’t benefited as a society by the profound innovation that’s been able to happen. His argument is that rather than a presumption of regulation, which is what our society has adopted collectively speaking, we should have a presumption of innovation. We should have permissionless innovation where you don’t as an entrepreneur have first to go and fill out form 1093X and then you have to go over here and get a permission slip. Dot your I’s and cross your T’s. Just go innovate. As long as you’re not hurting anyone and everything’s fine, you pass some simple little check and then go innovate.

The market and the government are very joined at the hip. Click To Tweet

The problem to your question is lawmakers need to become comfortable with that. What we’re trying to figure out in our state, but then more broadly the message to this is how do you get lawmakers to embrace permissionless innovation? How do you get them to abandon the two issues, fear and laziness? How do you get them to care? How do you get them to have faith rather than fear? I think part of that is storytelling by say, “Show me that phone in your pocket.” That’s a result of permissionless innovation.

Imagine if the government had said that before coming up with a new cell phone, you must do all these things. Would Apple have done that? Would their competitors have done that? Would that have sparked all the race of innovation that has accelerated new technologies and new things that we take for granted? Using stories and examples to get lawmakers comfortable with a presumption of innovation is where we need to get to. We’re internal with our organization trying to figure out how do you give them that comfort so when enterprise, when the hotels or when the protectionist incumbents come to them and say, “We need protection. We need regulation,” you can have a lawmaker say, “No, I support capitalism. I support free markets. I understand you may not like it, but we’re going to go this path instead.”

When I look at where we’re at as a society, especially with the fiscal situation we’re in as a country, as well as how our monetary system operates. The issues with government, mostly federal government deficits and how much debt is on the books. The debt they’re in with other countries as well as us, the Federal Reserve. You also look at the unfunded obligations, Social Security and Medicare. There are a lot of issues out there. I look at the future and without innovation, if things slowly sputtered along, there are going to be a lot of heartaches. Technology is where innovation occurrence because the idea of technology is to be more efficient.

In a free market, if you don’t have a technology that makes a person’s life better or reduces the amount of time or reduces the amount of money, it’s going to fail quickly. When you start to stifle innovation, that’s when the future is going to get rocky. I never heard of that book before, but it makes sense because if you’re having a hard time with Turo, what about a life-changing medical procedure? What about the medical marijuana that you’ve been dealing with? It’s one of those things where life is happening quickly, and if the government starts to put their foot on the brakes, it can be bad for everyone.

One of the challenges is that because economics and politics are inherently intertwined, you got all these regulations and laws that are encumbering the market. We’ve never had a truly free market. We can talk about wanting one and how they’re great, but we’ve always had this regulated market and politicians respond to pressure. Whether that’s angry mob pressure or people demanding things and saying, “We want this,” and looking at the polls. Part of our challenge, to be frank, is a lot of people are a climatized to the status quo. It’s hard to quantify. The unfunded liabilities and the college debt bubble, all these things are on the horizon. The numbers are so big we can’t even comprehend them anymore. The layperson, there’s no demand for change. Consequently, there’s no pressure being applied to lawmakers. If anything, it’s the opposite. I don’t want to think about that. I don’t want to touch it. I want my easy credit. I want the ability to get a loan to finance my house, put the burden on someone else, and that’s where the demand is.

TWS 14 | Capitalism

Capitalism: Global warming is itself a bit of political bread. It’s the hip thing to be excited about and it’s what everyone wants to chatter about.

 

You have that perverse incentive for lawmakers to ease the burden on the people who are directly in their ear and the people who can’t advocate and the rising generation who would keep kicking the can down to. That’s part of the problem is when we had the food truck owners rallied together, when we had the Uber and Lyft drivers rallied together, we can go work together to create the right pressure to get things changed. Create a freer market to get these bad regulations out the way. When it comes to the big financial problems you’ve listed, where’s the mob? Where’re the pitchforks? Where’s the pressure? If anything, there’s almost the opposite incentive and that’s to our collected detriment because it’s creating a big problem.

I was in Italy and we were in a city where there were this massive protest and kids apparently left school and they were protesting global warming. In Italy, I don’t know if you know much about what’s going on there, they’re horribly in debt and they’re in a recession. A lot of it has to do with their government and the lack of accountability that’s existed there, but yet they’re protesting global warming. That’s something I think you’re right. Worldwide, we’ve been polarized with status quo and how things should be and it’s been exploited.

Part of it is the bread and circuses mentality of Rome. There are political bread and circuses. Global warming is itself a bit of political bread. It’s the hip thing to be excited about and it’s what everyone wants to chatter about. Why don’t they funnel that same political energy to go tackle the real problems that are actually threatening people? It’s almost a convenient distraction for politicians to look cool and say, “I care about saving the world.” Save your country. Save your budget. It’s like the Jordan Peterson, “Clean your bedroom first and then go worry about other stuff.”

Accountability is a huge piece of capitalism and it also seems it’s a huge piece based on your success. With capitalism, the accountability is if you produce a bad product, people are not going to buy it. Therefore, you have the incentive to produce something of value. When it comes to lawmakers, what you’ve done is you’ve created a similar environment so that they operate in a different environment of accountability. Talk about what you’ve done with creating lawmaker index.

In our state, other groups do this too, but we’ve created it to the point where it’s effective. The very night that the legislative session ends, we already have done and finalized our index scoring of how they did. There’s immediacy. We’re not waiting a few weeks when everyone’s back in their lives. We get it out quickly. Ranking all the best and the worst votes and the benefit in doing this is we’re first to market. Everyone’s looking at our index. It’s the thing coming out the gate to see how everyone did. We get a lot of attention and because we get a lot of attention on the index, that creates an incentive for lawmakers to want to do well so that they perform good.

We can't all do the same thing, but we can support one another on our different paths. Click To Tweet

All throughout the session, we’ll have different lawmakers coming up to us and say, “How am I doing?” We get little bonus points when they sponsor our bills because they’re good free-market bills. We say, “If you run one of these bills, you’ll get some extra points. If you run a bad bill, you’ll get negative points.” We’ll get lawmakers like, “I only did one bill of yours. Do you have a couple more that we could do?” I have a puppy and I can use the treat to do good behavior. You don’t want them to pee on the couch. We have all these politicians doing bad things, you’ve got to wave the little incentive in front of them. By no means is it like the answer. A lot of them don’t care. Some of them live in districts where they’re liberal or progressive and they’re not all fans of the free market. They want these big socialist policies.

Those politicians in true representative form don’t care about our index because they feel they’re representing their constituency well. It’s not the answer across the board, but accountability is essential. When you go on Amazon to buy this laptop, you’re going to see the ratings. You see what everyone thinks about it, what experience they’ve had with it. You can have confidence in your decision to acquire that commodity. Why shouldn’t the same thing happen with elected officials? Why can’t we see their voting record conveniently? How they’ve done on the best and worst? How many times did they raise taxes? How many bills have they sponsored that protect the free market? That type of information leads to an informed consumer, in the case of a commodity or an informed voter. I’m sure you get this too.

You get to Election Day. I get all these texts coming in from people saying, “I haven’t looked at anything. Who should I vote for? I didn’t have time to study, tell me what to vote for. I think like you.” I’m like, “Don’t vote.” The concern is we need to have informed voting, informed consumers in the same way. I took an Uber drive and you can see the star rating from all the other drivers, and I have one too. It’s a self-policing system, a great example where the market is taken care of itself to weed out any bad actors. Why can’t we have that in politics? We need more of it.

Fundamentally, isn’t government about protecting free market principles and protecting individual rights. They’re not there to solve problems. If you look at the innovation that I think is the key to the future, inhibiting that is going to be catastrophic. I also look at it essentially technology replacing the government in a sense. We have the tools of accountability that government creates in the first place, whether it’s permits for restaurants or even drivers’ licenses. There are a number of different things that are governed to protect people, but at the same time, there are a lot of free-market tools that would most likely do a better job.

The issue is there’s always going to be those forces trying to dissuade the adoption of new technologies that are going to disrupt. I’ll give you an example. I was in the House of Representatives this session and I leaned over to my policy director. I made a comment to the effect that there’s this woman, a clerk whose job it is to read the name of every bill when it’s time to vote. That’s her job. You can automate that. Everything’s digital and yet this woman is still required to read. Run that through a Google voice transcription thing. It’s super easy, super effective and it saves $60,000 or whatever it costs to pay her. Yet everyone in charge of the budget and on the staff loves that woman of, “Why would we want to let her go? She’s great.” You have those perverse incentives always trying to inhibit the ability to progress.

TWS 14 | Capitalism

Capitalism: Figure out how to make a difference with your unique skill sets.

 

That’s the nature of governments, the Ronald Reagan, the closest thing to eternity is a government program or a government job. This has been great. I didn’t have all the time in the world, but we appreciate it because hearing from you is a different perspective on reality. I look at it completely different. I don’t see things as you see them because of your experience, especially with lawmaking in general in that process, but also understanding free market principles at the level that you do. Capitalism is interesting because we’ve never had pure free market capitalism in anything.

There’s always been in our modern society some element of government and policing to an extent and not protecting human rights. At the same time, you look at the capitalism principles, creating an environment in which people can innovate and not have this oversight or scrutiny and what they’re trying to do. It’s beautiful to see all the things that have happened in our lives, whether it’s the technology in our cars, our phones or in our computers. The more freedom we advocate, the better the innovation is going to be and the better our lives are going to be. To end with this, talk about what you see is the future of just lawmaking, markets, and society. How do you feel things are going in general?

Anyone who cares about capitalism has to care about politics. You have to care about human psychology. They’re inherently connected. You can’t succeed in life financially if you don’t understand how the system works. It’s like getting out the chessboard and all the pieces are laid out and you think it’s a checkers game. You have to understand the rules of the game. As sad as it is, politics inherently as connected to the system of capitalism that we have or the partial capitalism or whatever you want to call it. That’s the downside and the opportunity I see that a lot of people disconnect the two. They don’t realize if we’re going to be successful and have a true market economy or whatever degree that we can, we have to get involved politically.

At a minimum, we have to be aware politically to know where the currents are going and what to do. Either get involved, support someone else who is effective in your state or the national level. As great as it is to go try and make money and grow our businesses and that’s all important, we also have to be playing defense and offense against the forces that are trying to undermine what we’ve protected and what we’ve built. You look at the rise of AOC and it’s still burning to these days. The popularity of the rise of democratic socialism from people who don’t even understand the implications of what that term even means.

There’s a good reason to be a little fearful of the future from a capitalist perspective and what that means. We can’t care, ignore it and think it will go away. We have to confront the fact that the market and the government are joined at the hip. We need to know what to do about it. That’s the pitch I would make to your audience is to figure out in their path of life what their unique skill sets and interests, how to get involved and how to make a difference because we need all the manpower we can get. Whatever state your dear audience is in, I would invite you to go to SPN.org. That stands for the State Policy Network, and it’s like an umbrella association for all the different free-market think tanks across the country. Every state has at least one, some have more than one. Whatever state you’re in, if you want to see who’s in your back yard working in the trenches, and I promise you they’re having more success than any of the national groups that are doing. It’s hard to get national reform, but there’s so much opportunity at a local level where the rubber meets the road and these are the guys in the trenches working on free-market stuff in your community. SPN.org is where you can find them.

That’s the thing even doing interviews like this. You have been influential outside of Utah, The Tuttle Twins, but I know you’ve written a bunch of op-eds for nationwide newspapers. Plus, you’ve gotten a lot of press with some of the things in Utah. The digital privacy is one I remember where Utah was one of the first states to pass them. It’s one of those things where with Connor, whether it’s me following them on social media or it’s sharing some of his thoughts because I oftentimes talk with people and mentioned The Tuttle Twins books and give them away. You can have a similar impact, whether it’s through following these organizations, supporting them financially, but also sharing thoughts and sharing ideas. I’d also say Tuttle Twins is an incredible way to learn about free market principles from a number of different angles because teaching your children about it through those children’s books is incredible.

Breaking it down to that fundamental level solidifies that theory and that principle in your mind. I know that you’re making a huge difference here, but as our society continues to progress or grow at a quick rate. Alexandria Ocasio-Cortez, you have some radical ideas that are manifesting and because of good marketing, because of good influential tactics are gaining steam. Understanding what those things mean as it relates to our future is important. I understand that I don’t have time during the day to write the way you do or to do videos or to lobby legislative sessions, but there are organizations out there that are passionate.

It’s a division of labor. We can’t all do the same thing so we can support one another on our different paths.

What are the best ways to follow your organizations?

Our website is LibertasUtah.org. The Tuttle Twins books are a combo deal with all the discounts and workbooks we throw in is at TuttleTwins.com. If any of your audience wants to follow me or find out about me, google Connor Boyack and I’m easily discoverable.

Connor, thanks. I appreciate it.

Thanks for having me.

Thanks, everyone for reading. We’ll see you next time.

Important Links:

About Connor Boyack

TWS 14 | CapitalismConnor Boyack is president of Libertas Institute, a public policy think tank in Utah. He is also president of The Association for Teaching Kids Economics, a national organization helping teachers educate their students about the free market.

Connor is the author of several books on politics and religion, along with hundreds of columns and articles championing individual liberty. His work has been featured on international, national, and local TV, radio, and other forms of media. A California native, Connor currently resides in Utah with his wife and two children.

