What is the best way to invest savings?
There is no simple answer to this question, but there are guidelines.
All financial advisors have a conflict of interest when managing your savings. You are responsible for knowing how to manage your wealth.
Understand banking and fractional reserve lending.
Understand government and banking.
Understand the doubling interval.
Understand wealth preservation versus making money with investments.
Understand long term trends (cycles) and adapting.
Describe financial advisors conflict of interest.
Describe Fractional Reserve Lending and how it can be thought of as counterfeit currency.
A bank's balance sheet is upside down from other businesses.
In a banker's world cash is a liability while loans are assets.
Thus, when a bank lists its assets they are, in fact, the amount of its outstanding loans.
When a loan is made, numbers are entered into the loan account and added to the bank's assets.
To be clear, there is no effort on the bank's part other than typing digits at a keyboard which creates 'money' in the customer's account.
Of course, the expected outcome is that the loan principle plus interest will be repaid.
In this event the principle goes to money heaven (i.e., is destroyed) by subtracting the principle payment from the bank's balance sheet asset column.
Banks also have a position called the loan/loss officer and it that person's job to monitor incoming loan payments to ensure the bank maintains its loan/reserve ratio.
The loan/reserve ratio is the ratio of loans to vault cash or other liquid liabilities (somewhere between 2-15% cash).
Based upon daily loan payments, the loan/loss officer then adjusts the amount of new loans that can be made.
If all or some of a loan is not paid, the bank employs a loan-loss account to pay for these defaulted payments.
The account is filled from bank profits and is usually 1-2% of the bank's assets.
If the bank suffers gross loan defaults, it becomes bankrupt.
The FDIC steps in and uses taxpayers money to settle the worst of the bad loans and sell the bank at a discount.
At this point, one could consider using taxpayer money to settle loans as counterfeiting.
As for typical loans, one could say the loan is counterfeit, but only for the loan duration.
More precisely, the banker, without effort, takes wealth from future earnings.
Loan Loss Accounting
Describe the relationship between government and banking.
Describe the doubling interval.
Contrast barter, currency, debt, and money.
Barter is the exchange of goods/services.
Currency is legal tender meaning that it is unlawful to refuse currency when it is used to pay debt and taxes.
Currency is usually an abstraction of money and so its value is based on the confidence in the issuer of currency.
Debt is the future payment of currency to the debt holder.
Money is a store of value, permanent, non-traceable, portable, divisible, fungible, and consistent.
Money must possess intrinsic value, which is why paper or crypto-currencies are not money.
Money must be durable and permanent, which is why corn/cotton/wheat does not replace money.
Money must be convenient, which is why copper does not replace money.
Money must be divisible, which is why art work does not replace money.
Money must be fungible and thus have a wide degree of acceptance, which is why crypto-currencies do not replace money.
Money must be consistent, which is why real estate (which depends on location) does not replace money.
Money must be relatively rare and limited in the quantity, which is why iron or copper does not replace money.
Specie (gold/silver coin) is the ideal form of money.
JP Morgan, one of the most powerful bankers said: "Gold is money. Everything else is credit."
Contrast properties of possible currencies.
Value Permanent Counter-Party Portable Divisible Fungible Consistent
Specie (gold/silver coin) YES YES YES YES YES YES YES
Oil Yes Yes Yes No Yes Yes No
Corn/cotton/wheat Yes No Yes No Yes Yes No
Land Yes Yes No No Yes No No
Gold certificate Yes No No Yes No Yes Yes
Dollar bills No No No Yes Yes Yes Yes
Debt No No No Yes Yes Yes Yes
Tally sticks No No No Yes Yes Yes Yes
Contrast price of gold/silver versus its value.
In any transaction the seller has an asking price versus the potential buyer offering a bid or value reply.
The buyer would not make bid unless the good or service had value.
Value is seen as a constant or long-term relationship with the cost to produce/provide a good/service.
Price is seen as more volatile than value where a low price reflects pressure or stress on the seller and a high price is the result of the seller enhancing value through presentation such as a clean car or showcased home.
Precious metals are at historic low prices while their value has remained constant.
