Finance & Economics Archives - Page 7 of 8

Forget the Interest Rate – It’s the Quantity of Interest That Matters

submitted by jwithrow.

Financial success is all about understanding and mastering interest. You see, there are only three choices when it comes to financial matters:

Pay interest
Receive interest
Forego interest

That’s it.

All you must do to get ahead financially is to arrange your financial affairs such that more interest is coming in than going out.

It is the quantity of interest that’s important. This concept is not often discussed so most folks focus exclusively on the rate of interest instead.

3.5% for a mortgage? This is a great rate!

2.87% for a vehicle loan? We’ll take two!

.05% on a savings account? Well, we suppose something is better than nothing.

So the average person pays interest for their house and their cars and they forego interest when they buy their groceries and pursue entertainment. The interest that they do receive is negligible in comparison because they offer whatever capital they have leftover after expenses for a pittance.

So what’s the common man to do?

CNBC will say that the stock market is the only way to go.

What they will not tell you is that the stock market is ripe with risk. Getting into the stock market requires you to give up control of your capital and place it 100% at risk. All the while you have the hedge fund high frequency trading machines and the Wall Street insiders chomping at the bit to take your capital from you.

These forces are focused on the stock market every minute of every day, not just during business hours.
If you have the same amount of time and energy as well as access to the same amount of information as the insiders then you may be able to play the stock market and come out ahead in real terms.

We think that it is much more likely that you will only come out ahead in nominal terms at best if you come out ahead at all.

We think it a far better strategy to capitalize an IBC policy and then focus on employing that capital to develop sustainable sources of income.

The IBC policy ensures that your capital is generating a little bit of interest no matter what happens and your employment of that capital can be used to significantly increase the amount of interest coming in.

After all, what good is a 3.5% mortgage if you are not generating at least 3.6% in interest income consistently?

You see, interest rates are not terribly important – it is mastering the control of interest in vs. interest out that is truly the name of the game.

Distinguishing Wealth from Money

submitted by jwithrow.

At Zenconomics we feel like it is extremely important to differentiate wealth from money. Pop culture and mainstream personal finance relentlessly tell us that the two are one in the same but they are mistaken.

The key to differentiating wealth from money is to understand the difference between exchange value and use value. You already implicitly understand this difference but it is not immediately apparent in our culture today.

Money, by nature, holds an exchange value. You can exchange money for goods and services and the quantity of goods and services for which you can exchange money is determined by the value of your money. But this is all that money is good for – serving as a medium of exchange.

Wealth, on the other hand, holds both exchange value and use value.

You can exchange wealth for goods and services and the quantity of goods and services for which you can exchange wealth is determined by the accepted value of your wealth. Wealth in most forms, however, is not as easily exchanged for goods and services and this is precisely why money plays a vital role in a developed economy.

Unlike money, wealth also holds a use value. You can ‘use’ wealth in some capacity. Take real estate for example.

If you own residential real estate then you can either live in the home or you can rent the home out to a tenant to generate income. These actions both utilize use value. Of course, you can also sell real estate for money which utilizes exchange value.

Maybe your real estate consists of farm land which could be used to produce food. Now your real estate, which is wealth if owned outright, can be utilized to produce additional wealth in the form of food. Now your food has both an exchange value and a use value. You can take your fruits and vegetables down to the farmers market and exchange them for money if you want to utilize the exchange value. Or you can eat your fruits and vegetables if you want to utilize their use value.

It is important to point out that an asset must be owned free and clear of an attached debt in order for it to be considered personal wealth.

If you own a home with a big mortgage on it then you are one financial emergency away from losing the home and thus the case could be made that you do not truly own the home yet. This is not to say that taking out a mortgage to buy a property is a bad idea, but be cognizant of the fact that you will need to satisfy the mortgage before the property can truly be considered wealth.

It is also important to point out that some forms of wealth may hold better exchange value than others. A classic car collection may be extremely valuable to the owner but it may be difficult to find a willing buyer if the owner wished to exchange the collection for money in the future.

To reiterate, money is not wealth.