 

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Looking At The Markets, The Political Arena, And The World Economy with Dr. David Collum

TWS 13 | Economy

 

Let us talk about the free market as we dive into the insights of Dr. David Collum about the economy, our society, and our future. He is a Betty R. Miller Professor of Chemistry at Cornell University and is a regular and valued presence on the internet commenting on the financial system and the predicaments of our time. Dr. Collum gets philosophical and shares the paradigm and perspective he is using now to look at the markets, the political arena, and the world economy as a whole. Looking into our current situation, Dr. Collum shows how the economy has become about moving money and not goods and services, sharing better ways to distribute.

Watch the episode here:

Listen to the podcast here:

Looking At The Markets, The Political Arena, And The World Economy with Dr. David Collum

I have an interesting guest. We’re going to get into his story and what he does for living as well as something that I became intrigued with. His name is David Collum. He’s a professor at Cornell University. However, he writes a yearly economic review and has done for the last several years. You can find it on PeakProsperity.com, Chris Martenson’s and Adam Taggart’s blog. I’m excited to dive into his insight into the economy, into our society and what he sees as our future. David, welcome to the podcast.

I’m glad to be on.

I did a ton of research into what you wrote about in 2018. I happened to be going to a financial conference up in Whistler right after Ray Dalio was speaking, Howard Marks was speaking and there are a number of others. It helped me have a more refined perspective on what occurred in 2018. What I want to do is dive in briefly to your story because your economic review of things and your formal profession are a little bit different. Would you maybe explain how you came to start writing this annual review?

I didn’t pay any attention whatsoever to the stuff. I did chemistry. Around 1995, I started to pay some attention, some natural things start to develop some savings and you realize that it’s starting to matter. My dad and I used to chat about it when I was a kid. It was natural. As a raging bull for a while after that. In the late ‘90s, I started to notice that things are out of whack. In a fateful moment in July of ‘98, I decided to think for totally out of whack and I dumped half of my equities in cash. Almost to the day we went into that Asian crisis, I feel like I’m a half genius, half idiot. Down in the basement, I said, “If this comes back, I’m dumping the rest.” We came back and by mid ‘99 I had exited equities. There’s some phenomenon where once you go bearish, it’s hard to go on bearish again. Bulls get taught lessons much more dramatically than bears. By ‘99 I dumped all the equities right down to the last share and I was buying gold. I wouldn’t tell anyone though. It was embarrassing to buy gold.

Finally, I fessed up to a couple of people and they go, “Gold?” I said, “Yeah.” That paid off well over the next several years. It took a couple of years to not feel like an idiot though. I read more and more. I was at this chat board run by a guy named Doug Noland. We would chat and I wrote some stuff up at the end of the year and said, “Here’s how my year went and here’s what I’m thinking about.” One day I went viral. I left the containment field. I went from 200 clicks because that’s how many of us were there to quite a few thousand. It turns out one of the guys, named Jessie’s Café Américain, he had started the blog and he put it there. The next year I wrote it again and it got bigger. It was in 2008 or 2009, I decided to get serious. It was my 30th year of investing so I called it 30 Years of Investing from the Cheap Seats.

I laid it all out and all of a sudden, I started getting emails from people around the globe. The most shocking of which was the one I got from Iron Horn and he said, “This got passed to me,” and made some comments. From there, every year got bigger and broader. It had a natural growth rate to it. In 2018, it was about 160 pages. It’s hard to write 160 pages, but it’s hard to do it at the end of the year. I go into some lizard brain to do it. It goes to Zero Hedge, which spreads it around the globe. I’ll take on anything that catches my eye. If an antique catches my eye, I’ll write about antiques. If college finance catches my eye, I’ll write about it. There’s always a section on bonds, valuation and stuff like that.

I don’t necessarily count it by the pages because I’m reading it on a browser. I counted by how skinny that little icon is that you have to drag down. It’s quite a bit of work. Let me dive into a few things that you said. The first is you started to see things differently in the late ‘90s, which gave you a certain perspective. You acted on it. Maybe talk about where that philosophical base came from and maybe how it’s evolved into what that paradigm or perspective is you’re using to look at markets, look at the political arena and look at the world economy as a whole. Maybe you can go through that if you would.

I’m not a trader. I go into a position I usually average in slowly. It can take years. I probably make a trade a year even sometimes. I’m 100% about valuations. What happened to me in ‘98 is I concluded the valuations were at a point where historically win from that point. That’s still true to this day. Of all the cycles I’ve been through, I was in all bonds starting in 1980. People would say, “That was stupid.” I go, “I was making about 15%. It wasn’t that stupid.” When the crash in ’87 occurred, I was reading about it. I was not paying attention, but I realized I should be in equities. After the ‘87 crash, I moved into equities. I moved out again in ’99. I moved into gold, a lot of cash. I had a short position, which is a trade thing for me to do. I’ve done it twice. I will probably never do that again. It worked both times, but I know better now.

Winning doesn’t mean you’re not an idiot. I don’t blame myself. Every decision I make goes through the filter of it doesn’t work, will you forgive yourself? I started buying in ‘09 but I failed to buy not out of fear but out of greed. I started buying it. What a lot of people don’t know is we got down to approximately historical fair value in ’09. They think we are in some basement somewhere. We were nowhere near a basement. I document that exhaustedly especially in ‘18. I was positive that we would have to blow out a lot more. I remember Doug Cliggot saying, “I’ll be buying at this level and then it’ll drop. I will be bullish and at this level I wish I had saved my money.” That was the mode I was in.

When it jumped away from me I said, “This is 1931. We’re going back down again.” Nobody saw the levels of intervention coming. I know hundreds of people saw the mortgage crisis, hundreds and hundreds personally. I can’t find a single person that can point me to a single article where they said before this is over there will be trillions of dollars inserted into this. I can’t find that article anywhere. I failed to catch this road rage created by central banks. I’ve been largely not catching it. I was trading a lot of water and gold and I’m waiting for the next downswing. If my worldview is correct, it’s going to be a nasty one because they’ve blown up a gigantic bubble in both bonds and stocks. When those two start to blow up, I don’t want to be in the splash zone.

You had this perspective of things in ‘09 and then you saw the initial intervention mostly and then it gravitated to QE, how markets would respond short-term and the long-term.

The corporate buyback isn't capitalism. It presupposes that every other aspect of the economy is free market, which is not. Click To Tweet

First and foremost, I joined the club that turned out to be big and wrong that inflation would take hold. It hasn’t. There are people who say it’s there, but it’s not of the magnitude we thought and gold coming out of that bottom. It wasn’t in 2000. If I remember ‘13 where gold started paying dearly for not being right and that’s the thing I blew. I didn’t listen enough. I was like Lacy Hunt, Mike Shedlock, they were deflationists. I bought the bankers line that determined central banker can create inflation. Hunt and Shedlock are the two that I happen to remember well saying, “We are going to have deflation.” It didn’t sit with me and I think they’re correct.

It’s one of those things in hindsight. Everything makes sense as to this move and what it caused. I was looking at foresight when the move is taking place and seeing what impact it’s going to have. Sometimes it’s impossible because it could go a number of different directions. That was ‘09 and the world has changed quite a bit. How has your perspective changed in regard to your philosophy? Valuations no longer make much sense at all. You’ve had a lot of creative corporate finance going on which has continued to grow certain sectors. Ultimately, there are signs that there could be a correction. There are also signs that there might not, but maybe talk through what your experiences have been since 2009 and how your philosophy and perspective have been refined.

It hasn’t changed too much in the sense that of all the bubbles, this one is the one that seems most nonsensical to me. Every previous bubble, there was a good plot line, there was a good story. Whether it was 1929, 1999 or the 1960s where you can always say, “Here’s this revolutionary moment in history and things are rocking and this is why it’s exciting.” Even the South Sea Bubble, they all have a story. The story of this particular bubble is the Fed won’t let us down. That’s a stupid story because they’re incompetent most of the time. They are able to be competent in the short-term, but not able to stop the tides in the long-term and be a cause of a lot of pain when they don’t. I severely blame the Fed for ’09. They’re at ground zero for ‘09. It wasn’t crazy consumers. It was monetary policy.

How do you address those that are like, “The world would have gone to crap and were crumbled if the Fed didn’t intervene?” I hear that quite a bit.

I can live with that idea as long as those people acknowledge that aid has caused it. This is like Ted Bundy is killing people. The second thing I would want them to acknowledge before we would be on the same page is if they’ve been excessive since ‘09. It went off the cliff during Yellen’s term as Fed Chair. She had opportunities to start getting things back to normal and she failed. All excessive QE’s, it’s possible they can see disasters. They’re afraid of it. We now have a Fed who’s afraid of deflation, afraid of a recession. The Fed used to be the root cause of recessions and now they’re trying to avoid them at all costs. When the next one comes, it’s going to be bleak. We’ll have massive corporate debt. I can’t even fathom. Pension funds are underfunded at the top of a bubble. How do you get an underfunded pension when they’re all underfunded? The next brutal correction’s going to send them far into the basement that they’re going to break. They’re going to break right on schedule for the Boomers trying to retire. It’s going to be unpleasant. If the next recession comes and goes and it was garden variety, it’s wrong. I don’t know what to say, but we’re going to be in fetal position on the next one.                                    

I’ve dedicated this season to the theme of capitalism. When you look at free market capitalism and what that philosophy entails and the principles, I would say a lot of economists have understood it for a while and then what it has become. Looking at how that word is used nowadays, there has never been a truly free market, capitalistic system. That’s where you have intervention particularly by central banks and how that does not allow for certain elements of capitalism, mainly failure to occur. It essentially creates unintended consequences and now it’s been creating unintended consequences for the better part of 100 years. If you look at where we’re at, I would say fundamentally when you look at a free market, we would have crashed. Banks would have been out of business. A lot of other businesses would have folded, but that would have been given rise to a more efficient monetary system potentially. We can’t know. It’s all speculation.

You look now at what you mentioned, the fundamentals there when you start to manipulate behavior, you’re essentially deferring the problem to the future. Who knows what that’s going to be? I look at some of the same concerns that you have, the unintended consequences are monstrous. Maybe talk about a few of the big ones. You mentioned pensions. You mentioned the corporate bond market which is massive. Maybe get into those few points which you talk about extensively in your review. Maybe talk about those couple of those main unintended consequences that a lot of this monetary theory has created.

I went completely back to the law on valuations. I presented approximately twenty different metrics of market valuations. They all point to the same story. That is regression to historical mean won’t be a 50% correction. I believe this time at 50% correction, things will break. I don’t know what. These are chaotic systems that you can’t predict. You can predict it, but it will be a mess though. What we have is the appearance of politics getting into the game. At least some of your readers have been paying attention to this modern monetary theory. I’ve tried to get my brain around it. It looks like total nonsense to me. In theory, it’s fine. In practice, it looks like a disaster. It emerged in the context of a budget deficit that’s running 7% or 8% a year. We know in the GDP is running at 2.5% over several years and the budget deficit is running at 7% or 8% that you’re in a death spiral unless you turn it around. The market trends 300% while the GDP ran 30% to the extent everyone I know thinks over time they track. That’s not a good situation. That’s the famous Buffett indicator.

What we’re going to see in the 2020 election, politicians always promise free stuff, but you will be breathless with the level of free stuff being offered in 2020. Goofballs like AOC, Alexandra Ocasio-Cortez pulling the Democrats so far left that they’re socialists. I would never have thought there’d be people who were devout socialists in competency for high office. The rallying cry for the Democrats is going to be, “Wall Street got theirs in ‘09. It’s time for us to get ours.” That is going to be a catastrophic spark to cause problems that are almost unimaginable. I don’t know how to go there. If readers are interested, search justice Democrats. Go on an online search. You’ll find out there’s a coup going on within the Democratic Party and its real. I’ve seen videos of Ocasio-Cortez talking about how she got put into power and stuff like that. It’s a strange thing, the new guard of super liberals, super left wings. They are not trying to beat the Republicans. They’re trying to beat the Democrats. There’s a whole bunch of them. This is the real stuff. I wouldn’t have believed it but the first time I saw a presentation of it, there were videos attached showing people talking about it from the past.

What’s happening is there’s a powerful group who’s attempting to find Democrats in districts for which Republicans will never win. There are plenty of those which the people in the district are not happy with their representatives. They’re trying to knock the Democrats out at the primary. Ocasio-Cortez, AOC, is the de facto spokesperson for the Democratic Party. She’s got the microphone. It’s open mic night. She got elected with 15,000 votes in the primary. That’s where she got elected in the primary because she wasn’t going to lose the election. She’s going to lose the primary if she could. This Omar woman, I can’t remember her whole name. There’s about four for these freshman Democrats. This is the surreal part that people have to do a little deep diving. They were recruited by a casting call. They literally put out a call, Ocasio-Cortez said her brothers submitted her name and somehow it’s like they’re putting together a boy band or something. They’re putting together the Bangles and the plan is to start knocking off Democrats. I was wondering why Ocasio-Cortez was hammering the Democrats. She’s done some talks about that because she’s not against the Republicans. She is against the Democrats. This political move has massive implications for free-market economics.

It’s the first that I’ve heard of some of the points that you’re talking about. I look at what has essentially been a huge influx of capital, which I would say created the big bull run from ‘09 until even late 2018. It makes sense that you have a lot of economists at the helm there. You have Wall Street, which for better or for worse, they know how to manage money, they know how to make money and they understand the implications of losing money. You’re essentially saying that now, the influx isn’t going to go into the hands of Wall Street. It’s going to go into the hands of those that don’t understand even the fundamentals of things.

