The Greatest Transfer Of Wealth Ever

A vast number of people think that what we’ve been through during the last four years is just another episode in the economic crises history of the United States.  They believe a president has the power to continue the trend or reverse it.  So they put their faith in the next presidential elections.  They think their favorite candidate, whether Romney or Obama, will bring about the change they wish for.  So they go and vote.  Then, if their candidate wins they expect miracles from their leader until yet another economic event hits them and the dream fades away.  And so it goes every four years while the giant Titanic is sinking.

The reality of it all is that it matters little whether Obama or Romney becomes the president. Why?  Because – contrary to what we’ve been told – since 1913 the president or congress has had no control of our monetary policy.  The central bank has such powers.

During the last four years Mr. Obama has followed the policy of the Federal Reserve.  His major campaign contributors during 2008 elections are listed here.  If he wins, he will continue the same policy.  If Mr. Romney wins he will take over the torch because the money that funded his presidential campaign accepts no opposition.

I bring this up not to be political but to demonstrate to my readers that our next president won’t have the ability to fix the economic crises.  Therefore we should not rely on the government to make our lives and/or our children’s lives better. It is up to us to learn, assess, and prepare for the future by making educated decisions, while we still have the ability to do so.  Let me explain.

Sound monetary policy is vital to the economic recovery.  That is because it is the bad monetary policy that caused the problem, not once, not twice, but throughout history according to the Austrian School of Economics.  Asset bubbles form due to artificial expansion/inflation of money supply.  This is the key, this is the underlying cause.  When newly created (by the Fed) money – out of thin air – finds its way in the economy it flows into assets such as real estate, commodities, or securities.  The result is artificially inflated assets.  This is not sustainable.  If it was we would be trading houses today in the millions of dollars. It is not sustainable because in such a scenario the market forces would lead to a currency collapse.  If the bad monetary policy continues we will eventually end up with a dollar not worth a continental.

Since the real estate bubble burst there was no good monetary policy.  Money supply is still being expanded via bailouts and QE’s.  There was no good policy before either.  Such policy helped to induce the bubble.  A good monetary policy means stopping the creation of new money.  It means stopping the Fed’s printing pres, which in turn would cause the interest rates to go up.  Corporations would go bankrupt.  People and the government would be forced to live within their means.  Produce a lot, spend a little, and save more.  It would be painful.  Even though it would be temporary it would be necessary for a healthy recovery.  But again, it would be painful.  It means experiencing the withdrawal symptoms after years of addiction.  No politician wants to have that happen on his term.  Thus, the politicians will continue to kick the can down the road.

The question is what could potentially happen as a result of the failed monetary policy?  At least two problems.  Currency collapse and/or astronomical rise in the interest rates.  Both are conducive to loss of purchasing power for the average man.  Both require a pro-active approach in lieu of the common reactionary one.  I would not expect such approach from the government.  So, it is up to the average Joe to take the matter of his finances in his own hands.

I titled my article “The Greatest Transfer of Wealth” because such event is ongoing now.  Bad monetary policies destroy the working middle class.  It happened to the Romans leading to the collapse of the empire.  It happened to Weimer Republic in the early 1920′s leading to the rise of Hitler.  It happened to France, China, Russia, Argentina, Mexico, and most recently to the wealthiest country in Africa, Zimbabwe.  For a history on money and governments out of control read Daily Reckoning’s “Fiat Currency: Using the Past to See into the Future“.

Still not convinced?  Consider your net worth during the real estate boom and before the 2009 collapse of the stock market.  If your net worth is higher today you deserve to be congratulated.  You are in the 5% bracket.  If your net worth is lower today then you’re in the 95% bracket.

Within a few short years there’s a reasonable likelihood that the middle class will only keep its name.  In real life it will be partially or fully dependent on the government.  Being dependent on the government comes with strings attached.  Working a 9 – 5 job will not make the average Joe independent.  To get in the 5% minority bracket one must be truly visionary.  He must live his life unlike the 95% majority.  He must think like a contrarian and he must invest like a contrarian.

