By: Paul Rosenberg
When I was a young man, the older men I admired were the independent businessmen. Being a corporate suit issuing orders to underlings never appealed to me, but being a successful man who controlled his own life and business… that did.
Perhaps as a result, most of my friends are independent business people of one sort or another. Not long ago, I had a notable conversation with one of them, during which he said:
You know, Paul, business used to be fun. I’d take my children around and show them what we were doing, and explain the differences we’d make.
I waited just a beat as he winced and then continued:
Now, I don’t want to drag my kids into my business. Every time I move, there are regulations, permissions, forms to file. It takes up most of my time, for nothing. Business isn’t fun anymore. If I could find something else, I’d get out.
And this is a man who has been in his business since childhood, who loves to tell stories about it, and who used to enjoy his work immensely. If this guy is looking for the exit, the problem is dire.
It’s pretty obvious why
I have limited faith in government statistics, but there are a few informative ones on this subject:
The US Small Business Administration (SBA) recently reported that the annual cost of complying with government regulations is more than one trillion dollars per year and has been since 2005.
It goes on to report that big businesses (500+ employees), pay about $7,550 per employee to comply with the regulations. Small businesses, on the other hand (up to 20 employees) pay about $10,600 for every person they employ. And this is just one reason why small, independent businesses are being swallowed up by giant corporations.
Also bear in mind that this is just the cost of compliance with federal regulations. States also impose regulations on businesses. So do most of the county and city governments, especially large city governments.
New rules are produced constantly, and the cost of compliance rises constantly. In the US (and many other places), the cost of doing business has long since become prohibitive.
Clever folks always find ways to get around this insanity, of course. But those ways are extra work and probably help relatively few people.
#1: They get rid of their employees
They find niches in their fields that allow them to escape the endless paperwork, penalties, and senselessly wasted time that comes with being an employer. (If you’ve ever had employees, you know what I mean.)
And what of the workers? Well, some get hired by the few related-industry employers that remain, while others have to take a mind-numbing mid-level corporate job just to pay the bills or get insurance. The rest are living on food stamps, disability, or a dozen other welfare programs.
#2: They go offshore
If your business is not resident where the regulators are, they usually can’t say anything about it.
Not many business people have moved abroad, but lots of them have set up offshore companies and are conducting business on the Internet. These people get their lives back… if they can find a way to make it work.
That is the dirty little secret of offshore companies, by the way: It’s not about escaping taxes; it’s about escaping all that ridiculous, insulting, pointless paperwork. No more spending days crunching numbers at tax time, no filing new reports every time you do something. You just take care of your customers and deliver good product. (Which ought to be enough.)
#3: They pay politicians for protection
Why would anyone donate thousands of dollars to a politician unless they expected to get something in return?
Big businesses pay politicians so that they can make a phone call to get problems that arise fixed. Small businesses can’t afford that, and most small business owners have moral problems with bribery.
Legit Is Dead
Unfortunately, the old “American way” of working hard, conducting honest business, and succeeding is gone, dead, and buried. It may still happen from time to time, but infrequently and off the beaten path.
Not long ago, I found this sign posted on a streetlight in Chicago:
The sign is right – the old “legit” way of doing business is dead. If you want to get ahead these days, you either try to play a game that is rigged against you, you pay politicians to bend the rules for you, or you avoid the situation entirely.
It seems that the best and brightest – the would-be drivers of the economy – are choosing the last option.
What does that say about where things are going?
[Editor's Note: Paul Rosenberg is the outside-the-Matrix author of FreemansPerspective.com, a site dedicated to economic freedom, personal independence and privacy. He is also the author of The Great Calendar, a report that breaks down our complex world into an easy-to-understand model. Click here to get your free copy.]
The Federal Reserve publicly claims that its goal is to keep the inflation rate at a steady 2% per year. The wizards of the Eccles Building have determined that this is a healthy figure.