TWS 13 | Economy

Economy: When you start to manipulate behavior, you’re essentially just deferring the problem to the future.

 

My tax guy told me I’m going to pay 10,000 more in taxes this year because of the new tax laws. I didn’t see this coming. Maybe I’m unique. I’ve got an expensive house, got big real estate. If that’s true, April 15th is not going to deliver checks to people. All of a sudden there’s going to be a completely unexpected slowdown. That’s not going to help. We mentioned that all the time, student debt’s destroying a generation. Corporate debt’s nuts, corporate debt’s in a massive bubble. If you start toppling corporate debt structures, that goes straight to the economy.

One of the stats in your report that surprised me was the majority of the Russell 2000 was in junk status.

Something like 50% of the debt. It’s even worse then. 50% of the debt in the S&P is right above junk. When you swept the junk, you set up triggers all over the credit markets because there’s plenty of holders that did by statute, by legality which can’t hold junk. Electric’s a piece of garbage. It’s gone around the drain. Deutsche Bank’s going around the drain. There are a lot of companies that are not bringing enough revenue to pay their debt service.

Everything in essence intertwined and connected even other countries. Whatever is going to be that trigger that starts to release the dominos, who knows? Pensions are catastrophic because of the interest that they’re using as part of their actuarial models, which are not realistic. You add the unfunded liabilities. It’s been surprising to me because we’re in Salt Lake. Goldman Sachs’ biggest office in the world is in Salt Lake. You also have a relatively high percentage of startups getting to certain capitalization levels, but they don’t make any money. They operate based on being able to receive different rounds of funding. You look at how business is being created these days. We have to operate on a profit and I have had developers poached for 40%, 50% more than I was paying them.

I can’t afford that because other companies get funding. They bid up the prices of labor. You see signals everywhere. I tended to be in your camp back in ’09 or 2010. I didn’t see what was coming. I look at, “Is there something else on the horizon that we don’t see coming?” It’s the technological innovations that could potentially impact efficiencies and prices in a deflationary manner. I look at what you’ve gone through and that’s why the 160 pages is incredible research. It’s not stating just talking points, but also the actual proof behind it. I definitely recommend anyone who’s reading this who has some level of insight to check out David’s 2018 report definitely. Looking at these concerns that you brought to the table, I haven’t necessarily looked at the impact of Justice Democrats.

Justice Democrats are political. You’ll find articles about this movement. Who knows what they’ll do? That’s why these risks have appeared, but something like 65% of the population is signing off on the ideas of socialism. Back in the ‘20s and ‘30s, society had got through this unbelievable industrial revolution. Society was trying to figure out how an industrial world should be organized. There were central planner types. These were the guys who were at risk of being called Trotsky types. At the time, it was a credible idea that you needed good central control of things in this world that we had entered. There are the free market guys who said, “No, free market capitalism is the way to go.”

One can make the argument that that FDR was about a big compromise where the free market guys basically said, “Let us do our thing and we’ll put safety nets underneath you.” You’d get welfare state beginning. It’s the reason why society does protect weak people at some level. The welfare may be viewed as pejorative, but it gets out of control. It’s not a bad idea. We’re entering a period where we’re going to be looking ahead to a new grand compromise because somehow capitalism hasn’t done itself a service. I’ve been fighting about share buybacks and how corrosive they are and stuff like that. I’ve concluded people don’t even understand what they do and don’t do. The most fundamental level of what a share buyback is, people don’t understand.

Share buyback was illegal, but Glass-Steagall came into place after the Great Depression. It’s down as well. What I’ve discovered in the months I’ve been doing this theme is we’ve never had capitalism. There are capitalistic ideas and principles, but there’s never been a system because the corporate buyback isn’t capitalism. It might be, but at the same time, it should presuppose that every other aspect of the economy is a free market, which is not. Interest rates were manipulated which allowed for the corporate world to capitalize on low-interest rates and finance buybacks. It doesn’t necessarily create productivity in the company. It keeps their valuations at the same level or higher.

One of the ways to look at it is if you have an economy that’s based on goods and services, then all boats rise. This is an economy that develops new ways to do things and people’s boats rise at different rates, but all boats rise. We brought prosperity to ourselves by being fairly free market-oriented. The monetary policy has turned our economy from one of providing goods and services to one of moving money. We turn on CNBC, you don’t hear about capitalism; you hear about finance. As the economy morphs from goods and services to finance, you morph to a zero-sum game economy because no one’s making any. You say, “Yes sir.” What are the biggies? Is Netflix the replacement for US Steel? Is Amazon even the replacement for Standard Oil? Is General Electric being replaced by Facebook? These are stupid ideas.

Now, as the economy becomes about moving money, not goods and services, the little guy’s getting killed. That’s the wealth inequality problem. We will solve the problem not by finding better ways to distribute wealth, we’re going to solve it. I’m not saying it’s a solution is what we’re going to do. We’re going to try to redistribute wealth and redistributing wealth doesn’t work well. An efficient economy has a way of distributing wealth such that it’s fair. It’s not necessarily benign, but it’s fair. The workers get their share. They’re not as skilled as maybe then the upper guys who spent years in college and doing smart things, but they get their share. By pricing capital cheaply, they basically priced labor out of the equation.

Now, it’s cheaper for McDonald’s to get robots than to hire people. I am a little worried that change is always good. People worried about what we are going to do with a buggy whip maker, with cars. They’ll find a way. We’ll figure that out. Change can also be quick that it causes problems. If you add hot water to an ice cube, it cracks. If you’ll let it warm, it slowly melts. Things adjust. If you get too far from equilibrium, you get avalanches, earthquakes and explosions. These are big displacements from equilibrium who are turning the equilibrium.

We brought prosperity to ourselves by being fairly free-market oriented. Click To Tweet

What’s the central mechanism for that balance? What should it be?

First and foremost, the missed opportunity is for the Fed to quit worrying about recessions and let the downturns go. Let the downturns keep shaking out the losers and leaving room for the winners. When I was a kid, my dad was a contractor. He worked in one area and he went into cement pumping. It was this big monster truck that pumped up seven floors. I said, “Why did you go into cement pumping?” He said, “You mean besides I can make money?” I said, “Why that one?” This must have been 1970 or something. He said, “It’s because the truck costs $350,000,” which back then was a pot of money. He says, “I can compete with any other contractor who has the capital to buy that truck. We can both be on the playing fields at the same time.” He says, “What I can’t compete with are wildcatters who come in, undercut my prices and put us both out of business simultaneously.” Making capital precious keeps the meatballs out of the game. It keeps shaking out the losers and keeps the winners. It keeps the honest businessmen, the efficient businessmen in the game. Right now, we’ve got all these businesses that would not exist if we weren’t giving them credit and that is a problem.

That’s also what they consider as the solution where a lot of these technologies are ultimately to make life cheaper, make life better, make life more efficient and solve the world’s electricity issues and food issues. It’s both sides of the argument. What I’m saying is what’s in the middle balancing it all out? Like you said about water, if you go too cold, something happens. If you go too warm, something happens. Who is there dialing the temperature?

It’s the rate of change. Every once in a while, you have a small earthquake. You never get them anymore. If you go for 100 years in California without a serious earthquake, you’re about to get your rear kicked. This is where I blamed the Fed. They kept trying to avoid the corrective measures that would have kept it from getting too far from equilibrium. You asked me how I got into this. The field I’m in chemistry turns out to be complicated. Few people want to go near it. I was told that I couldn’t get funded and things like that. All sorts of contrarian things drove me into this field. What I discovered is absolutely everything that people thought they knew it was wrong, almost to the letter was wrong. We’ve gone through many projects after projects. Not only were the answers to the questions wrong, but the questions themselves were also wrong.

For 35 years, this has been my life. What it has taught me is experts can be dead wrong. I have a few superpowers, none of which you’d normally think of me. I’m not that smart. I have the ability to figure out what I don’t have to do and not doing it. That’s a superpower. The other thing I have the ability to do is to look at a bunch of experts who all tell me something and say, you’re full of crap. Few people have arrogance or the ability to resist the tractor beam, but I can look at a dozen central bankers who say, “This is what we should do,” and I go, “I don’t think so.” That’s a special crazy. I’m supposed to debate one of the vice presidents of one of the federal reserves. That’s a special crazy. It’s scheduled now I’m told on a podcast.

Is it one of the board members?

It’s a guy in St. Louis and it’ll be on Twitter, I guarantee you. It probably will be less than a debate. We’re going to talk about modern monetary theory. He invited himself to my podcast, curiously enough. He chimed in and said, “What about both of us?” At first, I don’t think he knew who he was. I said, “He’s the vice president; you got to say yes to this one.” We’re going to get on and discuss it. He entertains the idea of the modern monetary theory, which in practice is preposterous. I can explain it in theory, but I can’t explain it in practice. He’s an open-minded guy. I don’t think we’re going to clash. I also know that I can’t let it clash because it’s not fair to him. I could say, “Why did you instead do this?” In public he can’t respond to certain questions. I can say, “Isn’t Greenspan an idiot?” What is he going to say? I am going to have to be aware of the fact that I have to approach this differently.

Going back to like my original question, now I know we’re a lot of your philosophy has come from. You have stated theories. Human beings all have that element of fallibility where we form certain opinions, but it’s based on certain amounts of information, but not all information. I don’t know if anyone has all information, but you look at the world in that capacity and you realize that there’s a tremendous amount of trust for people that are considered so-called experts. You put yourself in a political role. You put yourself as part of the Federal Reserve. Suddenly the layers of power create this God-like mentality, but it also creates this incredible fear of being wrong.

That’s where a lot of the issues start because there could be positive results because of current monetary theory and what they’re trying to do. At the same time, they never addressed the consequences and there’s always going to be consequences. I can’t wait for that debate, but what a platform to try to have a discussion with an insider at the Federal Reserve on MMT, which is excellent. At the same time, it’s a modern monetary theory. Calling the question does monetary theory in general and what it does because right now it doesn’t make sense. Maybe you can explain this briefly, but from what I understand, the difference is it’s a creation of money that’s not monetized. There’s no underlying asset. If the Fed prints money, they buy a mortgage or they buy a bond or they buy a treasury. They buy something. This buys nothing.

The modern monetary theory has one of the premises that deficits don’t matter.

There is no debt. You’re never going to have debt. You could print your way out of a deficit.

TWS 13 | Economy

Economy: At the time, it was a credible idea that you needed good central control of things in this world that we had entered. Then there’s the free market guys who said free market capitalism is the way to go.

 

We talked about this many years ago. It is actually about 100 years old. We said, “In theory, the government doesn’t have to tax us at all. They can spend the money created with help from the Central Bank.” What happens is the cost of government shows up as inflation and it erodes your spending power as a tax. There are a lot of problems with this, one of which is that inflation is called a hidden tax. I want the taxes to be in plain sight, so we understand what it is we’re being taxed. The real problem is they make this assertion that taxes are to control the money supply. The claim they make is you spend the money and then you tax to pull that money back. It becomes a chicken and the egg if you’re not careful. Some say, “We’re already doing this, why do you care?” It is also this dismissal of government spending is rampant in that community.

Their idea to curb inflation is up to Congress to curb spending. When was the last time you saw them do that? That in practice goes nuts. When was the last time a guy stood up and said, “We’re going to have an inflation problem? As your senator, I’m proposing a bill that will cut jobs.” That’s not going to happen. It’s a stupid idea. Once in a while, they say something stupendously stupid. For a while it can sound rational. All of sudden they say something that’s mind-bogglingly stupid. I go, “You guys are making it up now.” It’s getting a lot of negative press. In theory, the tax against Larry Summers and Frogman even of all people are fighting it. They’ve shown up at the moment when our deficits look unsustainable. Along comes this theory that’s 100 years old that says, “Deficits don’t matter. Don’t worry about it.”

It’s not a coincidence. This has been fascinating. I wanted to see what your insight is and your philosophy around how you view you view things. Hopefully, the audience got something out of it. In the past, we’ve talked extensively about a lot of the issues we’ve briefly touched on. These are issues that are results. Those results have a cause. The cause is where to start, not trying to change the results by themselves. I look at what the Federal Reserve has done since 1913 and what’s happened since then. You can see a lot of positive things, but also from a fundamental standpoint, you can see a lot of negative things. We’re at unprecedented levels when it comes to the signals of our markets and the levels we’re at whether it’s a debt or otherwise. It’s scary at the same time. It’s always that question in the back of my mind, “What am I not seeing? What do I don’t know that I don’t know?” That’s always been that X variable that’s part of the equation that few people can ever understand until it happens.

When Powell showed up, people who thought they knew Powell as chairman of the FOMC. People said he’s different. He doesn’t care about the markets. He’ll do what’s right and the markets are damned. If they have to correct, they have to correct. Two events occurred that were mind-boggling to the point that those who are likeminded were breathless. It was December 24th when the markets had corrected 16% after a 300% run. They corrected 16% and all of a sudden secretary of the Treasury Mnuchin who’s most famous for his wife. The president’s working group on capital and we go, “That’s not even a blip? What are we doing?”