In fact, the only reason to hold money is to use it to purchase desired goods and services. There is no other use for money.

And if you want to maximize your own wealth, you must wisely use money as a tool to acquire wealth.

**For more of Joe’s thoughts on the “Great Reset” and personalized asset allocation please read “The Individual is Rising: 2nd edition” which will be available later this year. Please sign up for the notifications mailing list at http://www.theindividualisrising.com/.

The Stock Market Deception

submitted by jwithrow.

The stock market is comprised of numerous exchanges through which buyers and sellers can trade securities. The New York Stock Exchange is the world’s largest stock exchange followed by the NASDAQ. The Tokyo Stock Exchange and the London Stock Exchange are third and fourth in terms of market capitalization.

As we mentioned, the exchanges enable buyers and sellers to trade securities with one another.

We repeat this statement to emphasize the next one:

The exchanges are not where businesses raise capital unless an initial public offering (IPO) is taking place.

We think it is important to recognize this fact.

The vast majority of trades on a stock exchange are simply speculative – there is very little productive activity taking place. Even IPOs are usually not terribly productive as the intent is often not to raise capital for business operation but rather to enrich the owners and private investors.

So if most trades are just speculation then why do we view the stock market as a gauge of economic health? Why do we assume that the underlying economy is good when stock prices go up?

We do not assume that the economy is good when corn or oil prices go up. But corn and oil contracts are also traded on futures exchanges and there are speculators who profit when their price rises.

Conversely, why do we assume that the underlying economy is bad when stock prices go down?

Nothing real is destroyed when stock prices fall. Buildings don’t collapse. Equipment doesn’t break. Goods don’t go up in smoke. Engineers don’t lose their knowledge.

Maybe there was a time when stock prices somewhat reflected the financial health of individual companies, but those days are long gone. With mark to unicorn accounting, leveraged stock buy-backs, and all other manner of financial wizardry, CEO’s can and do manipulate stock prices regularly.

Additionally, the Federal Reserve has spent the past three decades ensuring that liquidity flows directly into the stock market so that equity prices continuously rise in unison over time.

The point is that there is a huge disconnect between the stock market and the productive sector that mainstream finance pays no attention to. In fact, mainstream finance has convinced most people that speculating in the stock market is the _only_ way to invest for retirement.

There may be a place for stocks within your asset allocation model, but it is important to recognize the stock market deception for what it is and understand the game you are playing if you do delve into the market. I would highly recommend enlisting the services of independent financial analysts if you do allocate some of your capital to the financial markets.

As we have touched on in a number of other essays here at Zenconomics, financial planning should be comprehensive and diversified according to your own unique circumstances. Simply amassing paper equities denominated in fiat currency is a very fragile plan.

As Nelson Nash says: “If you know what’s going on, you’ll know what to do.”

Be wary of the stock market deception and plan accordingly.

**Want more information on how to build a sustainable financial plan? Are you ready to turbo-charge your retirement portfolio? Do you yearn to exit the rat-race? Is financial freedom calling to your spirit?

Do not take a backseat when it comes to your own finances. Learn everything you need to know to master your finances in 30 days by enrolling in Finance for Freedom today!

Seven Reasons to Abolish the Federal Reserve System

submitted by jwithrow.

The following are seven reasons to abolish the Federal Reserve System.

This list is taken directly from G. Edward Griffin’s “The Creature from Jekyll Island”. If you are up to the task, read this tome for a thorough understanding of how the monetary system actually works.

1. It is incapable of accomplishing its stated objectives.
2. It is a cartel operating against the public interest.
3. It is the supreme instrument of usury.
4. It generates our most unfair tax.
5. It encourages war.
6. It destabilizes the economy.
7. It is an instrument of totalitarianism.

Acquire Assets

submitted by jwithrow.

Wealth comes as a result of the acquisition of assets. If you want to be wealthy you must do two things:

Acquire assets
Avoid liabilities

Sounds easy, right?

Well let’s make sure that we understand the difference between an asset and a liability.

Robert Kiyosaki offers a solid fundamental distinction:

“An asset is something that puts money into my pocket. A liability is something that takes money out of my pocket.”