This essay will ignore the fact that the Fed’s CPI measure of inflation has been distorted and that the inflation rate has been consistently much higher than two percent over the past several years and instead this essay will pretend to take the Fed at its word and analyze the merits of a 2% inflation policy year after year.
While a meager 2% inflation per year appears to be harmless on the surface, those familiar with the mathematical concept of exponential growth will immediately recognize the flaw with this policy.
Whenever the quantity of something grows at a constant rate consistently, the quantity gets exponentially larger over time.
Let’s use an example to illustrate this.
Suppose you purchase 10 magical oranges from the farmers market and these oranges multiply by a rate of 50% every day.
So your 10 oranges create 5 additional oranges by the second day. On day three, your 15 oranges create 7.5 more oranges. On day four, your 22.5 oranges create 11.25 more oranges. On day five, your 33.75 oranges create 16.88 more oranges. On day six, your 50.63 oranges create 25.32 more oranges. So, after one full week, your original 10 oranges have multiplied into 75.95 oranges which equates to a full 760% growth over that time period. So the 50% per day growth rate actually results in an explosion of growth over time that is much larger than 50% in quantity.
This example may be a bit extreme, but the mathematical concept is just as true for a 2% annual rate of inflation.
Our money supply would grow exponentially even if the Fed were able to manage a 2% annual inflation rate. As a result, our money would become exponentially less valuable every single year until it finally became absolutely worthless. We would experience this exponential loss in the value of our money in the form of exponentially higher prices for goods and services every single year until finally a loaf of bread would be astronomically expensive.
As you can see, mathematics very simply exposes the evil of an inflationary monetary regime.
The only possible outcome of 2% annual inflation, as the Fed’s policy states, is the complete destruction of the currency over time.
The politicians and talking heads will argue over a myriad of economic facts and figures and they will all propose pet solutions but they are all distractions. An inflationary monetary regime will always corrupt and destroy an economy, regardless of what rules and regulations are in place.
A sound economy must employ sound money. This is the most important economic fact and it is not discussed on your television.
Sound money is the only solution.
Inflation is the enemy of honest and hard working citizens and only sound money can keep inflation in check.
Presented with no comment:
Ruins of Detroit
Ruins of Rome
While not taught in many economics classrooms, the Austrian Business Cycle Theory is one of the most important concepts to understand if one is to make sense of recent economic history.
The CNBC talking heads told us that the financial collapse in 2008 was an unpredictable event that was impossible to foresee. The money masters over at the Federal Reserve concurred and they offered to graciously lower interest rates as a “solution” to the crash.
A basic understanding of the business cycle theory, however, exposes the folly of the Federal Reserve and the media talking heads.
Boom-bust business cycles largely result from the confluence of fractional reserve banking and central bank monetary intervention. In our fractional reserve banking system, banks are able to extend credit that is backed only by a fractional percentage of bank assets and client funds. Low interest rates encourage additional credit extension as borrowers are eager to lock in low rates for long term capital projects and banks are eager to lend as they can generate greater revenues on loans than they can generate with a conservative investment portfolio.
It is important to note that interest rates are a reflection of savings relative to consumption in a free market economy. Low interest rates signal a high level of savings and thus the cost of borrowing is low. Conversely, high interest rates signal a low level of savings and thus the cost of borrowing is high. In effect, interest rates indicate the consumer’s time preferences. Are consumers currently using most of their income to consume goods and services in the present or are they saving their income to consume goods and services at a later date?
Broadly speaking, low interest rates send a signal to businesses that suggests that consumers are saving for later consumption. Couple this price signal with the low cost of borrowing and long term business projects look very profitable to businesses. Businesses are more willing to finance long term projects because the savings level indicates that consumers will have money available to spend at a later date.
There is strong economic activity when long term projects are engaged. Materials are purchased and contractors are hired in the short term from outside of the business in order to complete the project. This also creates additional demand for local goods and services that would not be present if the project was not taken on.