It’s possible something was going on in the credit markets under the surface. I picked up little murmurs about that. In January, Powell found himself on stage with Yellen and Bernanke. The huge mistake he made was to be on that stage because you do not speak as the Fed jury. You don’t speak extemporaneously onstage. He monitored the idea that the Fed was ready to support the markets. All of a sudden, that was the birth of the Fed, what they call it. The idea the Fed will not let the markets drop. Those two events created this massive January rally that we’ve witnessed. What it did is it showed a lot of serious players that the Fed is weak.

They capitulate. I heard the same thing as far as Powell is concerned but imagine the pressure he’s under. That’s where everybody caves at a certain degree of pressure?

Imagine if the generals in World War II couldn’t imagine dropping guys on Omaha beach. How would that work? If you’re in that position, you can’t be weak. If you can’t make the tough calls, you don’t get to be there, but he is there. He blew it and he looks real. He did a 60 Minutes episode.

I didn’t know he was the one with Yellen and Bernanke. I knew about the 60 Minutes one.

He wasn’t explicitly lying, but it was a massive dose of it. It was a massive dose of highly-engineered statements. When they asked him about wealth inequality, whichever one I know says, “You got the point at the Fed on that.” That’s the whole financing the economy in spades. When they mentioned that to him, he said, “That’s not under our jurisdiction,” which is technically not a lie, but he caused it.

That’s a big thing. That’s one thing that’s scary. At the top levels, there’s little velocity. At the lower levels, that’s where all the velocity is. That’s the main catalyst for higher inflation, but it’s kept at bay because it’s at high levels. It’s interesting Powell’s involvement and what the cause of that is. In the end, if they’re the temperature creator that we’ve been referring to, it’s one of those things where the markets have rebounded because that was not what they were priced for at the end of 2018.

The indicators say we’re close to a recession. We were close in 2015. I said, “A recession is coming.” People laughed. By the end of the year, you can see we were flittering around 0%.

Human beings all have that element of fallibility where we form certain opinions that are based only on certain amounts of information. Click To Tweet

On the yield curve, you are briefly inverted too. There are lots of lots of signs. I’m assuming you don’t sit down and take December off and write 160 pages about things. What are you using during the year to keep a pulse on what’s going on? What feeds are you following, what podcasts? What newsletters? What are you typically paying attention to?

Twitter is a gold mine. It’s big mind sync. If you can manage your Twitter feed better than me, you’re a better person. I happen to like Zero Hedge. You got to have a filter. Zero Hedge is great. I’ve had people tell me I’m an idiot for following Zero Hedge. 700 of my followers follow Zero Hedge. Everyone I know who I think is a big-brained Wall Street genius type, they all follow Zero Hedge. I would say Zero Hedge is indispensable. You can’t believe everything because they get stuff wrong, but they’re way ahead of people. Between those two, the stuff I can pick up on, the fly off Twitter is exciting.

Who are you following on Twitter specifically?

I’ve got a list of about 170 people who are on a list. I’ve got a much larger follower list, but I use my cold list and the guys I watch all the time. I watch it for Hussmann, Felder. My favorite person is Rudy Havenstein. He is a hoot-and-a-half. He’s the comic of Twitter. There are certain journalists I keep track of. Lisa Abramovich is good. Kate Long knows the bond market. Chris Whalen, there’s people coming across the feed all the time. Josh Crumb, Luke Roman. These are all people who are the junkies of financial Twitter, everyone knows their names. We’re all following the same people. They’re all entertaining guys. They don’t all agree, but they’re out there battling and posting. If you’re on Twitter and you’re there to share cooking recipes, it’s a colossal waste of time. I bang on the politics a lot.

When the Mueller report got summarized, I was having a field day for about a day where I was pointing out that 500,000 articles were written on Russian collusion, that is the number in a couple of years. There were people who are completely and utterly clueless and the media is completely and utterly clueless. Who knows about obstruction? The fact of the matter is they blew it. The Democrats blew it. They played their cuts. They believe their own press. It was hysterical to me. It’s like the Covington MAGA hat boy, they completely screwed that up. Every couple of months, they completely screw up a story. You got on Twitter and you’ll see their stupid stuff and you go, “I can’t believe those journalists are missing that.” It’s like a huge cocktail party where everyone’s drunk as a pig in Wall Street.

When’s the debate? What’s the date and time for that?

It’s sometime in April.

Do you have nothing definitive?

If you pay attention to my feed, I can guarantee you it’s going to be posted a few times. I don’t think it would be that exciting. It’d be archaic. I’m playing the straight man through this other guy. I don’t want to name because it hasn’t happened yet, but I think I’ll be poking. He’ll be explaining, I’ll be going, “What about this?” That’ll likely be the tenor. There’s the podcast himself. I like the guy.

Who’s the podcaster? Are you not allowed to say that either?

It’s Mac Abraham. We’ll see what happens. It shouldn’t be combative in my opinion. It should be a nice discussion.

TWS 13 | Economy

Economy: There’s a tremendous amount of trust for people who are considered so-called experts.

 

When you have that type of contention, that never leads to a productive dialogue. I’m excited for you to do that. That should be an incredible experience. We will let our audience know that they can chime in or at least listen in. David, this has been an awesome discussion. Thanks for taking the time. Is the best way for people to follow you Twitter or are there other ways?

If you search my name, the top links are no longer chemistry. @DavidBCollum is my Twitter feed. You can find me there. Anyone who passes the minimum IQ test could find me because I’m in the Department of Chemistry at Cornell. If armed with Google, that is not enough information. You need help. I get emails from people, some rather stunning ones sometimes where I go, “I didn’t expect that one.” I am the Paris Hilton of finance now.

I thoroughly enjoyed reading through your material. Thank you for the research that you do. I know it’s making a difference. Hopefully, with the combined efforts of others that when things start to get a little haywire, there’s enough influence to make sure the decision at the bottom is a good one.

I’ve never been on Twitter through a downturn. That’s going to be fun because my Twitter experience has all been during this big tenure.

You have been bearing one of the biggest runs.

He’s calling you an idiot in public. I’ve been chastised. One guy said semi-complimentary. He said, “People listen to you. You should be more careful.” I said, “If they’re listening to me, they’re in trouble already.”

There are a lot of freedom fighters out there that understand a lot of fundamental principles and basics and see the nonsense in what’s going on. I see why. Typically, that theory isn’t valued. Correction ensues because hindsight is one of the best teachers.

I’ll throw out a lab pitch for your readers. Of the many things I’ve focused on and said, “That doesn’t make sense.” The Roth IRA is a bad idea and is relative to a regular IRA. It has got a mathematical hole in it that’s a monster. I’m looking at this and I figured out and then I go, “Why haven’t people figured this out?” I don’t know.

What is the hole specifically?

The hole is if you get taxed the same at the beginning or at the end, which is the Roth versus the regular. The results are the same. It’s 4th-grade math. Timing’s irrelevant. You are taxed 20% in front of 20% at the end. You’re getting to the penny the same amount. The problem is the Roth IRA, you voluntarily put in money, pay the tax on money at the marginal tax rate. You’re taking the top sliver off like a 35% tax rate for some people. You’re voluntarily paying the high tax rate, whereas in the regular, when you pull it out it comes out over the effective tax rate. It comes out over all the brackets. The effective tax rate uses around 12% to 15% lower.

What if it is higher in the future?

The cost of government shows up as inflation - called hidden tax - and it erodes your spending power as attacks. Click To Tweet

It could be higher but that’s about no one knows. All I know is you’re giving up 12% to 15% upfront based on that logic. I want to ask him, “Why do they market the Roth?” He said, “You’re selling Corvettes, you sell the red one.”

It’s the bet of what you pay now versus the bet of what you pay in the future. The math gets the same rate. You’re paying the same. You can make a bet of not paying now, but then if taxes go up in the future, AOC says 70%.

Against the 70% but you’re still paying the effective tax rate at the end.

How do they calculate the effective tax rate in that regard?

There are actually calculators online that do it.

You put all the margins and it creates the effect.

It comes out starting at 0% and then 5% and goes up to 35%. No one’s effective tax rate is ever higher than their marginal by definition. They would have to drive the tax rate so high that the effective tax rate would soar and that’s almost impossible.

Change the tax code to tax withdrawals.

Even when the margin range was up 80%, 90%. Back in the early ‘60s, the effective rate was way lower.

There are trillions and trillions of dollars in qualified money. It comes down to at what rate you pull it out in the future. That’s the determining factor. David, thanks. This has been insightful. I appreciate your work. We’ll make sure that we get the word out, increase your listeners a little bit. Hopefully, as things start to manifest and a lot of the stuff that’s been deferred for a good part several years, that there’s enough influence out there. The culprits or those that created the whole thing are held accountable.

The system will break and then they’ll blame something else.

TWS 13 | Economy

Economy: The fact of the matter is the Democrats blew it. They played their cuts. They believe their own press that itches.

 

Those guys will be long retired. Alan Greenspan, he’s on his last leg.

His reputation as has dropped. His legacy finally got uncovered.

Have you seen that new documentary? It’s relative to the bailouts and what’s occurred since then as far as what Greenspan’s reputation. It also has some interviews with Bernanke too supposedly. I can’t remember the name. Where we’re at as far as social media, as far as information and how quickly it transfers, accountability is a lot more probable these days, especially at those levels.

If the next recession we get through it without a big deal, then I would say that I called her on. I’d be doing me a call if we get through another one.

It’s one of those things where it’s an artificial manipulation. If it was a free market, there’s going to be a correction. There has to be. If you have a manipulation, then it papers over the problem.

You’re out of manipulation. At some point, you get to the end of the rope and the next one is going to do it. Has it started? I’m on record saying I think it started in December.

With that little correction?

When the NBER announces when the recession started, I’m on record saying, “I think it started in December.” Watching auto sales and stuff like that. When they start, they start ever in perceivably. You don’t notice it. There was a poll done in 1991. They asked 51 economists whether there would be a recession that year and all 51 said no. Not only there was there but when the poll was done we were in it. That shows you how hard it is to detect when it started. When did the avalanche start? You noticed when it finished.

There are many fundamental issues and if it goes, it’s going to go. The talks by Howard Marks are interesting and I’m not sure if you’ve read his book. He hits upon the emotional state of things, the feeling state of things collectively. There’s this fundamental variable, fear, greed or passiveness and what that has to do with market cycles. The book is Mastering the Market Cycle. That’s interesting because Twitter is probably given you a good pulse of what the sentiment is out there.

It is bi-modal. You got the Yahoo saying everything’s wonderful. You got the bear saying, “I think it started.”

I’m excited to see what happens. For those that are in the know, for those that are prepared to make certain decisions, it’s going to be a great opportunity. There’s going to be a lot of people that pay a dear price for it.

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About David Collum

TWS 13 | EconomyDavid Collum is the Betty R. Miller Professor of Chemistry at Cornell University and is a regular and valued presence on the internet commenting on the financial system and the predicaments of our time. David has contributed many Year in Review articles and podcasts to the Peak Prosperity community, all of which are available online at www.peakprosperity.com.

 

 

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Italy – The Past, The Present And The Future

TWS FF 10 | Raise For Life

 

Humans are designed to grow, to expand, and to solve new problems. It may be at various levels and capacities based on our uniqueness, but we all have that within each of us.  With that in mind, how do you get a 10% raise for life? There are actually more opportunities to work from home or work in a place you want to live in because of how society is progressing. Everything is within your reach because of the internet. Knowing that all these options exist creates focus and ultimately a path to build your value statement. In this episode, Patrick tackles how to make more money or make the same amount of money with less time and do it every year.

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Italy – The Past, The Present And The Future

Financial Friday

I am in a different location than Salt Lake City, Utah, my home office. I’m actually in Florence, Italy. My wife has had a dream of coming here for so many years and there’s actually a conference that I’m attending so we’re excited to extend a little bit and visit a few cities. We were in Milan, then went to Venice for a few days, then came here to the conference in Florence. Then we’re headed to Rome for a few days. We’re hitting all of the hot spots. I thought what would be appropriate for this episode is to talk about Italy, the past, the present and the future, and what that has to do with you specifically in regards to the idea of compound interest. Get ready for another episode.

Let’s first talk about the past. I’ve mentioned this in episodes of the past, but Italy is actually credited as being the ground zero for banking. It’s really the more robust organizations. They had massive influence that started here in Italy and you can still see signs of that. One of the most prominent families, probably one of the more well-known ones was the Medici family. You could see their coat of arms everywhere and it’s popular here. I learned a few different things I thought that would be interesting for you. First off, they’re the first prominent banking family that had tremendous influence during the Renaissance era. Eventually part of this line became Popes and lots of influence. From a banking perspective, here’s something that’s pretty fascinating. They’re credited with the creation of double accounting using two variables: credits and debits. The banking family also funded the creation of the opera and they also funded the creation of the piano. These are things that we look at every day and realize that they’re just a part of our culture, but they weren’t necessarily here several thousand years ago. It’s interesting to see that history behind it and that it was funded by credit, by somebody taking a loan, using that loan to make something. In this case, it was opera and the piano.

However, a lot of the early banking families like the Rothschilds, obviously the Medici family is also part of it, they lent a lot of money to the Catholic Church. In addition to these ventures, the opera and the piano, the Medici family also funded the construction of St. Peter’s Basilica, which is at the Vatican City. That’s also very interesting. Then there’s a bank in Siena, which is the oldest bank still running today and it was founded in 1472. Before Columbus sailed the ocean blue, there was an Italian bank that was up and running and it’s called the Banca Monte dei Paschi di Siena. That’s essentially very instrumental in creating what we know as banking now.