We would expand upon this distinction by stating:

An asset is something that will maintain or increase in value over time.
A liability is something that will decline in value over time.

With this understanding (sans-accounting), we can think of two big liabilities that far too many people acquire thinking that they are assets:

1: Cars

Cars, no matter how luxurious, will lose value over time.

In addition to losing value, cars also carry acquisition and repair costs. When the acquisition costs involve taking on additional debt then the purchase of a car is even more financially damaging.

We prefer to drive a beater until the wheels fall off.

If you must have a nice car, follow Mr. Kiyosaki’s advice and first acquire a productive asset that will provide the cash flow to pay for the car.

2: Currency (fiat money)

Yes, those lovely U.S. dollars sitting in your bank account are actually liabilities.

Preposterous, you say?

Please search the internet for a chart of the U.S. dollar’s value over time and see for yourself.

Or just read our essay on sound money.

The U.S. dollar has lost 98% of its value since 1913 and this trend will continue.

The solution is to trade dollars for assets – do this sooner rather than later while folks still think dollars are valuable.

Investing in Gold and Silver Bullion

submitted by jwithrow.

Investing in gold and silver bullion is, believe it or not, much easier than investing in stocks, mutual funds, exchange-traded funds, or bonds.

If the concept of investing in gold and silver seems strange to you, it is only because the financial media has marginalized the precious metals in order to sell more paper equities and the mainstream media has associated the precious metals with paranoid dooms-dayers. And apparently you haven’t been reading our little blog here.

You see, gold is money. It has been for all of recorded history.

You can’t pay your taxes with gold because your government knows that no one would want government currency if you could. And then your government would be in big trouble.

We talk about the ‘why’ in more detail here and here so now let’s look at the ‘how’.

Gold and silver bullion is available in the form of coins and bars of varying weights and measures and purchases can be made either in person at a reputable coin dealer or online through an internet dealer.

The advantage of buying from a local coin dealer is that you can pay in cash anonymously and you can potentially develop a working relationship with the dealer. The downside is that you will have to pay your state sales tax on all bullion purchases made at a local dealer.

The advantage of buying online is that you don’t have to leave your home and you can avoid the state sales tax (for the time being, anyway). The downside is that you cannot purchase anonymously and there is a delay between purchase and delivery.

Gold and silver bullion can also be sold back to the same dealers – be sure to research their individual policy.

The IRS currently classifies precious metal bullion as a collectible and thus taxes the gain on sale at the collectible rate which is 28%. Keep this in mind if you choose to invest in gold and silver bullion, especially if you sacrifice anonymity and purchase online. Also, be sure to stay updated on the current tax laws regarding gold and silver bullion as they could change at any given time.

There are many strategies when it comes to investing in gold and silver but a general rule of thumb is to stay away from unique collectibles (numismatics) unless you are very knowledgeable in the field. The reason being is that numismatics carry a much higher premium than standard bullion from well-known mints but there is a much smaller market for these rare coins and thus they are much less liquid.

Our favorite strategy is to dollar-cost-average into both gold and silver periodically at the ratio of one American Gold Eagle to twenty American Silver Eagles.

MyRA-QE Taper Connection

submitted by jwithrow.

We have a question for you:

Is it a coincidence that the government has introduced the “myRA” plans just as the Federal Reserve has begun to taper its quantitative easing programs?

Let’s think this thing through for a minute.

We know:

China is now a net-seller of U.S. Treasuries so the Federal Reserve has had to step in and purchase U.S. Treasury Bonds in increasing quantities to support government spending.
The average American saves for retirement in a qualified retirement plan focusing primarily on mutual funds, exchange traded funds, and stocks with bonds comprising a small portion of the allocation.
The proposed myRA plans are designed to focus on U.S. Treasury Bonds.
The Federal Reserve’s quantitative easing programs have pumped massive amounts of liquidity into the system which has resulted in a broad increase of stock prices across the board.
Tapering QE will withdraw liquidity from the system which will almost certainly result in a broad decrease of stock prices across the board and quite possibly a severe stock market crash.
A falling stock market would likely cause many Americans to seek investment options that they deem “safer”.
The government is already hard-selling their myRA plans stating that there is “no risk to lose what you put in”.