The expectation is that high levels of economic activity will continue after the project is complete. The contractors move on but the completed project is expected to create additional jobs and bring in more customers. This expectation is why the business took on the project in the first place.
But the price signals are distorted when the central bank artificially lowers interest rates. While lower interest rates give the illusion of savings and they make long term projects appear profitable, this is because of central bank intervention and not free market activity.
So the ‘boom’ period of the business cycle comes when banks extend a large amount of credit out to businesses to engage in projects that appear to be feasible due to artificially low interest rates. In many cases these projects are just mal-investment, however, and the ‘bust’ period of the business cycle comes when the mal-investments have to be liquidated because they were not profitable.
So the central bank intervention creates a boom by encouraging an outsized extension of credit that would not occur in the free market which is necessarily followed by a bust as the debt is liquidated and credit is rapidly contracted due to mal-investment.
With an understanding of the Austrian Business Cycle Theory, it is easy to see how the financial crash of 2008 came about. Of course you could use this theory to analyze macroeconomic events that have occurred since the creation of the Federal Reserve System in 1913, but for our purposes we will look at the most recent business cycle.
The Federal Reserve, after the dot-com bubble burst at the turn of the century, increasingly expanded the money supply to ease the latest bust period. Given all of the federal subsidies and policies regarding home ownership, much of the newly created money flowed into the housing sector. As we know, new housing construction was astronomical during this time period and anyone with a pulse could obtain a home mortgage.
Not only did this lead to an explosion in housing and home-ownership, but all of these new mortgages were securitized and packaged into incredibly opaque and complex financial securities that circulated on Wall Street. This created a convoluted and interconnected web within the housing sector as the performance of the financial securities was dependent upon the performance of the home mortgages which was dependent upon the ability of the borrower to service the debt.
When the artificial ‘boom’ ran its course, many unqualified borrowers (and some qualified) defaulted on their mortgages which triggered losses throughout the interconnected web.
This was the ‘bust’ of the housing bubble and the bust period would require a significant liquidation of mal-investment and contraction of excess credit that was extended due to central bank intervention.
Instead of allowing for the liquidation of debt and the contraction of credit in order to clean out all of the mal-investment and bad debt, however, the Federal Reserve told us that it had a better idea.
The Fed lowered interest rates even further and it launched its quantitative easing program which is just a fancy term for increased money printing.
Using the Austrian Business Cycle Theory, what do you think will be the result of the Federal Reserve’s current actions?
This essay is just a brief introduction to the theory, please see this for a more thorough description and analysis of the Austrian Business Cycle Theory.
An executive from America was standing at the pier of a Mexican village, taking a much needed vacation. It was his first in more than 10 years. He noticed a small boat docked with just one fisherman on board. Inside the small boat were several large yellow fin tuna. The executive complimented the Mexican fisherman on the quality of his fish and asked how long it took to catch them.
The fisherman replied, “only a little while.”
The executive then asked, “why didn’t you stay out longer and catch more fish?”
The fisherman replied, “I have enough to support my family for a little while.”
The executive then asked, “but what do you do with the rest of your time?”
The Mexican fisherman said, “I sleep late, fish a little, play with my children, take siesta with my wife, and stroll into the village each evening where I sip wine and play guitar with my amigos, I have a full and busy life.”
The executive scoffed, “I am a Harvard MBA and could help you. You should spend more time fishing and with the proceeds, buy a bigger boat. With the proceeds from the bigger boat you could buy several boats, eventually you would have a fleet of fishing boats. Instead of selling your catch to a middleman you would sell directly to the processor, eventually opening your own cannery. You would control the product, processing, and distribution. You would need to leave this small coastal fishing village and move to Mexico City, then LA and eventually NYC where you will run your expanding enterprise.”
The Mexican fisherman asked, “But, how long will this all take?”
To which the American replied, “15-20 years.”
“But what then?”