For example, the historic price of an ounce of silver would be 10 days of hard labor which, in today's dollars, is ~$1,000.
Moreover, since the 1950s, vast supplies of silver have been consumed leaving a fraction (1/50th) in the market as jewelry, art, industrial, and investment silver.
Gold, on the other hand, is not consumed, but it has been anonymously reused (re-hypothecated) over the decades as collateral on trillions of dollars of debt, making its theoretical price resolution as high as ~$50,000/Oz.
Explain how the value of currency versus the value of gold is upside down from how we normally think.
In an ideal world, governments control currency transparently thereby engendering trust in the currency as a measure of value.
But from the earliest civilizations through today the opposite has held.
Governments always overspend on public works and war.
Rather than levy taxes to pay for the overspending, the supply of currency expands to pay for public works and war.
Expanding the currency supply acts as a stealth tax.
A tax based upon citizens inability to recall year-to-year price changes, and when price hikes are noticed, the merchant is blamed by government officials which, in turn, impose "price controls".
Currency expansion is also a regressive tax robbing purchasing power from the poor, who can least afford it.
Furthermore, when the government spends new currency, it reaps the benefit of current currency value; after the new currency has circulated and spent by an average citizen, its value has decreased.
When a private entity increases the supply of currency is called counterfeiting; when government increases the currency supply, it is called fiscal policy.
Earliest civilizations including Chinese Dynasties, Egyptians, Grecians, and Romans would simply create more "cash" as in China, or copper coins in early Roman times.
Later, impurities (e.g., copper) would be added to gold and silver to allow the minting of more coins.
Today, the Federal Reserve simply enters numbers into a computer program to create new dollars.
The temptation to overspend on public works and war is so great that ALL (of the thousands of) fiat (by order) currencies created over the millennia have dropped to a value of zero within several decades.
To appreciate the rarity of gold, one must look at the periodic table.
As one moves down rows of elements in the periodic table, atoms contain more protons in their nucleus (i.e., increasing atomic weight).
With each increase in the number of protons, increasing amount of energy is required create these heavier atoms.
It is theorized that it would require the energy of two colliding neutron stars to assemble the 79 protons in the nucleus of gold atoms.
Besides being rare, gold does not oxidize giving it the properties of permanence, divisibility, portability, the properties of money.
Since governments cannot control neutron stars to expand the supply of gold, gold has had constant value throughout history when compared to volatile currencies.
Warren Buffett jokes that it is silly to dig a hole to mine gold, then dig another hole to store gold and hire an armed guard to secure it, but the simple truth is that gold is a store of wealth while other financial forms of wealth are derived from gold.
Things are upside down because we think of currency as being constant while gold changes in price.
In fact, the opposite is true.
If one uses gold to purchase oil, college tuition, medical services, or any other "inflationary" item, one would discover that the amount of gold required to purchase these items has changed little for more than fifty years.
So the only thing that can be changing is a loss of value in the dollar.
What is meant by "theoretical price resolution" of gold/silver.
Purchase of financial assets is not an investment in wealth (money), but rather a re-allocation of currency within the financial market.
Financial asset values are maintained by sellers finding additional buyers and prices are maintained by confidence in the market.
Buyers take for granted equity-to-currency-to-money conversion can occur at a moments notice, but it works only if there is confidence that the market will stand-in as a proxy for wealth.
And when a large number of investors attempt equity-to-currency-to-money conversion, confidence is lost.
Issuance of debt (making loans) is predicated on future earnings which is high-risk in a contracting global economy.
Debt default (deflation) began in 2008 with the Lehman Bros bankruptcy, but rather than allow losses, the majority of default has been replaced with new debt (tens of $trillions of new loans).
At some point in the (near?) future $trillions of additional debt will become meaningless in a contracting global economy.
It is axiomatic that the approximate 1000 trillion dollars of global debt that has not and cannot be re-paid will not be paid.
As debt default mounts and new debt crosses an hereto unknown threshold, a loss of confidence in equity (stocks) and currency, will engender waves of panic as holders of financial assets attempt to convert to real assets.
It would be a sellers-only market.
The conversion of equity-to-currency-to-money would be further constrained by the vast amount of financial assets compared to limited amounts of currency.