Hmm.

Maybe our benevolent bureaucrats really do think that myRA plans will help the common man.

But we hold dearly to a personal mantra:

Maximize Capital,
Minimize Crap,
Never Trust the Government.

With that mantra echoing in our mind, we can’t help but be a little suspicious – something funny seems to be afoot.

What do you think?

Qualified Retirement Plans

submitted by jwithrow.

Qualified retirement plans have their roots in the Employee Retirement Income Security Act (ERISA) that was enacted in 1972.

The most common qualified retirement plans are the 401(k) and the IRA (individual retirement account). These plans allow individuals to contribute funds to their account on a pre-tax basis to be invested predominantly in stocks, bonds, mutual funds, and exchange traded funds. Taxes on investment gains are allowed to be deferred until distributions from the account are taken. Individuals may begin to take distributions without an early withdrawal penalty once they reach age 59.5. Any distributions prior to age 59.5 will be subject to a 10% early distribution penalty. Individuals are required to take a minimum distribution annually once they reach age 70.5. Distributions will be taxed at the individual’s ‘ordinary’ tax rate.

Mainstream financial thinking suggests that qualified retirement plans are the absolute best way to save for retirement because these plans enable you to invest funds on a pre-tax basis during your peak earning years and the investment gains can grow tax-deferred until retirement when your income is lower.

This way of thinking makes a number of assumptions.

The first assumption is that the investments held within the qualified retirement plan will consistently grow in value and they will not experience any significant losses to principal at any time which would serve to stunt the plan’s growth.

The second assumption is that the individual is not capable of effectively using capital during his/her peak earning years to develop diversified income streams that would provide significant income during retirement years. Maybe this would better be stated as the assumption that there is actually a “peak earning period” in an individual’s life.

The third assumption is that the rules governing qualified retirement plans will never change. Mainstream personal finance assumes that the early-distribution penalty will always be 10% and the qualified distribution age will always be 59.5. Mainstream personal finance assumes that ‘ordinary’ tax rates will always be what they are currently. (We say that there is nothing ordinary about the income tax at all!)

What’s overlooked here is the fact that qualified retirement plans are a government-created solution to government-created problems: Onerous taxation and a constantly devalued dollar that make it very difficult for the average American to save for retirement.

Pay very close attention to the language that must be used to discuss qualified retirement plans. In talking about these plans one must use words like allow, may, require, and penalty. In other words, these plans consist of permissions and requirements. People are given permission by the government to contribute funds on a pre-tax basis. And they are given permission to defer taxes on their investments. But they are required to leave all funds in the account until they reach a certain age or they will be penalized.

Any time permission is required to do something it follows that the permission could also be withdrawn at some point in the future. Otherwise one would not need permission to do whatever it is.

If you recognize that qualified retirement plans are a government-created solution to a government-created problem then a very important question must be asked: What happens if the government decides that there are bigger problems than Americans saving too little?

For example, what if government’s biggest problem became the need to finance out of control spending?

Cyprus and Poland have provided two possible answers to that question and the trend suggests that the rules governing qualified retirement plans could very suddenly become less favorable for the individuals using them at some unknown point in the future. The “myRA” proposal seems to be the first step in this direction.

So we can’t help but be skeptical of qualified retirement accounts. It just doesn’t add up. IRS approved tax shelters as a government solution to taxation and inflation? It seems to us that cutting spending, cutting taxes, cutting inflation, and returning to sound money would be a much better solution.

So we will continue to stay away from qualified retirement plans in favor of the IBC strategy for maximizing capital. This strategy, if implemented correctly, does not expose our principal to loss, it offers us access to our capital at any time for any reason, and it offers favorable tax treatment as well. All without requiring us to adhere to silly IRS rules about what we can and cannot do with our money depending on how old we are.

It just makes more sense.

Minimum Wage Cannot Fool the Free Market

submitted by jwithrow.