Let’s get to the transition to the present. You look around Italy and it’s such an amazing culture. I’ve never been here before, but there’s beauty everywhere. The art, the cathedrals, the ornateness of everything, the food, the culture is so rich. Why don’t they have the power that they once did? They were the superpower of the world. Obviously, Rome being one of the greatest examples of a society that rose and then subsequently fell. There are many variables. If you look at why they lost so much power, I put it into two primary reasons. The first reason is the wealthy that were clearly intelligent, mainly coming from banking and being able to lend on ventures that were suitable for lending, such as the opera such as the piano, there are lots of different trade ships and the shipping industry being funded by banks. They had it going really well and there were some incredibly wealthy nobles and non-nobles.

What you started to find was that there became this idea that in order for the wealthy person to get into heaven, they had to make some pretty big donations to the church for them to be permitted to go to heaven. It was interesting. There are several different comments on some of the tours we took that talked about how much of the wealthy’s money went into funding, just these incredible cathedrals and churches, which is nice because we still have that today. At the same time, you look at the productivity and the wealth that was created in the first place, the ability to analyze and price-risk that it wouldn’t do something that really did not produce anything.

Humans are designed to grow, to expand, and to solve new problems. Click To Tweet

Second variable is that disruption happens. What happened in 1492? Columbus sailed the ocean blue, new trade routes were created, new trade partners were created. It no longer was the Mediterranean Sea. It really became to the Americas and slowly the Roman empire as well as Italy and their significance started to falter. It’s interesting to see how us as humans and our race, how we innovate and we’re always making things better and new things are created that we don’t necessarily anticipate. It ruins businesses sometimes. Just look at what the retail industry is becoming because of Amazon, you have disruption and you have cycles and you have new ways of doing business. It puts the older businesses, established business on the fritz. You see that quite often, especially in our day and age, and it happened back then too.

Let’s transition to today. Italy today is part of the European Union. This is the present. It’s not doing so well. However, Italy has a pretty big economy. It’s about a $2 trillion economy. It’s part of the European Union. I think it’s either fourth or fifth as far as its GDP. $2 trillion is its GDP. The issue with Italy is that from a banking perspective, they should be the experts in loans. If they’re the ones where banking originated, right now their GDP is over 150% and their credit rating is one notch above junk. Junk is considered a very high-risk bond or a high-risk investment. That’s where Italy’s bond rating is right now. One of the riskiest countries out there, one of the poorest situations, they’re in a recession. They had some negative quarters of GDP in 2018.

I’m going to give you one example of some of the stuff they’re spending money on. They’re taking out loans, you would think with a background in banking that they would know how to price the risk of different ventures just as a culture. They committed money to building this tunnel that goes underneath the Alps and it connects to France. I know the European Union has pledged money for it as well as France and a few other countries. However, Italy pledged 30%, 35% of the project and the project from the get-go has a negative $7 billion return. Obviously the point of making an investment with debt is to have a positive return. That’s the nature of debt. Oftentimes when you put debt in the hands of government politicians, they don’t necessarily have the incentive to always be profitable. It’s to do what’s good for everyone, yet there are a lot of unintended consequences with that, such as the situation they’re in right now where they have way more debt than they have GDP. As interest rates should be creeping in on their ability to go into Junk status and possibly be defunct and bankrupt. What’s interesting is the whole concept of bankruptcy originated in Italy, banco rotto, which is like a broken table because banking used to happen on a table. That’s where banco comes from.

This is where Italy’s at. I looked at where they’re priced in the market and they’re priced at a very interesting interest rate. In the United States, typically to understand the medium of short-term and long-term bonds, you have the ten-year yield. In Italy, it is basically at the same level as the US’ ten-year bond. That shows you just how mispriced the markets are when it comes to the underlying collateral, which is in this case, Italy’s government and being on par with the United States who has the best credit rating that’s out there. It’s just fascinating. The reason why it’s priced like that in the present is because you have the European Union, the European Central Bank, is ultimately going to be forced to bail them out. Who knows what the future is going to be? Oftentimes the fundamentals, the logical way of thinking as far as A plus B plus C equals this, “If this happens, then this should happen. Then this should happen.” It’s the human being’s ability to deduce and the ability to be rational and understand connections. At the same time, human beings also have the tendency more often than not to be irrational and their behaviors don’t reflect logic.

That comes down to the future. That in the future we don’t really know what’s going to happen. We can speculate but right now, Japan has been operating at over 200% debt to GDP for a really long time. They keep on going. Obviously, they have their own central bank, which is the Bank of Japan, whereas Italy does not see the European Central Bay because they’re part of the European Union. They can’t create their own currency. It would be interesting what the future holds. What this does show is that there are a lot of things that are out of whack and things are changing very quickly as far as technology, as far as the new people coming online, new technologies. That disruption is what creates companies going out of business, countries having major issues politically. What does that have to do with you? That has a lot to do with you because we live in a world that is interconnected.

The majority of American savings, which I’m assuming the majority of my audience are Americans, the majority of savings is tied to markets and markets are affected and impacted by a few things, the speculation of what things are right. For instance, the two and a half percent-ish that the Italian tenure is at as far as yield is concerned. That’s priced into expecting that the European Central Bank is going to bail them out. If they don’t bail them out, what is going to happen? You’re going to have a tumbling in the bond market, which means prices are going to go down quite a bit and the yield is going to spike to where normal levels should be for a country that has a bad rating. Right now, the expectation is that the European Central Bank’s going to bail them out. Therefore, the yield is still pretty stable. You look at other aspects of the market and what it prices and sometimes it’s rational, sometimes it’s not. The disruption and how quickly things are evolving shows that there is going to be volatility. When you have volatility, you have a much higher probability of loss when asset prices go down.

Let me hit on one more point. I look at my experience here in Italy because it’s not just the debt to GDP, which is really high, but there’s super high unemployment, almost 11%. Walking around the streets of these different countries, you wouldn’t think that there is a high unemployment rate. The people of Italy seem to be very productive. What I mean by that is they don’t open until 10:30, 11:00 in the morning, stores, cafes, restaurants, and then they close for the majority of the afternoon for like a siesta. Then they open up at night and they still are profitable. I look at the amount of youth that are on the street as well as a lot of the businesses that I have observed. There’s a lot of productivity. It’s a very dynamic people too. You look at how beautiful the hills are, the environment is the tourism that exists here. It’s incredible. Those resources are there for the Italian people. Yet oftentimes that’s not what is relied upon for things to rebound. It’s typically government who intervenes and thinks that they know the right decisions to make. Apparently that’s not working out so well for most companies, but we’re not going to have to be talking about that more than what I’ve already mentioned.

Let’s get to the last aspect of this short episode of Financial Friday, which is compound interest. One of the things that I see as the biggest misunderstanding or financial point that is made that is never questioned, which is the idea of compound interest. Compound interest is typically defined when an amount, typically money, is earning interest and then that interest earns interest, and that continues to grow. The hockey stick example is often used, exponential growth is often used. The rule of 72 applies to compound interest. Whenever it comes to something that can lose, when there is a loss available and anything that is assessed as being a compound interest, the whole notion of compound interest must be questioned. Here’s why. I used this example in the book that I wrote in Heads I Win, Tails You Lose. I hit on it a few different times because a lot of the claims in financial services with typical financial planning, is that because the market has earned certain rates of return in the past that they use that even though they disclaim that the past results are not indicative of what future results are going to be, they still use it. They use an interest rate to determine how interest compounds over time. If the market has averaged let’s say 10% over the last 30 years, then that 10% is used every single year without loss to determine what an end value will be.

TWS FF 10 | Raise For Life

Raise For Life: As you’re doing research and due diligence on what is available to you to make more money, make sure that it is fulfilling and aligns with who you are.

 

Here’s the problem with that is if you actually look at the nature of markets, when a market goes up and interest is earned, but then the market goes down and there is a loss, what happens next is very important. You can’t just measure the number because if you look at an average return, if you lose 50% in the market and then you earn 50% that next year, so one year you lose 50% in the next year and you gain 50%, you’re not going to be at zero. If you earn 50% and then lose 50%, you’re going to be at zero. Why is that the case? Let’s look at 2008. The markets collapsed in 2008 and the S&P lost about 40%. Math shows that if it lost 40%, it’s going to get back to breakeven if it earns 40% because negative 40 plus 40 is zero divided by two is zero. However if you have a $200,000 balance, you lose 40%, $40,000 and then you gained back 40%, you’re only gaining back 40% on $60,000.

Let me do that math for you again. If you start with $100,000 and in 2008 you lose 40%, your balance is $60,000. If you earn 40%, you’re earning not on a hundred, you’re earning on 60% which is only $24,000. You’re at $84,000 not back to a hundred but yet the average return is zero. There was an event that boil my blood because he’s talking about compound interest and talk about average returns and they were showing what the future will look like if these average returns are earned. The claim was made that if you didn’t participate in the 300% increase in the market over the course of the last ten years, then you lost out. I’ve heard that quite a bit, not just from this group. This group particularly hit home because there’s an affinity that I have with so many other of their teachings. This thing totally spun me because of the notion of compound interest and just how misunderstood even at very high levels this concept is.

I ran some numbers. The numbers show that from 2008 to 2018, the eleven-year period of time, the market losing was 38.49% in the S&P 500. The gains that it earned since 2009, if you look at the increase that it’s being talked about, it’s the level of the S&P and the level that it’s at now, which we argued that those two levels show almost a 300% increase. However, that is not how money works. That’s how math works, where you can measure those two points and show the increase but you’re missing time. Number one, you’re missing ten years there. 300% in one year is amazing. Over the course of ten years, not so much. Even if you look at a 30% average, which you just took 300 divided by ten. That’s not reality. The average return is actually only 6.74% over that eleven-year period of time if you factor in the 38% loss. If you factor in management fees, 1%, then you factor in taxes, the actual return is just above 2.5%. That is how profoundly misunderstood this concept is.

When you hear average returns, that’s something that you want to call into question. If it has to do with an account that can lose money, where your balance can actually have a loss in a year. The notion of compound interest must be analyzed at a much higher economic level where you are able to factor in the actual losses of money, not just the losses of an interest rate. I didn’t want to lose you too much. I’m going to post a video that I did on compound interest because this will help kind of go through these examples. When you think, do you like what you’re reading? Is this interesting to you? Do you like some of the history of banking? I hope that you take some action and actually go and study what compound interest is, how it works. These videos are very short, ten, twelve minutes the particular one I’m referring to. I know that it will make a big difference because it will give you some knowledge, give you some education that as you’re learning about finance and seeing how it applies to you specifically, most people will ultimately run some compound interest calculations, make so you do it the right way.

If you wouldn’t mind and if you’re not subscribed to the YouTube channel, subscribe. If you aren’t following me on social media, Instagram, Facebook, I love to connect with you. I try to post as much as possible. I’m posting about being here in Europe. It’s a fantastic trip. I hope you get to come here if you haven’t already. Also if you would do some reviews, if you review in iTunes, that really helps us get the word out, get the message out. I love to hear your feedback. Thanks for tuning into this episode of Financial Friday.

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The Capitalist System’s Agenda with David Morgan

TWS 11 | Capitalism

 

Some say that many governments have tried various economic systems, but there’s nothing like capitalism. How true is that in today’s government and market? Capitalism is a financial system where goods and services produced are through supply and demand in a market economy. A precious metals aficionado armed with degrees in finance and engineering, David Morgan gives more precise and in-depth insights on the different types and principles of capitalism. In this world of chaos that we live in, The Morgan Report founder sheds light on the importance of being accountable and trustworthy in business as he critics the current monetary and market systems.

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The Capitalist System’s Agenda with David Morgan

We’re going to dive into some philosophy as it relates to capitalism. I have an incredible individual that’s on. His name is David Morgan. He’s an economist, a precious metals expert, a writer and is the publisher of The Morgan Report. David, thank you so much for joining me.

Thanks for asking me. It’s a pleasure to be with you.

I thought I’d start off because of your expertise as it relates to precious metals, how your perspective about the tenets of capitalism is maybe slightly different as an expert in precious metals than maybe someone with an economics degree?

I’m going to go through a stream of conscious, I’ve thought about what you asked. First of all, I adhere to pretty much the Mises Institute, so that’s the Mises.org if you’re interested. There is a huge book called Capitalism that you can get actually download or get the PDF for free off of the Mises Institute’s website. There are a lot of critics about capitalism and I would say justifiably so. Every system has been tried and nothing succeeds like capitalism. First of all, you have to define it and I’m not sure this is a textbook definition but basically, it’s laissez-faire or the free market. There are a lot of people that say, “If it’s a free market, anything can happen. You have to have rules, you have to have regulations, you have to have regulators and without this you’re going to have complete chaos.”

You can’t legislate honestly. You can legislate it but you can’t do anything but enforce it. In other words, the market itself is the purveyor of right, wrong and good, bad and that type of thing. In a free market, the idea is the sound principle is that if I create something, I can benefit myself. Capitalists are selfish, yes and no. In true capitalism or idealize capitalism, I invent something because I’ve got this idea that’s going to save me time and energy, and it works. My neighbors come over and say, “That’s so awesome. I want one of those.” You build one for them and you barter. That’s true capitalism. Real capitalism or idealized capitalism, I am benefiting myself and society at large. This is the free market. I’m going to expand from this idea.