In such a crisis people would horde cash, banks would go on 'holiday', and there would be the possibility of currency re-issue (red dollars), subsequent inflation (red dollars only worth a fraction of green dollars), or even a period of hyperinflation before settling in for a long economic depression.
Finally, such a shock would cause a rapid and terminal collapse in the global supply-chain.
To summarize in simpler terms, the global Western financial markets are a Ponzi scheme, meaning that the system depends on the confidence of new participants either though new buyers, new immigrants, new countries, new resources, more economic growth, more inexpensive energy, or a combination of these.
Describe wealth preservation versus making money with investments
Describe long term trends (cycles) and how to adapt.
Liquidation of Government Debt
As covered in the IMF working paper Liquidation of Government Debt,
the use of a combination of shearing and fencing have up to five common characteristics:
2)governmental control of interest rates to guarantee negative real rates of return;
3)the funding of government debt by financial institutions;
and 5)discouraging (or even outlawing in some cases) precious metals investment.
Capitalism versus Creditism
In traditional capitalism, economic growth is driven by savings and subsequent investment of savings from a micro-level.
In creditism, economic growth driven by expansion of credit (debt) and controlled by central banks and governments from a macro-level.
Since the world's currencies are no longer backed by gold/silver, today's currencies are credit (debt) issued by governments;
thus, loans, letters-of-credit, securities, and currencies are various forms of the same thing - debt.
The essentially unlimited issuance of debt has produced unprecedented world-wide prosperity in the last 40 years.
For example, US public/private debt expanded from $1 trillion in 1964 to $57 trillion in 2013, an increase by a factor of 50.
This vast amount of world-wide credit has never been seen before; however, the liquidation of Lehman Bros. in 2008 revealed a
systemic inability to repay debt, which continues through today (see first figure below).
Given the relatively paltry Nominal Gross Domestic Product (NGDP) and 'check book' money supply, how can the debt be paid?
Here are three possibilities:
Foreclosure - Collateral collection on non-paying debt would cascade from individuals, to small businesses, to corporations,
to banks, to governments world-wide. The subsequent selling-induced deflation would lead to a never-seen-before
world-wide severe depression that would require decades of recovery, or possibly collapse society for
Maintain Status Quo - As they have since 2008, governments can continue to create more debt (currency) to replace non-payment of debt.
Thus, the world's population becomes poorer as more and more currency is created to replace bad debt.
Out of necessity, governments must obfuscate the amount of increased debt and resulting reduced purchasing power of currency,
which is why statistical gymnastics have been introduced into the Consumer Price Index (CPI).
And when factoring an average nine percent (9%) year-to-year inflation rate over the last decade, one can see the nominal
stock market gains would, in fact, lead to a loss in real income (see second figure below).
If the US were to expand its debt to the same extent that Japan has, then public on-book debt would grow from the current $17 trillion to $42.5 trillion.
In other words, if this path is followed, we can obtain a general idea of our future by observing Japan.
Government Takeover - Currency creation is controlled by private bankers which would never forgive outstanding debt,
but it is possible for government to forgive debt.
As a last ditch effort it is possible for government to take control of currency creation, thereby remove,
currency creation from private bankers and direct productive use of credit from spending on consumption
and war to spending on energy, technology, and infrastructure.
Which alternative do you think is most likely? My bet is on door number 2. Our society will follow the road to impoverishment until...
Symbiotic relationships among energy, the economy, and perception of wealth
Our debt-based financial system is a result of the possibility of future growth allowed through essentially-free energy and, therefore, is dependent upon growth.
Said another way, forms of wealth that include Fractional Reserve Lending, equities, corporate bonds, letters of credit, infrastructure project funding,
and debt-based currency (Federal Reserve Notes) all depend upon future growth to pay back the debt.
The financial system is maintained with negative-feedback loops; but, the system is also extremely complex and unable to assess true risk
as demonstrated in the London Whale blowup.
However, once the system breaks through its outer limits, reverse positive-feedback loops take control.
One example is panic stock selling, but in today's economy the most likely outcome would be a lack of trust and panic withdraw of credit as occurred in 2008.