An important facet of a dynamic market economy is a flexible pricing system where prices can freely adjust in response to changes in supply and demand.

Wages are no exception to this rule. You see, wages are simply the price of labor and this price fluctuates with supply and demand in the marketplace – just like any other price.

When it comes to the jobs market, employers seek to hire employees at a wage which will allow the employer to profit on an employee’s labor. As such, the employee’s salary must necessarily be priced lower than the total value of his or her production. Otherwise the employer would not have a need for the employee’s services.

If this seems callous to you then please ask yourself a question:

Are you willing to pay someone $100 to do a job that is only worth $50 to you?

Well most employers aren’t either.

So, employers are willing to offer a salary within a specific value range according to the nature of the job function. The employee may be able to negotiate a higher salary but only up to the employer’s ceiling price beyond which the employer would not be able to justify the hire.

Minimum wage laws, however well-intentioned they may be, have no place within a free market system. Minimum wage laws distort the market pricing system and they fail to achieve their stated intent – they serve only to increase unemployment. Employers will trim their workforce to account for forced wage increases and individuals who would otherwise be willing to work for pay beneath the minimum wage will be priced out of employment.

What’s lost in the clamor for an increased minimum wage is the fact that wages are not the common man’s problem in the first place. U.S. median household income in 1970 was $7,651. It was $22,109 in 1985. And $41,262 in 2000. And median household income in 2012 was $50,099.

Wages have skyrocketed!

But wages don’t buy nearly as much as they used to, do they? Sounds to us like inflation is the common man’s biggest problem – let’s pass maximum inflation laws!

Or better yet, let’s End the Fed and get back to Sound Money.

Sound Money

submitted by jwithrow.

The most important facet of free market capitalism is sound money. If you don’t have sound money then you don’t have free market capitalism – you have something else.

Sound money is simply money that serves as a reliable store of value. Put another way, sound money is money that does not constantly lose its purchasing power. Sound money affords one a reasonable expectation that one unit of money today will buy the same amount of goods and services as one unit of money tomorrow. And next month. And ten years from now.

What a novel concept!

Anyone who has taken a finance course is familiar with the time value of money principle. In finance class, we learn to discount our money over time based on the inflation rate. We are taught, correctly, that present dollars are worth more than future dollars.

What we are not taught is that this is a deformation of free market capitalism!

The general market has chosen gold and silver to serve as money throughout most of history because the precious metals are particularly well suited for this purpose: they are limited in supply, they have functional utility outside of the monetary system, and, unlike our money today, they cannot be created from nothing.

Make no mistake about it, that’s where our money comes from today: nothing. It is created from nothing and then loaned into existence at interest. See the Hidden Secrets of Money video series for a more thorough examination of our money.

You see, money should not be a function of government nor should it be a function of a central bank behind closed doors. And it certainly shouldn’t be created from nothing. This is why the U.S. Constitution only authorizes gold and silver as legal tender; the Founders knew well the virtues of sound money and the dangers of fiat currency.

Did you know that the U.S. dollar was defined by the Coinage Act of 1792 to be 371.25 grains of fine silver? This act set the standard weight and measure of the dollar in terms of silver and individuals in the market were still free to accept or reject coins of differing weights and measures as they saw fit.

But we digress.

Here is why sound money is important to you:

Every dollar to your name is constantly losing value and there is no way for you to predict how much value your savings will lose over time.

This is a direct result of the monetary system that is in place whereby central banks create money from nothing and then lend that money to governments and to commercial banks at interest. That money then enters the economy when governments spend it and when commercial banks lend it out to customers. This is done constantly and it is why your money constantly loses value. Such a system has a profound impact on people from every walk of life.

How can we accurately plan for anything long-term if our money is constantly losing value? We can only guess.

What we do know from history is that sound money leads to a stable economy while fiat money leads to booms and busts.

The general market prefers the former while big government prefers the latter.

For more information on the sound money principle see the article links below. For a lot more information on sound money and monetary history see the book links below.

The Principle of Sound Money

The Simplicity of Sound Money

An Introduction to Sound Money