Let’s say in the real world, that’s the idealized world. We have a situation where there’s competition of capitalism. If I invent something, it works, I start to have a market, I get my neighbors involved and they all like it. One of the other neighbors says, “That’s a great idea but I know how to make that better,” and he does. Then basically, I’m more or less out of business or theoretically, I’m out of business because my idea has been made better and away we go. The market itself has determined, “This is the better product.” I want to take that theme and explore it a little bit. If it goes way back into the early days of self-entertainment, meaning the television but then this thing came out called the VCR, where you could actually get a movie and play it on your own TV.

There were actually two main thrusters there. There was the VHS and Betamax. Betamax was the far superior system than the VHS but if you had pure capitalism, the Betamax probably would’ve won out. In our society, we have something called advertising. If you can advertise something that might be inferior but convinced the majority or the consumer that your product is better for variety of reasons, you can have an inferior product take over the market, which is what happened with the VHS. This is another example because this one that hits close to home because I was all for the Betamax. When I went to buy one, the salesperson was nice enough to tell me, “Don’t, it’s not going to happen. It’s going to go the other way.”

TWS 11 | Capitalism

Capitalism

I want to point out some flaws to capitalist. Let’s go to non-classic Liberal. In some cases, they’re justified because there are people out there that only think of profit. They are greedy and basically run scams. It happens but again, you could legislate in a way and say, “You can’t do that.” In an idealized capitalism, if I make a product and it’s an inferior product, no one’s going to buy it. The market itself is going to give me true feedback and I’m out of business because word gets out. I might think that the product, but if I think it’s great and the market doesn’t, it’s useless. That’s where the real free market will work if it’s allowed to. People have this greed thing. This is probably something out there, I don’t know if I’m inventing this word or not. I’m sure it’s out there somewhere but I would consider conscious capitalism.

Conscious capitalism is where you actually take into the large picture something like the Native-Americans and the Chinese purportedly where you’re looking out four or five generations. You’re saying, “If I build this product like this, is this to the highest and best good of all involved?” Take off on that thing and hopefully you can follow my train of thought. In this day’s capitalism, there’s built-in obsolescence. You have an automobile, a washing machine, a refrigerator or whatever. A lot of these products could be made better. Meaning that they don’t have to have built-in obsolescence. It’s possible. An automobile, it’s not a good example but a refrigerator washing machine and stuff, they can be built to last 30, 40 years fairly easily.

Of course, they’re machines and they can break down and need repairs but overall built-in obsolescence is morally correct or morally incorrect. That’s a tough question. In our view of capitalism, if I build this VHS tape player and it only lasts five years, then I’ve got a market every five years because people are going to go back and you’re going to get a newer one. I have my business model so that I stay in business. If you’re a conscious capitalist, “I’m building this thing that’s going to be so good that this is going to last a lifetime.” I have to build it one time. That’s a much better use of resources. This is more conscious capitalism, more than driving out where you think it through and I could take it on a tangent if you don’t mind but this is more where the Millennials are going with the minimalist idea. That I only need one of these things, I don’t need twelve.

I only need one set of dishes. I only need one set of glass or only one set of coffee mugs. I like that idea because, we speaking to the society at large, have become brainwashed or the propaganda has got us to such a degree that rather than take what we need, we’re constantly taught what we want. Our want can never be satisfied because we always want the next iPhone. You’re taught this. In your heart of hearts, you may actually realize it doesn’t matter. It functions the same. There’s not much difference between my six and the ten. I’ve got a six and I don’t want upgrade it but that’s the idea. We’re built into this obsolescence, consume, consume, consume. Whatever I’ve got, there’s a better one coming out and I must have it. These ideas are not necessarily capitalistic ideas. They’re more bet on the propaganda machine from Mr. Bernays and teaching people what they think they should think rather than use what I call conscious capitalism. I said a mouthful. I’m sure you’ve probably got some ideas throw back at me. I’d love to hear your thoughts.

I would say the premise of humanity is that we have fallibility. We make mistakes. We make wrong calls. We have a unique perspective. Everybody has a different perspective of the world. We operate off of that, but it doesn’t mean that the other person’s perspective. I look at capitalism and the framework itself is the exploration of what you think and figuring out a way to do well, to appease that self-interest exchanging with others. Equally, as capitalism can create a lot of wealth, it equally could destroy wealth. A person may have the right idea but they bring that idea to the marketplace and to them it was a good idea but nobody else thinks the same. I think capitalism goes both ways. It appeals to both sides of humanity, our side which is brilliant and can bring value.

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In the process of trying to figure that out, when we do fail, it has to equally support that. As I’ve thought through this concept and thought through some of the things that you’re saying, in the end we have to believe that. We have to believe that there’s going to be success and there’s going to be failure. Ultimately, as you brought up laissez-faire capitalism, it’s one of those things where the equality is essentially the equal protection of individual rights. I think capitalism is definitely confused. There are multiple definitions and it depends on who you’re asking. Warren Buffett has a definition for it. Everybody has all their definitions of it.

Fundamentally, I think it’s pretty simple if people would actually take time to research it and it’s understanding that, we as humans have shortcomings and we also have this notion of self-interest. It’s figuring out what is the right system in order for those tendencies and instincts to operate. That’s where I go to, whether it’s Mises and there are a lot of others like the Austrian school but there’s also the Chicago school too that understood some of the primary fundamentals of capitalism. It’s one of those things where it’s reasonable to expect that system would work now as it was assumed to work 100 years ago just because of how much perception says we’ve progressed.

It’s been corrupted so much. Most of what we called capitalism is crony capitalism. Rather than go out and let the best product win in a real free market where there’s competition, they have a defense contract, which is a good example where it’s basically favoritism and political infighting. Who’s got the best lobbyists in Washington, DC to get a given contract during a given weapons program? It might be an inferior product but in real capitalism rather than the government funding and even the startup or the initial, let’s say piece of equipment or a piece of hardware, the entrepreneur wouldn’t have to go out and get funds one way or the other. Maybe they had a big success and had a lot of capital like Howard Hughes and they want to make something.

They have it within their own means to create something new and then there’s someone else that’s a competitor that raises funds. The market would decide which is the best. Like a foot race as a metaphor, this piece of hardware versus that piece of hardware, which one function the best, which one has the longest life and which one is easier to repair? We don’t have this anymore. We have a very small amount of it. There is this true free market capitalism in existence, yes but it’s rare. Most of the stuff, especially when you get government bigger and bigger has to do with who you know and this is called crony capitalism. It’s who you know, it’s what political cloud. It’s your district. It’s like, “We’ve never gotten funds for this. We should give it to them because they need to bring up their standard of living in this part of this district, of this town, of this state.”

TWS 11 | Capitalism

Capitalism: Every system has been tried, but nothing succeeds like capitalism.

 

It goes and it all sounds well-meaning but it doesn’t serve everybody to the highest and greatest good. The highest, greatest good is one capitalism and its real free market form and the market determining who’s right and wrong. I remember one of my earliest interviews I ever did on the internet is capitalism. It guarantees the right to succeed and the right to fail and that’s part of the process. I’m going to pick on Elon Musk. I don’t know him. I’ve seen him on TV, the internet and I heard him speak. He’s obviously quite brilliant. If Tesla was a true free market where he wasn’t subsidized, it would have failed. I’m going to add onto that. You can have a great idea who is ahead of its time, which means that you can have this electric vehicle from his Tesla motors and you can’t raise the capital and you can’t make it profitable.

Unfortunately, capitalism is based on a profit motive. That’s the way it is. If you don’t profit, then you’re basically out of business. We have crony capitalism, subsidies or whatever. He gets pushed. We need electric vehicles. It’s great and it’s wonderful. We’re going to subsidize them. He may have been ahead of his time where it wasn’t profitable at that time. He goes back to the drawing board and says, “I created a luxury car and it’s too expensive. I’m going back and I’m going to reinvent this thing. I’ve already got the basics, I’m going to go and I’m going to make the beetle, the initial Volkswagen of the EV market. That’s going to be my initial Tesla product.” It comes back out and the market’s like, “This thing is only $13,000. Are you kidding me?”

I’m not trying to pick on Tesla but everyone’s familiar with it so they can understand what I’m saying and get a picture in their mind. This is the idea of real free market capitalism. He might have failed temporarily and gone back. What does the market need? They’re awesome but is that what the market needs? What if the market needed a $17,000 EV that’s got a 200-mile range and everybody loved it? That’s what the market needed. The market comes out like, “Holy moly.” He’s only making, let’s make up a number, $1,500 per vehicle but he’s selling $12 million the first year.

There are two thoughts I have. The first one is agree with you. You look at whether it’s Amazon who is putting retailer after retailer out of business or it’s a Tesla that’s completely disrupting the auto market. Those markets were already manipulated. If you go back and look at how much GM has suffered through the years and how much political clout that they’ve built and spent. That cycle goes on forever, the unionization and how that has affected certain things. The second point I’m trying to make is our whole system has these elements of capitalism but the whole system is not based on it. This system is based on this cycle, which I think academia is part of it. You have funding for academia which bids up prices of tuition. You have students that are trained to be workers because of how our school system is set up based in the Prussian system.

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You have the government that’s involved at local levels, federal levels in pretty much everything as far as who they’ll fund, what they will subsidize and what they’ll back. This entire system has been based on that vicious cycle and because of the capital markets, whether it’s leveraged by the Federal Reserve because of loose lending standards. You have a whole system which is based on these fundamentals, which is in capitalism. Still, I look at some of the fundamentals of capitalism very well would have prevented a lot of what we’re experiencing right, which I think there’s a lot of good stuff. There are also some things to be concerned about. I’m trying to figure out, where we haven’t had necessarily sound money for 50 years, 71, I believe. We never had capitalism so knowing that, what do we do? How do we understand what’s right, what’s wrong and how to understand what we do to live a fulfilling life?

I look at the study of economics and the study of capitalism, the free market system. It’s being aware of what those principles are. A lot of the unintended consequences, a lot of damage hasn’t occurred yet based on some of how our economy works but it’s ultimately going to occur whether it’s one fell swoop or whether it’s in pieces, it’s still going to happen. The awareness of these principles will allow people, to understand what to do when a lot of the chaos starts. In the past, what has ultimately been done? It’s, “Government should take care of it. I’m not responsible for that. They should take care of it. They’re smarter than me or that’s their role.” Other than that, I look at what capitalism was as far as the intention and the principles around it and what we have. I think there are some stark differences. At the same time, the notion of capitalism is still very much alive in everybody. It’s part of our instincts.

One of the fundamental principles of capitalism is property rights. You have the right to your own body. You have the right to make a living. Let’s go to a real baseline example. Let’s say we are somewhere in the 1800s and you can own land by staking it for example and you go out and you build a cabin for shelter. That is all by your own labor. Do you own that or not? On capitalism, of course you do. It was your labor, your ingenuity, you designed on a piece of paper or both and you made it. You took something that was raw, which was land and trees, you converted it into something more meaningful and of higher value. That’s an example of property rights and without that, capitalism breaks down. The idea that, “You made it but I need it more than you do so I’m moving in, you go build another one.” This is absolutely fundamentally anathema to true capitalism but this is the idea of socialism, each according to their need. I need it more than you do because I can’t work and you can or I’m too old to build one. I get it, you don’t and that’s the way this is equal. This is fair. This is what’s right.

This is a concoction of the mind is what’s fair and what’s right. To harp on it, the real capitalism is determined by basically competition and by the ability of someone or someone’s company corporations or whatever. What happens when these systems break down? This is not unusual. I want to assure everyone that there are cycles through the monetary system. It’s happening again and again. We’re in a situation where certain times in history, you have the fundamental philosophy breaks down and the fundamental philosophy is trust. What can we trust? Can we trust these big corporations to do what they say? Can we trust the government to do what it says? Can I trust my company to provide me the pension that it has promised me? Can I trust the city to pay me the pension that it has promised me?

TWS 11 | Capitalism

Capitalism: In most of today’s capitalism, there’s built-in obsolescence.

 

What happens in a corrupt system which we’re in and have been for quite some time, is the trust starts to be questioned. First by the intelligentsia, the intellectuals or whatever, I’m not trying to differentiate. People are different. Some are deeper thinkers, some look ahead and some don’t, some don’t care. It’s something the government should care take care about. I don’t have to worry about it. The company should do it. I worked for you. All I have to do is collect my check but you cannot overcome Mother Nature. There’s Mother Nature in the marketplace and the more you distort the market place, the more you’re going to have a price to pay. This is cyclical. This isn’t something that’s just unique to our generation. The trust breaks down and the confidence breaks down. The whole system is based on confidence and the whole system is a lie because the idea is you can’t print wealth and you can’t.

If you could print wealth, Zimbabwe would be the richest country in the world and everyone would be down in Zimbabwe because they’ve printed their selves as one of the wealthiest nation on the planet. America pretends that you still can print wealth and we’ve been doing it for a long time and we’ve gotten away with it because of the reserve currency of the world that’s basically enforced our currency on everyone else that must accept it. The people that must accept it of course use it because it works still to some degree. At the top, what Mises calls the crackup boom more and more people in the market place start to question, what is the viability? What is the long-term confidence that I have in this piece of paper, in this idea, in this unit, in this thing in my account? That starts to break down and it’s already breaking down. In fact, it broke down to such a degree in 2008.