Turning our attention to energy, we see our modern societies have become dependent on nearly-free energy.
We need an Energy Returned On Energy Invested (EROI) factor of at least 8:1 to maintain current living standards.
But an EROI of 14:1 is required to support such things as good education, health care, and the arts.
The bad news is that our EROI is on the cusp of dropping exponentially and as EROI continues to drop (Arctic, deep sea, tar-sand and shale-oil, have an average EROI of 5:1),
economic growth will slow with far reaching and devastating reversal of global prosperity in an unequal fashion.
Once one accepts that growth will slow or even cease, all of the current common sense assumptions about financial investing, such as the assumption of making money from money, cease to be true.
Funding the needed $trillions to develop 5-3:1 EROI oil infrastructure in a low-to-zero growth world economy would be almost impossible.
This simple realization would create a positive-feedback loop of bankruptcies that would destabilize and crash the world's financial system.
Again, wealth is based upon future growth, so the wealth that disappears in a financial crash is stocks, endowment funds, pension funds,
insurance companies portfolios, the ability of governments to borrow, and the ability of governments to tax.
Michael Greenberger, the former Dir. of the Commodity Futures Trading Commission (1997-99), explained that it was the financial industry lobbyists who donated millions to Phil Gramm over his 24-year congressional career and drafted the 285-page bill called the Commodity Futures Modernization Act. They used Phil Gramm as a vehicle since he was then the chairman of the U.S. Senate Committee on Banking, Housing, and Urban Affairs.
On December 13, 2000 the Supreme Court had issued its decision on Bush vs. Gore. Two days later, December 15th, President Bill Clinton and the Republican-controlled Congress were locked in a budget showdown over a massive 11,000-page, $384-billion, Omnibus Spending Bill. It was the perfect moment for Gramm to slip in his 285-page measure sponsored by Senator Richard Lugar (R-Ind.), who was the chairman of the agriculture committee. They had tried to get the measure passed earlier and it had been considered dead. But committee chairmen have the right to submit bills directly to Congress without committee approval so the bill was never debated in committees or submitted to the House or Senate for a vote.
Phil Gramm stood up on the Senate floor to hail the act's inclusion into the must-pass budget package. But only an expert could have followed what Gramm was saying. The act, he declared, would ensure that neither the SEC nor the Commodity Futures Trading Commission (CFTC) got into the business of regulating newfangled financial products called credit default swaps - and would thus "protect financial institutions from over regulation" and "position our financial services industries to be world leaders into the new century."
It worked! Just prior to the Christmas holiday, the act found its way into the The Consolidated Appropriations Act for FY2001 (Labor, Health and Human Services, and Education Appropriations Bill) (H.R. 4577). The Senate version passed by it "Unanimous Consent." President Clinton signed it into Public Law (106-554) on December 21, 2000. and the rest is history.
The new Commodity Futures Trading Act allowed banks to speculate in the market by increasing reserve ratios from 9-12:1 to 30-40:1 meaning that for every dollar of physical cash, they could create up to forty dollars of "loan cash" to use for what turned out to be high-risk investments.
Earlier in his career Phil Gramm sponsored the Gramm-Leach-Bliley Financial Services Modernization Act which, in turn, repealed the Glass-Steagall Act and allowed traditional depository institutions (banks) to speculate in financial markets just as they used to do before the Great Depression.
In an interview, Sandy Weill (CEO Citigroup) said that they spent $200 million in lobbying fees to Congress over a two year period
to have Glass-Steagall overturned. Afterward, the Travelers Insurance merger with Citigroup was completed.
Add the transfer of regulatory control to Wall Street and it led to systemic ruin for the nation, but mega-bank conglomerate profits were made.
The official plunder start date was 1996 with the Irrational Exuberance speech by Fed Chairman Greenspan in which he said they would give up
managing monetary aggregate growth to the shadow banking system which was creating money through asset-backed securities and credit derivatives.
Instead, the Fed would manage the CPI; but at the time the US was exporting inflation and importing Asian goods.
In this way Asian meltdown was seen as beneficial to the US since it made Asian goods cheap compared the inflated dollar.