The American laughed and said that’s the best part. “When the time is right you would announce an IPO and sell your company stock to the public and become very rich, you would make millions.”
“Millions.. Then what?”
The American said, “Then you would retire. Move to a small coastal fishing village where you would sleep late, fish a little, play with your kids, take siesta with your wife, and stroll to the village in the evenings where you could sip wine and play your guitar with your amigos.”
By Paul Rosenberg, FreemansPerspective.com
This was a big phrase in the 1960s, as young people turned away from
the corporate conformity of the 1950s and decided that they wanted more
out of life than being an adequately-fed cog in a big machine.
Let’s be honest and admit that the modern corporate script involves
selling your own wishes and dreams for paychecks. I know that a lot of us have played
along with it because of necessity, but this is not a way of life to
cling to, it’s a way of life to escape.
You are meant to live your life. Yes, I know it can seem hard, but
it’s the only life that’s really worth living. You have to give meaning
to your life, and you’ll never get it by following the televised script and hoping for pats
on the back from the people who are playing along with you.
This life you have is precious. Human beings are engines of creation;
we are able to imagine and to turn our imaginations into reality. And we
are capable of supercharging our creative abilities by sharing our lives
and loves with other people. We are astonishingly capable creatures.
Don’t waste all your life’s abilities in a corporate cubicle. You’ve
already seen how that goes: Work excessive hours, go home tired, watch
TV, sleep, and start over. Your kids end up in mini corporate worlds
called “schools,” where they are taught to sit, be quiet, obey, and turn
off their internal desires and loves. If you play that game you’ll miss
most of your life in the process, as well as most of your children’s
Once you get some corporate inertia going, it is all too easy to get
sucked into it permanently. Don’t let that happen to you.
So, here’s my modern (and slightly adjusted) interpretation -
Tune In, Turn On, Drop Out:
Wake up and see the world as it is. Turn off the
talking heads on TV and get to know the real world. Stop spending all
your brain cycles on celebrities, sports heroes and gossip hounds – get
to know your neighbor and the old woman who lives around the corner,
strike up a friendship with someone on the other side of the world. Travel. Spend your time with real people; get to
know them, and reveal yourself to them. It only seems weird because the
people who programmed you didn’t want you to think freely.
Do you think I am being dramatic by referring to “the people who
programmed you”? If so, read this:
Education should aim at destroying free will so that
after pupils are thus schooled they will be incapable throughout the
rest of their lives of thinking or acting otherwise than as their school
masters would have wished.
That was from the highly esteemed Bertrand Russel, by the way, and
I’ve got plenty more of them. Take this seriously, because your
programmers have been.
Tune in to yourself rather than your programming: What do you really
want? Most people can list a dozen things that bother them, but not a
single thing that they really want. This is a problem. Find out what you
want. What do you love? What do you want to work for?
Do you remember all those times in the Bible where Jesus berates
people for being “hypocrites”? Well, the real word he used was actors -
as in stage actors. And whether you are religious or not, this is
crucial: Stop acting in someone else’s play. Take off all the masks and
Start doing what you love. Don’t wait for someone else, do it
yourself. Start helping your friends and neighbors, spend serious time
with your children – not at a game or a party, but just you and them,
talking. Find out what they love. Tell them what you love, what you are
proud of, what you regret. Tell them you love them. Tell them things you
don’t tell your friends. Let them know you.
Start living, not merely existing. DO the things you feel an urge to
do. And don’t fall into the usual trap of “what if I make a mistake?”
That’s simply fear-based conditioning. Resist it. Do what you love, and
in so doing, you will turn yourself on.
Are you going to go through your whole life and never follow your own
wishes, always sacrificing them to the tyranny of other peoples’
opinions? Please don’t do that to yourself – you’ll suffer greatly for
it when you’re old.
Screw all the expectations and turn on – act on your own will.