We’re a cat’s whiskers away from having to complete financial collapse. Most people don’t believe that. I’m not saying that to gain points or to scare people but it is a truth. Most people are unaware of actually how close we came to a complete collapse. The reason I say complete collapse is because when the banks give up the trust of each other, which had happened, then the whole system would freeze. As Jim Rickards says the Ice-Nine situation. He used the metaphor where everything freezes up. We’re very close to that. The only reason we didn’t freeze up because it was starting to happen, the ice was starting to freeze. It was starting to take off and the Fed intervened and said, “Bank A don’t trust Bank B’s paper. Bank B doesn’t trust Bank A’s paper. Here’s what we’re going to do. We’re going to buy all this worthless crap, we’re going to give you treasuries for it, the most trusted paper out there.” That kept the system from freezing out but we’ve got very close.

The next time, will the Fed be able to intervene, paper it over, make it better and all of that? The answer is no one knows. I don’t know. You don’t know. No one knows but the game is getting very near the end. The main thing to watch of course is the bond market, the debt markets and credit markets. Do you trust that dollar to be worth enough in the future for you to loan it for a given period of 6 months, 2 years, 5 years, 10 years or 30 years? It’s breaking down and yet the system isn’t allowed to function as a free market would. In a free market or a true capitalistic system, the right to succeed means the right to fail. The bond market would fail and these bonds would be marked to market.

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They might not go to zero but it would certainly be worth less than face value almost across the board. This, of course, is allowed to happen because of the powers that we are able to basically buy up their debt. They could come in and buy up their own bonds, issue currency for it and keep the game going. Eventually, it gets to the point where enough of the market says, “I don’t trust what that dollar is going to be worth in the future. I’m going to spend it for something that’s a hard asset that I can maintain value and I am going off these dollars. I want to get rid of them because I’m not sure what they’re going to buy a month or a year.” This takes place over and over throughout the world. It’s happening in Argentina. It’s happened in Valenzuela. It’s all over the place. There are so many times it’s happened. The idea that it can’t happen in United States or the world currency, the US dollar is preposterous. This actually is happening but most people don’t recognize it. That’s what we see. Philosophically, it’s a loss of confidence, loss of trust and once that’s lost, it’s very difficult to get it back.

One of the points was this notion of accountability. That’s what you were saying when it comes to trust. Part of that human element that we have is some people don’t tell the truth and some people do it consciously. Some omission and commission. It’s one of those ideas where, what is this the standard way to protect everyone? It’s to have something that doesn’t attach to a human being that can be used as a unit of accountability. That’s where precious metals because fundamentally it’s very difficult to manipulate. You can’t create gold out of nothing. That’s I think the fundamental premise but we’re way beyond that.

We’re in this environment where the United States is that beacon of trust when it comes to any financial exchange around the world. Whether the reserve currency or whether because we have the biggest military force or whether it’s our influence on goods and so forth. It allows making sanctions at other countries. It allows us to throw weight around but in the end it’s a fallible unit of trust that we have. I was curious to understand your perspective and understanding of precious metals at a very deep level. How do you balance that with what our current system is, which is operating around the same thing in a sense like trust? That’s where the accountability is. At the same time, it’s not a completely objective trust.

I want to hold that thought but you did a great job on why the dollar still remains where it is, is it the military forces? One thing I’d add to that as the Rule of Law. The other nation states don’t necessarily operate in the same standards of the United States and also used to. The reason it is that the rule of law is breaking down. The reason there is the legal system in a lot of ways is due to business and contract. If you didn’t meet the contract, then there’s a legal remedy but that also is breaking down. The loss of confidence goes to, “What can I have confidence in that will see me through financially?” The answer there is primarily gold. Gold has stood the test of time for thousands of years. Ups, downs and in between and the value does vary but nonetheless, it never goes to zero. It’s always coveted, especially in times like these where we’re unsure of what that dollar is going to buy a year out or ten years out or whatever.

TWS 11 | Capitalism

Capitalism: The society at large has become brainwashed or the propaganda has got us to such a degree that rather than take what we need, we’re constantly taught what we want.

 

You’ve seen the banking system actually had the largest purchase of gold that they’ve had in I think eleven years or something. It’s a massive amount that they purchased relative to what their purchase has been in the past. The public is burn out on the gold story. Gold went higher year over year for eleven years straight. That’s a pretty darn good bull market. That peaked out in 2011 and here we are years later, it’s been going sideways to down. We found the bottom, I believe. Even the gold bugs had given up. The thing about gold is I think a big misunderstanding about it. Here’s the idea that I have and it’s pretty simple. One is you buy gold, you sleep better and you forget about it. You own it because at times like these it’s a must if you can afford it.

The other part is you buy it because you want capital gains. You want to have a better life, you want to see the price appreciation so good relative to when you bought it you can basically improve your lifestyle. There’re two types of gold purchases. You have people that understand that by some enough for their protection, which is generally thought to be 5% to 10% of your overall net worth. It could be as small as 2%. It’s basically what makes you comfortable and forget about it. That is not the vast majority. Those are the true gold bugs. Most of those people don’t consider this to them gold bugs, they consider themselves smart enough to understand the nature of fiat money to hedge. The vast majority are looking to trade it or swap it or whatever make these big gains on it. When gold doesn’t perform within a certain timeframe, then they’re very disappointed.

Silver is even a different story. Silver as Professor Jastram called The Restless Metal. As he wrote that book, you looked at silver’s relationship to commodities over a vast period of time like he did with the gold constantly. He looked at gold the same manner. What he determined was that gold basically is the ultimate money and regardless of conditions, especially during depressions, gold was the best asset you can own. Silver was mixed. Some other time during the depression, silver actually did well, sometimes during depression it didn’t. Silver, the conclusion of the book was during inflationary times, nothing outperforms gold. We saw that take place when QE2 was announced, when QE1 took place, the market acknowledged where we probably need it. We saved the banking system. We’re going to get back on track.

When QE2 was announced, most of the people that are monetary savvy said, “Here comes the inflation.” The problem was that all those savvy people and yours truly included and I traded that market did very well but none of that money, none of that QE hit main street. It only went to Wall Street. Basically, it was static money. It was sterile. It was there but it was all printed. It went to a vault and stayed there. It didn’t circulate. It had no velocity. It didn’t have any meaning in the marketplace. Once that was made clear to the market, the price of silver basically crashed. Most of us, myself included thought when it was announced that we’d see the velocity of money increase. We’d see it hit main street but didn’t. That’s been the story ever since. A lot of forces going back and forth.

The only thing that you can control and influence is your awareness, your knowledge, and your understanding of how the system works. Click To Tweet

The idea that I think was the best that I can give to the public at large is, take the attitude of someone that buys gold, silver or both with a comfortable amount and go about your life. You can pretend that we’re not going to have a financial collapse. I think we will. I think it will occur in my lifetime but you don’t want to harp on it. You don’t want to live your life thinking about it. All you need to do is be hedged but most people that learn this think, one is going to happen. It’s almost imminent and that the only asset class to own is this one. That’s poor thinking. Energy is a very important asset to own. If you’re a capitalist as far as, “Where can I put my money and make money with it?” What is the one thing that’s gone on from 3,500 BC where have been 14,000 wars since there has? If you want to invest, buy defense stocks, buy Lockheed and the war machine continues. Chris Duane calls it the Debt and Death paradigm and he’s correct. Unfortunately, that is the real world that we live in.

I look at the complexity of the world we live in and it’s interesting. I would say at the same time you look at how concerned you could be looking at debt clock. You’d look at that and it’s like, “This thing’s going to pop tomorrow.” You also look at humanity and how much they’ve taken ideas and done some brilliant things with it. It’s one of those things where it’s always been the case with humans. There’s always been good stuff that’s going on. There’s always been some bad stuff. It’s trying to figure out how to keep a balance of it. As much as there are a lot of ways to be concerned, there’re also a lot that can be celebrated to an extent. I’ve stood back and I’ve said, “I don’t know what the future’s going to hold. I love your point about trust. People especially in times of difficulty will seek trust but they’ll seek something that they trust. Somebody or some group of somebodies failed them and did things that weren’t trustworthy.

They’ll seek trust but in the end it’s an awareness of how people work. It’s also an awareness of what principles are. I know that there’re some principles to capitalism that still are extremely relevant when it comes to personal freedom, personal capitalism. Which is taking who you are and what you know and doing something with it that’s of value to somebody else. If that is claimed, you definitely want to be aware of questions to ask and a good foundation of knowledge so that you know what they’re talking. There’re so many different definitions of capitalism. In the end, I look at it being an incredible time to be alive. It’s understanding that when you go against principle, there’s probably some sayings around, when truth or principles followed what the result is going to be. It’s going to come home to roots.

These are decisions that are unprincipled and they are decisions that have to have a price paid for them because failure means loss. There’s lots of different failure being papered over, whether QE, what the Fed’s done, government policy in general but there’s a lot of failure being deferred. It’s being aware of how to position yourself both from a business standpoint, from a personal standpoint, from a money standpoint, so then when those corrections happen, you know what to do. You’re not operating out of scarcity and emotion. You’re operating out of awareness and knowledge. That’s the most that we can do in the end.

TWS 11 | Capitalism

Capitalism: What can I have confidence in that will see me through financially? The answer there is primarily gold.

 

Maybe we’ll do a little bit more a philosophy. The idea of founding the nation, you can work capitalism into it and the idea of property rights that we already discussed is the rights of the individual. In a constitutional republic, the rights of the individual are protected. Democracy actually comes from the word mobocracy which is mob rule, majority rules. In the constitutional republic, the rights of the individual are preserved. That’s key in a way that the system was set up initially because that protects someone to have the right to not only free speech but free thinking and motivations based on their own personal goals. If in an idealistic world, if you have an idea and make something of value to you and the market says we want it to, you can become rich. There’s nothing wrong with that, at least from my perspective.

The whole thing has been usurped and corrupted by such a degree that people don’t even seem to understand how the system could work. If you go back to the financial failure of 2008, in real capitalism all those banks that were over-leveraged would have failed, not only Bear Stearns and Lehman Brothers but many others. In fact, AIG would have failed. AIG that insured all of these CDOs, all these swaps and everything else is out there in this derivative Never Neverland couldn’t make good on it. The backing of full faith and credit means that everybody that’s a taxpaying person in the United States is responsible but why are they responsible for a bank’s failure? The banks should be held accountable. It comes back to your accountability. Who’s accountable? Let’s make the people accountable. This is what most people don’t even understand. They didn’t have a clue. They think the government actually produces something. The government produces misery most of the time.

The reason of the misery is because the failure of those institutions are put on the backs of the people. It was subsidized by you. If you’re a US-taxpaying person, you’re the one that’s paying for that failure. It’s not the government paying for it, you are but this is a concept that most people don’t even get in school. I don’t think it’s even taught anymore. It comes to accountability. Who’s accountable? If you go run up to your credit card and you can’t pay it, then it’s your right to put it on your uncle because after all, that’s the way the system works. He’s more capable of paying it than you are. Let’s swap it over to him. That’s basically what’s taking place. Most people are so under-educated. I don’t want to offend anybody but I’m not here to sugarcoat it either. You’re responsible, why are you responsible? You shouldn’t be, the bank should be held accountable, but they’re not.

This is one of the biggest problems with the system at large and this is why the distrust in the currency goes to the next level. The velocity of money starts to pick up where people would rather own a jar of peanut butter that they know that’s cumbersome. I see inflation in a much higher level and many do. John Williams, I have him on my mastermind series about once a year. I read his work. The hamburger index and everything else are going off down a rabbit trail. I’m not a big fast food guy. I try to eat healthy most of the time but occasionally I do it. Here’s my point. A basic meal is $12 in there. I couldn’t believe it has been such a long time since I’d been into one of those places. I thought I misheard the guy. I thought I ordered two meals but this is real inflation. This is what mom and pop in America are facing. I think the inflation rate is squeezing a lot of people and it’s evident across the board.

Money is important but you don't have to make it the center of your life. Click To Tweet

You’re right but here’s the thing. Nobody knows what that means. They see higher prices, they hear the word inflation, but they have no idea how it’s created and why it occurs. It’s not a natural phenomenon. It’s like, “Why are prices going down? Isn’t that a good thing?” but yet prices are going up. It’s a fundamental question around, “Why is bed policy for things to become 3% more expensive every year? Why is it 3% less expensive?” I was in Walgreens. I had to renew my passport. I heard this older woman at the counter and she was buying makeup and she was stuttering. She didn’t know what to do. She was like, “I can’t afford it.” She didn’t pay for the makeup. She paid for some other things. People are experiencing it, but they’re not aware of what it is and why it’s occurring. That goes to everything that we’ve been talking about, which is the current monetary policy is fundamentally flawed. It’s not trustworthy but yet people are trusting it. It’s not going to be this slow process. Everyone’s buying stuff and exchanging and it goes really quick. The only thing that you can control and influence is your awareness, your knowledge and your understanding of how the system works. When things start to happen, you know how to respond to that, not react.

I think one of my main job for the public good on a global basis is to teach these principles to the people and have an understanding. Then they can go and take an action, or not take an action but at least they could explore. They don’t have to take my word for anything. Look it up, do your own research. Do some reading. Look at the grand inflations of the past. There’s so little awareness and that’s the reason there’s such a small market for the gold and silver markets because most people have no idea that they preserve wealth and there are financial asset for thousands of years. If that was well-known, you’d have a lot different percentage into those metals than you have now.