Because I spend my time helping people finance commercial property I get to be exposed to unconventional ways to increase wealth.  Whether they are in real estate equities or debt, in commodities or the stock market, the driving criteria is to buy when the majority is selling and to sell when everyone else is buying. There is an incredible opportunity today to buy quality real estate at extremely low prices.  Yet, the real estate market activity is supported mainly by investors.  Part is domestic and part being the citizens of other countries.

But the 95% doesn’t get it. They continue to keep their retirement with their stock broker.  They would rather have their hard earned money invested in the artificially inflated stock market.  They are now comfortable that the Dow Jones – and their retirement account – is getting close to the levels pre-2009.  Never mind the cost of living jumped up.  Never mind that there are investments in hard assets today which are considered by a few (the 5% bracket) less risky than the stock market.  Never mind that such assets produce a monthly stream of income better than most of the dividends paid by corporations. They won’t take the risk, or at least this is what they think.  In reality the risk is in following the conventional wisdom and maintaining the status quo.  American writer, Lillian Smith once said “When you stop learning, stop listening, stop looking and asking questions, always new questions, then it is time to die.”  So will be the faith of the average retirement account.

My goal is to share economic news with my readers.  Then, present them with possible solutions. Please note that any type of investment represents a risk.  Please contact me if you’re open to alternative investing ideas.


4 thoughts on “The Greatest Transfer Of Wealth Ever

    • I’m with Scott – smart lady!
      I appreciated your comments about misplaced trust in either candidate. It helped me understand my personal gut summation: “my faith in one is less than zero and the other is just zero”. As they say…. follow the money… and as you said the problems dwarf anyone’s campaign promises, or should I say misrepresentations (lies)…..
      I’d appreciate a follow up article on why you like real estate at this point – despite it also being largely a debt based “investment”.
      For what it’s worth, I expect these low rates to last a relatively short 2 – 4 years and give way to higher risk-adjusted levels which should proportionately depress nominal property prices. Property tax hikes are another likely trend serving to reduce expected investor returns. Yet overall, I’m thinking that “he who loses least may be the overall winner” during this time of wealth erosion and transfer.

      • Hi Chip, I like your thinking and I agree with you on all the points you made. As far as low rates during the next 2-4 years here are my thoughts. That is the intention of the Fed (and of course, the government). Can you imagine what it would do to the U.S. considering its enormous amount of debt if rates spiked up? As far as I know based on my own reading we’re right now just able to pay the interest on such debt but have not been able to manage paying down any amount on the principal balance. I wrote an article not long ago about the importance of getting out of an ARM and my thoughts are that the Fed will not deliberately contract the money supply (which in turn would raise the federal funds rate) like Paul Volcker did in the late 1970’s and early 1980’s.
        But there are other events which may interfere with the fed’s plan. Banks starting to lend (maybe less likely in the next few years) or China bringing a gold based currency replacing the dollar as the world’s reserve currency. It’s not that I wish such an event to occur but markets and countries don’t care about what we wish.

        You make a good point when you say that along with the rise in interest rates real estate prices will continue to be depressed. And I could see why even lower prices would not be out of the question. Taxes too will most likely go up since local govts will continue their appetite for expansion and their inability to budget like a successful business.

        I wrote an article last year on why I believe real estate makes sense. Of course, just like other types of investments one must be selective with the type and location. Here is the link:
        If debt is used, long term low fixed rates are in my opinion the way to go. But not all real estate investment must be debt based. There are many folks who have all their retirement eggs invested with a stock broker in paper assets. They could use part of their retirement investing in shares of real estate projects, small residential projects, or private money at way better rates than the current money markets. I will write a more detailed article on these kinds of investments. I hope you’re having an amazing day!

  1. I agree that president don’t have an ability to fix the economic crisis and i think it take’s years to fix it because now a days there are a lot of problems that they really should take in mind.Well that was a good advice i ever seen.In Finland country i never seen yet any transfer of wealth however i think that everything for it is going smooth aside from other problem of finance of people specially in loan.Anyway thanks for this article.

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