After a decade of greed, the pendulum swung against the US as a result of mega-banker influence and economic self-dealing.
These mega-banks have meddled to the point of killing the national economy, the banking system, and themselves.
Which is why Max Keiser correctly labels the mega-bankers suicide terrorists.
The Gramm-Leach-Bliley Financial Services Modernization Act and the Commodity Futures Modernization Act created a shadow banking system between 2000 and 2008 that created over $500 trillion in credit (that's more than 12 times the World's GDB). These shadow banks collapsed in 2008 but they applied for and were awarded the status of "real" banks and subsequently provided with $700 billion in funds from Congress.
Regardless, nothing has changed from 2008. One mega-bank, JP Morgan & Chase has about $90 trillion of Credit and Interest rate default swap risk listed as assets, but with only a cash value of $380 million.
There are not enough people to pay back debt created by the former shadow banking industry. For the last two years, more and more millions of people continue to default on debt. From the top of the heap at the Federal Reserve, it appears to the Board of Governors and Ben Bernanke as *deflation* with more debt defaults than money creation, so trillions are pumped into the system (For example, the $2 trillion in new public debt created since 2008 matches all of the debt created since the beginning of the country).
From the view of the mega-banks buying back the Treasuries, life is good. They make $millions in fees and they see *price inflation*, but no problem since a 10% per annum increase in food is nothing compared to their income.
From the view of salaried employees, it *stagflation* since the government has been understating price inflation for decades while real price inflation has been doubling every seven or so years.
1% of the population owns about 40% of all assets. This "hot" money is always looking for the *lowest risk* and highest return on investment. Thus, hot money is jumping from US Treasuries as the Fed issues and buys more and more of its debt diluting the value of the dollar.
But there is just one problem, there is no safe sink for hot money to flow into (God forbid anyone would invest in domestic manufacturing and actually hire someone to work). So it goes into tangibles and spikes commodity prices. Wheat, for example, is about to double in price and has led to the subsistence revolts we are seeing in Tunisia and Egypt.
The Egyptian Tinderbox: How Banks and Investors are Starving The Third World
The Western wealthy elites have boxed themselves into a corner with too much bad debt and no safe harbor for cash on hand. Therefore, hot money will continue to migrate into tangibles to track inflation, but also creating a tipping point where everyone will drain savings and or speculate in tangibles.
Need for Finance Transparency
One of the basic problems we face today is too much debt, both private and public. Deregulation over the last decade has led to a world-wide debt burden of hundreds of trillions of dollars. No one knows the exact amount, but it could be as high as a $quadrillion dollars, more debt than the world can reasonably be expected to pay pack. Meanwhile, the Federal Reserve continues to create more and more debt-based money - hundreds of billions per month and $1 trillion per year in the last two years and on into the future.
For to understand this mechanism in more detail, see this Federal Reserve Report. Oh, and the seemingly hard reserve values mention have been lifted and are now set at the discretion of the Federal Reserve.
But it's just macroeconomics, right? This is not germane to computer science? Well then consider Facebook's Zynga virtual dollars which are are sub-culture now, but moving into position to transform the global economy as more and more hundreds-of-thousands of people join in. As bad as the Federal Reserve banking and fiat currencies are – *Zynga's virtual currencies are thousand times worse than the Federal Reserve.*
The key element in computer generated virtual currency is that there is no ratio of paper-to-real value as there is with the conventional fiat currency described above. No fraction. Just demand. The more you want the more you get. Whatever you need to play games or participate in virtual worlds. The trap, of course, is that virtual currency is created with no effort while the virtual currency consumer must exert real labor to obtain it.
And just like it is with easy credit, most of this global army of game
addicts or immersion addicts will be sucked into easy-to-obtain virtual debt and will need to "click" their way out of debt (generating views that Zynga can sell to advertisers to sell ads against). It will be a casino-based click-prison. Just like banks have done, as the supply of virtual currency is expanded and then contracted, players will be reduced to subsistence clicking.
Is this an exaggeration? Zynga has been selling $500 "buy-ins" or "pump-ups" to give users virtual dollars and status in these games. Now there are hundreds of thousands and soon to be millions of people buying virtual currency for virtual status or to pay off virtual debts.