One of my most popular videos called Myths in the Silver Market. One of my pet peeves I said in the video was this idea of most of the coin dealers or precious metals dealers that you will talk to, especially those that are more established than I am. I’ll tell you why I think everyone should own a little. This goes back to the idea we talked about that everyone should know a little. What people don’t understand is how few people actually take action. In that example on this video, I said at the time the mining activity was roughly 700 million ounces a year on the silver market. If everyone in the United States owned two ounces of silver, which is very little. It’s $30 worth. It’s not going to change your life. Two ounces of silver, believe it or not, goes to $100, it won’t change your life. It goes to $1,000. It might change it a little bit but it’s not changing your life. It’s a little warm up.

If everyone in the United States bought two ounces of silver, it would take up the entire mine supply on an annual basis. The United States is only 5% of the world’s population. If we include everyone, the other 95% of the people on the planet should own a little. There isn’t enough silver for everyone is my point. Yet, so few people own it or understand it and it doesn’t have to be silver, but silver is a good example. It is my specialty and I enjoy a lot of aspects. If you go back to 1980 at the top, most of us think that the amount of gold in portfolios of roughly 2% maybe 3% and now it’s about a half a percent. If we went back to the 2%, we need a four-fold increase in the amount of gold demand that we have right now. Think about that. Think if there was a four-fold increase in demand for gold, the world would be a better place.

TWS 11 | Capitalism

Capitalism: In an idealistic world, if you have an idea and make something of value to you and the market says, “We want it, too,” you can become rich.

 

This has been fascinating. I know we could probably keep going and all on all of this. I look at as an expert in a certain field. Historically, it has been pertinent to understanding money in general. Looking at where we’re at now, I’m sure you’re as surprised as I am. The more you learn about how the monetary system works, the more you learn about business cycles, especially if you understand about the Austrian business cycle, which shows that the Central Bank is at the hub of financial collapses or financial corrections. We’re well beyond what is reasonable but at the same time we’re still kicking along every day. The future is going to be bright, but also the future is going to be very volatile I think because of the technology that’s coming online. I also think because of how connected the world is becoming, how many people are joining the internet and becoming connected in emerging markets especially.

It’s going to be interesting to see how things transpire. I still cling to my understanding of financial principles and monetary principles in essence. Even though they may not be the clearinghouse right now, it’s a deferment of what should be clearing right now. If you understand that, you’re going to understand what those signs are when things start to get volatile. I also step back and say, “That could be totally wrong.” Who knows? They can maybe come up with some new principals. The modern monetary theory is absurd. People are advocating, some of these don’t make any sense. In the end it’s what can you do? It’s becoming aware and becoming educated. With that being said, I’ll give you the final word. Then would you mind giving out your contact information, your website, your YouTube channel, social media, so people can start following you?

First of all, money’s important but you don’t have to make it the center of your life. Most people think about it almost constantly, especially if you don’t have enough. It is part of life. There’s probably a better system out there. As it stands now, there’s nothing better than a true free market capitalism. It’s been proven over and over again. Where we are going to go in the future is very interesting because with this Modern Market Theory, which is preposterous, but I have to say with the advent of the digital currencies, which is basically everything that’s on your VISA or credit card and the advent of the cryptocurrencies. It’s not inconceivable to think that you could create more something out of nothing, ad infinitum and keep this thing going a lot longer.

I’m certainly open-minded enough to see that that’s a possibility. It’s unlikely, but unlikely doesn’t mean impossible. As far as getting ahold of me, the best place to go is our main website, which is TheMorganReport.com. If you’re interested in my new project, there’s a webinar that you can get for free. The URL is ComingEnergyBoom.com. We’ve broken it up. I think it was about an eight-hour lecture between me and some of my colleagues. They’ve got it toned down to about an hour and a half. As far as social media, I am on YouTube, I’m on Twitter. I do have a Facebook presence. The best thing to do is type in any search engine, David Morgan Silver. If you type in David Morgan then the word Silver, you’ll find the LinkedIn, you’ll find the YouTube. You’ll find all of the social media.

David, it was an honor to have you on. Thank you for sharing your wisdom and everything that you’ve studied for so many years. It’s been an awesome conversation.

Patrick, I appreciate having a conversation. Thank you.

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About David Morgan

TWS 11 | Capitalism

David Morgan is a precious metals aficionado armed with degrees in finance and engineering. David considers himself a big-picture macroeconomist whose main job is education—educating people about honest money and the benefits of a sound financial system. Besides being an author of three books dealing with precious metals, he is also a much sought-after public speaker. Additionally, he consults with hedge funds, money managers, and mining executives.

His ideas can be seen in the movie Four Horsemen, a Feature Documentary. Available for free at www.fourhorsemenfilm.org.

As publisher of The Morgan Report, he has appeared on CNBC, Fox Business, and BNN in Canada. He has been interviewed by The Wall Street Journal, Futures Magazine, The Gold Report, and numerous other publications.

Additionally, he provides the public with a tremendous amount of information by radio and at times writes in the public domain. You are encouraged to sign up for his free publication which starts you off with the Ten Rules of Silver Investing where he was published almost a decade ago after being recognized as one of the top authorities in the arena of Silver Investing.

 

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Boost Your Wealth

TWSFF 09 | Investing In Yourself

 

Patrick talks about how to get a 10% raise for life by investing in yourself. People are spending their time away from their families, loved ones or even the things they love to do in exchange for money. The hard money they earned is invested in other things such as retirement plans. Instead of investing the money to other things, Patrick points out to allocate it to the most important one – yourself. As people grow and expand, investing in human life value assets will ultimately lead to more money.

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Boost Your Wealth

Financial Friday

The topic is how to get a 10% raise for life. Let me step back and explain why I feel like this is a focus that everybody should have, which is making more money, figuring out how to do that every year. First, I believe that humans are designed to grow. We are designed to expand, to solve new problems. We all have that within each of us. It may be at various levels and capacities based on our uniqueness. I see how much time people are spending away from their families, spending time away from the things they love to do, their hobbies. They do it to exchange time for money, for working. I get it. At the same time, I don’t know if individuals ever step back and analyze the process and the exchange. It’s essentially exchanging time for money. It’s exchanging time for value because the money comes because somebody values your experience, your skills, your abilities, your training. That connection sounds simple but I believe it’s very profound. The irony is that because it’s not understood, people then take a portion of what they’re making and they save it. They invest it in retirement plans. They give it to a money manager at Wall Street. They turn around and make measly returns.

TWSFF 09 | Investing In Yourself

Heads I Win, Tails You Lose

I believe that same amount of money, probably even so much less, can be invested to earn hundreds of percent per year in what I call the number one investment, which is you. What I mean by that is in the book I wrote, Heads I Win, Tails You Lose. This is something I covered there. I spent several pages in there discussing what’s known as the human life value, the HLV statement or Human Life Value statement. Most people are familiar with the financial statement. A financial statement is your assets, liabilities, income and expenses. I took a different approach, which is something I learned from some individuals that I have tremendous respect for, which is income comes from your human life value assets. It’s the training, the degrees, the certifications, basically what you’ve accumulated in which somebody is willing to give you money for because they find it valuable. Those assets are not static assets. Those are assets that can be enhanced or built. That is what’s going to ultimately lead to more money. As far as the hundreds of percent per year, which is essentially a billion of these assets with the investment and capital that you are allocating elsewhere.

We also have human life value liabilities. This is what’s also interesting is that when you identify what your assets are, you want to focus your time, your effort and your energy to those assets, which requires eliminating some liabilities or maybe even increasing liabilities. Increasing liabilities is essentially having others do the things that you’re not good at, that you don’t like doing. What that does, it gives you more time, energy and ultimately focus to enhance these assets. I’m not going to get into a lot of details there. Maybe a simple example is having someone cut your lawn. It’s going to cost you maybe $100 a month during the summer or shovel your snow. That’s the time that you can spend and put energy into stuff that you’d like doing or stuff that you’re good at.

I’m sure that you may be good at mowing the lawn. If you’re worth $100, $200, $300 an hour, why are you going to pay somebody $30 or why are you going to pay yourself ultimately and sacrifice the time you could have spent earning $100 an hour for $30 an hour? It’s a big loss in doing that. The idea is to invest in yourself and build your income. How you do it is interesting because there are so many ways to approach it. I would say some simple ways to approach it is to be familiar with what your market value is, your economic value. That can be easily done at Salary.com, Payscale.com. There are a lot of other sites that are popping up that will show you based on your experience, based on your certifications, your degrees, what you’re doing, your job title and so forth. What the median is, what the long tail, the other side of the bell curve, the high end, the low end. It’s going to show you other positions that may be in the same field that pay more than what you’re currently earning.

Humans are designed to grow, to expand, and to solve new problems. Click To Tweet

Those positions, you may have the experience for that or you may not. This is what gives you clues as to where to place the investments to build those human life value assets. It could be a management certification, a leadership certification, some leadership experience, management experience. It could be to do with software development or marketing and certification in certain elements of marketing. There’s a whole slew of things. What I would say is that approaching these types of websites, what you want to go in with is not necessarily the fact that you can make more money by having this experience. It’s also, is this a position that you would want to do? I believe that fulfilling work gives us vitality. It creates tremendous productivity. It’s getting into something simply because of money. I hear from dentists all the time who hate digging in people’s mouths but they do because they make a lot of money. That drains other elements of your life. As you’re doing some research and due diligence on what is available to you to make more money, take into consideration what I said, which is ensure that it is fulfilling and aligns with who you are.

Another investment you can make is in a different assessment. Assessments that actually tell you more objectively about who you are, what your strengths are, what your tendencies are, your instincts. This helps to understand yourself better and the value that you bring to the world. It may be engaging with people at a different level. It may be different positions as far as the style of communication that you like or dislike or how you work with groups or don’t work in groups. Knowing more about yourself is going to also enable you to work in certain positions.

TWSFF 09 | Investing In Yourself

Investing In Yourself: Fulfilling work gives us vitality. It creates tremendous productivity.

 

The approach here is simple. The approach is you’ve got to figure out how to make more money per year. Focus on 10% for now. It may cost you $1,000, $2,000, $3,000. Going to the investment return, if you make an investment of let’s say $3,000 a year and you make $100,000 a year as a salary, that’s significant but $3,000, if you can get a 10% raise because of that, that’s $10,000 in additional money. That’s a 300% rate of return more. My point behind all of this is that should be where the focus is. It’s figuring out a way to make more money or make the same amount of money with less time. I’ve written some eBooks that talk about this.

I’m in the process of doing a big research project associated with jobs, professions, contract work positions that pay more than $75,000 a year. You can do anywhere in the world. Also, a lot of it is part-time, 20 hours, 30 hours per week. My big drive when it comes to writing the book doing this podcast is to help individuals have more freedom, even more freedom than they have right now, more independence. Sometimes people wake up in the morning. They go to work. They go to an office because they think they have to. Because of how society is progressing, there’s so much opportunity to work from home, work on an island somewhere, work in a state or a place you want to live as long you have a good internet connection and do so on your terms.

Figure out a way to make more money or make the same amount of money with less time. Click To Tweet

It may not be available for everyone. Knowing that these positions exist can now create focus and ultimately a path to build your human life value statement to the point where you could have one of these jobs or one of these professions whether it’s contract work or a full-time position or a part-time position that’s remote. These opportunities are coming online more and more. I have a researcher that’s digging into this. We found hundreds of domestic, US-based jobs that pay over $75,000 a year. It’s exciting. We’re going to a whole book and eBook around that for your benefit. I wrote a little eBook that you can access at TheWealthStandard.com. I know it’s going to help create some ideas. It’s going to create some motivation behind doing this because I know you can.

If you’re reading this and you’re thinking about how to make more money, hopefully, these ideas have resonated with you. Some of them are repeated in this eBook. They’ve already written, which is how to make 10% more for life. Here’s what you’re going to get as a result. If you make $100,000 a year and you’re getting the customary 3% raise per year because of inflation, cost of living, that amounts the total lifetime earnings over 30 years. Factoring in that 3% raise is under $5 million, so 30 years of that. If you’ve got a 10% raise every year instead of 3%, which is totally possible. It may not be every single year but averaging it out over that course of time. The 10% a year average amounts to $16.5 million. It’s more than $11 million more just by this being the primary investment as opposed to other types of savings, mutual funds, investments and so forth. Another few ideas, hiring a coach. I have two coaches right now. I’ve had a coach since I’ve started my businesses. I’ve graduated past several of the coaches. I found that some coaches didn’t necessarily have expertise in certain areas that I needed but not in others. I’ve had over a dozen in the last several years. Right now, I have two.

These two coaches are women. They’re very experienced with the relationship, very experienced with business and personal development. It’s the first time I’ve had women as coaches. They’ve been pushing me harder than my previous coaches. The accountability is so high. It’s incredible. I’ve seen so much growth in a few months, tremendous growth. Coaches are important. What’s an idea around getting a coach? I would reach out to the most successful people in your circle of influences or acquaintances and ask them who their coaches are. I guarantee that some of them have them.

You start to interview several and get clear on what you want from a coach. For me, it’s helping me communicate better, helping me have more balance in my life as well as accountability. It’s been huge and highly beneficial. A personal coach is another way in which you can make an investment. I hope you found some value in this. Hopefully, you can do what it takes. Take action now, do something, stop contributions to this, that or the other. Dedicate some capital to making an investment in yourself because I know that it’s going to pay off. I hope you enjoyed the episode. We will see you in the next episode.

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