Stop wasting your time and energy on governments and arguments and
politics. Drop out of their mindset and start reclaiming all those
wasted hours. Lying politicians are simply not worth your devotion. Drop
the endless party fights and stop arguing about them. Politics is ugly,
and politics on the brain makes us ugly.
Stop paying attention to the hundreds of ads you see every day – they
are scientifically designed to grab your thoughts. Turn away. Stop
buying trendy things, and definitely stop buying things for the purpose
of impressing other people.
Stop trying to fit in, and stop living according to other people’s
expectations. Let them call you weird. Let them talk about you. Stop
caring about it. If they were real friends, they wouldn’t treat you like
that. So if they are willing to call you names, you’re better off
dropping them now.
Don’t fight the system – that just keeps all of your energy and
attention focused on them. Forsake the system and start creating a
better life for yourself, the people you love and the people you
respect. Stop giving all your life’s energy to a barbaric system of
force and manipulation.
Let the system go; all of it. Move on and let it rot where it sits.
But We Need A Plan!
No, you don’t. You need a life!
Let go of the plan addiction. Life is organic, not mechanical.
First of all, you need to identify what you want to create with the
precious life you’ve been given. Not what you want to stop, but what you
want to make.
If you’ve never been told to do this before it may seem hard, but you
can do it if you try.
Don’t sit and wait. Stop talking and start doing.
[Editor's Note: Paul Rosenberg is the
outside-the-Matrix author of FreemansPerspective.com, a site dedicated to
economic freedom, personal independence and privacy. He is also the
author of The Great Calendar, a report that breaks down our
complex world into an easy-to-understand model. Visit his site to get your free copy.]
Chances are you have played the once popular board game Monopoly. If you are a member of the younger generation and have not had the opportunity to play the game then I would recommend that you purchase it because it offers a valuable lesson.
The object of the game is to buy up as much real estate as possible so that you can earn rental income when another player ‘lands’ on your real estate. Once you have acquired the real estate then you can invest in houses and hotels to increase your rental income. Common thinking suggests that the game is called monopoly because players attempt to achieve a real estate monopoly. I do not think that this would be accurate, however. I would suggest that the title is derived from the fact that the ‘bank’ holds a monopoly on the money supply.
The object of the game is not to hoard the Monopoly money but rather to convert the money into productive assets. These productive assets then generate additional money in the form of rental income which can be used to subsequently purchase more productive assets when the opportunity arises. Interestingly, the money generated from productive assets can also be used to pay taxes when the player is unfortunate enough to ‘land’ on those spots.
Players of the game understand that the Monopoly money holds no inherent value. The Monopoly money is only the accepted means of exchange with which productive assets can be purchased. This is the lesson that we would be wise to learn and apply.
The Monopoly money is not terribly different from our fiat currency today. Our currency holds no inherent value and the central bank (Federal Reserve) holds a monopoly on the money supply. In fact, the Monopoly money may actually be better in context than our dollar because the Monopoly money maintains its value over the course of the game whereas our dollar is constantly losing value due to inflation.
So in this regard, the key to our own personal financial success is not terribly different from the object of Monopoly. The path to true wealth in life is the same as it is in the game – use the monopoly money to purchase income-generating assets. Obviously this is more complex in real life as there are a myriad of assets of varying quality to choose from and the process of acquiring these assets is much more complicated than ‘landing’ on their spot. But the concept remains the same.
Mainstream personal finance does a poor job of emphasizing this. Personal finance gurus almost exclusively suggest that we invest all of our surplus money in stocks and bonds. This may be due to the fact that financial advisors make their living by selling the securities that they tout. And while there may (or may not) be a place in our investment portfolio for paper securities, they certainly do not take the place of real productive assets.
Keep this concept well in mind as you build and execute your own personal financial plan. The goal is not to end up with the most money at the end of the day; it is to use money to acquire productive assets that will then provide income streams.