To confirm that virtual money is now real money, a court in England has
ruled that *virtual currencies are the same as real property.*
An individual hacked into the social gaming giant Zynga. He transferred 400 billion virtual poker chips to his account and proceeded to sell them on the black market. (Yes, there's a black market in virtual Zynga poker chips.) In total, they were worth about $12 million USD.
Zynga caught the guy selling their chips. He pled guilty and will probably serve a long sentence in jail (he was on probation from an earlier hacking-related offense).
More to the point, there was a debate in the British court where he was
tried as to *whether the hacking actually constituted theft, since virtual poker chips are virtual, and Zynga can just create as many as it wants without cost.*
The court answered by saying that, *virtual goods can be treated
like property* and adding poker chips to your account amounts to theft.
Facebook, Twitter, HuffPost, Linux, Wikipedia, and many others are all examples of voluntary collectivism. Some call it altruism. Some call it "open-source," but it is the same thing, a form of self-organizing collectivism that takes advantage of group knowledge. This has been around since the beginning of life on Earth. It was formalized in the 1500s and called science or the scientific method. It this exact collectivism that led Issac Newton to say "...If I have seen a little further it is by standing on the shoulders of Giants."
The boom of the Internet since 1994 has made the above cyber examples possible. Nevertheless, banks have tried to figured out how to introduce an interest bearing virtual currency along with fractional reserve banking into the economy of the Internet.
It now appears that they have succeeded. Zynga will become a pernicious banking force that will destroy collectivism in the Internet economy just as the Federal Reserve has destroyed the pre-Internet economy with low interest rates and the unbearable burden of debt. Zynga will load up millions of users with interest-bearing virtual currency that will transform the Web from voluntary collectivism (nature) to forced collectivism (a type of casino in cyber space). Zynga is the enabling currency provider driving Farmville and Cityville that will eventually corrupt the self-organizing collectivism seen today on the Internet.
As computing environments create more and more immersion, I think we have a responsibility as computer science professionals to comment on this emerging monopoly on human effort.
Numbers in parentheses are the amounts received as listed in attachments A (CDS), B (buying securities underlying CDS), and D (securities lending agreements):
$12.9B Goldman Sachs (2.5/5.6/4.8)
$12.0B Bank of America/Merrill Lynch (7.0/2.3/7.6)
$5.2B Bank of America (0.2/0.5/4.5)
$6.8B Merrill Lynch (6.8/1.8/3.1)
$11.9B Societe Generale (4.1/6.9/0.9)
$11.8B Deutsche Bank (2.6/2.8/6.4)
$8.5B Barclays (0.9/0.6/7.0)
$5.0B UBS (0.8/2.5/1.7)
$4.9B BNP Paribas (0.0/0.0/4.9)
$3.5B HSBC Bank (0.2/0.0/3.3)
$3.3B Calyon (1.1/1.2/0.0)
$2.3B Citigroup (0.0/0.0/2.3)
$2.2B Dresdner Kleinwort (0.0/0.0/2.2)
$1.6B JPMorgan/Morgman Stanley (0.6/0.0/1.0)
$0.4B JPMorgan (0.4/0.0/0.0)
$1.2B Morgan Stanley (0.2/0.0/1.0)
$1.5B Wachovia (0.7/0.8/0.0)
$1.5B ING (0.0/0.0/1.5)
$1.1B Bank of Montreal (0.2/0.9/0.0)
$1.0B Deutsche Zentral-Genossenschaftsbank (0.0/1.0/0.0)
$0.8B Rabobank (0.5/0.3/0.0)
$0.7B Royal Bank of Scotland (0.2/0.5/0.0)
$0.7B DZ Bank (0.7/0.0/0.0)
$0.5B KFW (0.5/0.0/0.)
$0.3B Banco Santander
$0.4B Dresdner Bank AG (0.0/0.4/0.0)
$0.4B Credit Suisse (0.0/0.0/0.4)
$0.2B Citidel (0.0/0.0/0.2)
$38.8B US Banks
$50.2B Foreign Banks
$12.0B Municipal Bonds