Now great due diligence is required when purchasing assets in the real world, unlike in Monopoly. One would be wise to be very picky about what assets are purchased and knowing when to pass on an investment is equally as important as knowing when to buy. I cannot outline a specific plan for acquiring your productive assets as every individual situation is unique, but I can recommend that you do as much research as possible on any asset that you consider purchasing.
Remember that money is just an illusion. Its only purpose is to serve as a medium of exchange and a temporary store of value. It is wise to keep a predetermined amount of cash on hand at all times for emergencies, but any money above the reserve fund would better serve you in facilitating the acquisition of real assets.
The Federal Reserve’s decision not to taper but to continue its $85 billion per month stimulus program (read: $85,000,000,000.00/month money printing program) is no surprise.
While the Fed has publicly appeared to be torn on whether or not to taper, the fact is they are stuck. They simply cannot cut back without collapsing the markets. The Fed’s monthly liquidity injections are now built into the capital markets and any pull back would result in the implosion of the bond and stock markets, a rapid rise in interest rates, and a massive slowdown in the flow of capital.
Credit growth from the Federal Reserve has vastly exceeded the economy’s productive potential and the reported GDP growth would likely have been negative in the absence of quantitative easing. The central bankers see this as a reason to print more money but they miss the point entirely and each new round of printing has a smaller impact on markets than the previous. This is the Law of Diminishing Returns in action.
The point that the Federal Reserve is missing is that this is a solvency problem, not a liquidity problem. The solvency problem cannot be solved by printing more money to perpetuate faulty policies.
Now is probably a good time to listen to Bill Bonner and ”fed proof” wealth.
Our culture has become one of infinite entertainment. From T.V. to movies to video games to facebooking and web surfing – we constantly have entertainment at our finger tips twenty-four hours a day, seven days a week. And of course for the weekends and special occasions we have fancy restaurants and bars, shopping malls, movie theatres, theme parks, football games, concerts, and all kinds of other events that offer entertainment for a price.
Now all of these things are fine and dandy in moderation, but our society tends to suggest that we should be pursuing one of these forms of entertainment at all times when we are not working. And I think that this trend is dangerous.
Entertainment in our culture today is little more than an activity or medium that distracts us from reality – usually resulting in time passing very quickly for us. Most of our television shows and most of our movies fit this description. Our football games and concerts fit this description. And these things are not bad in and of themselves as long as we see them for what they are and as long as we do not assign too much importance to them. For example, is your favorite football team really so important that you should feel a sense of pride when they win and a sense of failure when they lose?
We are so entertained today that we tend to neglect things of greater importance – we spend less time on things that truly matter. Coincidentally, the things that truly matter tend to cost less than our entertainment.
What truly matters to you? Do you place enough emphasis on it?
Eliminating modern entertainment altogether is a bit extreme but cutting back is probably wise. Make an effort to spend more time with family. Spend more time discovering your own spirituality. Work on developing a constructive hobby that could potentially serve as a source of income for you. Read books on topics that interest you. Exercise more. Explore nature. Sit on the front porch and enjoy the weather. You might be surprised at how rewarding an evening away from the T.V. can be.
I will leave you with a personal story from when I was initially working on getting my own financial house in order.
To further cut expenses, I made the decision to get rid of my cable T.V. service. So I called my cable company and I politely asked the customer service representative to cancel my cable service. She immediately asked me which company I was switching over to. I advised that I was not switching and that I was just getting rid of cable. Her reaction suggested that this was probably the first time she got this answer. She had been trained with talking points to try to dissuade me from switching to one of the major competitors (being satellite mainly since the cable companies have monopolized the industry) and so she was caught off guard. She paused briefly and then asked, “Well what are you going to do with your free time?”
I couldn’t help but laugh.
And that is my question to you: What are you going to do with your free time?
I suspect that, when this wonderful journey called life is nearing its end for each of us, we will all wish that we would have spent a little more time on the things that truly matter.
So we might as well start today.