Reading time: 1,045 words, 3 pages, 2.5 to 4 minutes.
It’s happened. Just as I predicted. And, we’re next. The Polish government has confiscated private pensions. And, just as I wrote in the Back to the Dark Ages about the Cyprus ‘Bail-in’ that was perpetrated on a small country first and then used as a blueprint for others, so too will the Polish confiscation be played out everywhere else. Coming to a country near you.
Of course, the propaganda presstitutes covered it up with misleading headlines spinning it as an “overhaul” of the retirement system with the headline
Poland reduces public debt through pension funds overhaul.
The innocuous byline is “Reform moves bond assets from private to state fund”. In other words, they’re confiscating private pensions and converting them into government bonds. That doesn’t sound so bad does it?
Remember, the price of bonds is the opposite to the movement of interest rates. Interest rates are at all-time lows and they are starting to rise. They have nowhere to go but up. Central banks are losing control along with their influence. As interest rates rise, the price of government bonds fall and the value of your pension based on government bonds diminishes. Kiss you pension good-by.
The Polish Prime Minister said “We believe that, apart from the positive consequence of this decision for public debt, pensions will also be safer.” Right, he’s doing you a favor by stealing your money and transferring it to worthless government bonds.
Zero Hedge summarized it thusly:
1. Government has too much debt to issue more debt
2. Government nationalizes private pension funds making their debt holdings an “asset” and commingles with other public assets
3. New confiscated assets net out sovereign debt liability, lowering the debt/GDP ratio
4. Debt/GDP drops below threshold, government can issue more sovereign debt
So, this will allow the over-indebted Polish government to borrow more and continue to spend like drunken sailors. My apologies to drunken sailors; when they run out of money, they STOP spending. And, Poland is not alone. All countries are in the same boat. Poland is simply the first and, once they get the details ironed out it will be the blueprint for other countries.
Will it happen here? Yes, it’s only a matter of time. When? I don’t know. We may (“may” as in I don’t know for certain) have a couple years. That’s important because one way to protect your private pension (RRSP, 401k, Roth Ira, etc.) is to cash it in, take the tax hit and make like Warren Buffet by exchanging it for “stuff”, preferably stuff that generates an income. You may not have to do it all at once. You can soften the tax blow by spreading it out over several years.
As governments are awash in debt, they can’t acquire more so first they’ll steal your saving from the banks first (‘bail-ins’). However, that won’t be enough because, as I’ve said endlessly, we are past the point of no return. First it will be your savings. Next it will be your pension funds.
Below is Jim Sinclair’s recipe for Get Out of The System (GOTS) from his Commentary of September 5, 2013.
For your reference, here is my GOTS check list:
1. Your equities are held in certificate form.
2. You have no Federal income tax favored retirement funds.
3. You have no CDs and investments in bonds.
4. You have modest money deposited among selected BRICs countries.
5. You store your own precious metals.
6. You have no mortgage obligations.
7. You keep cash on hand for 6 months expenses.
8. You have no consumer debt at all.
9. You have a small hobby farm for protein and veggies outside of where you are living with no mortgage debt, set up green.
10. You have a gas, diesel or electric car with high fuel mileage for the farm.
11. You have a generator with large fuel capacity for the farm.
Note the reference to all retirement accounts. Those accounts are going to be targeted and your hard earned assets will be replaced with a special issue of sovereign paper that will have no real value whatsoever. Whilst the penalty and taxes may seem onerous they will seem insignificant after the nationalization occurs. Quite simply there is no time left and I advise that you must act now to secure what you have.
He speaks to high net worth individuals. Not everyone has this much wealth. Everyone’s financial situation is different so there’s no ‘one-size-fits-all’ approach. What you can do to protect yourself depends on how much money you have and which country you live in.
a)If you have a little spare cash, convert it into gold and silver and stuff such as durable necessities and food with a long shelf life. I’ve discussed this before in
Stockpiling and in Dozens of Survival Articles from Beans Bullets Bullion and Bible.
In other words, convert cash into things you will need in the future. As well as ensuring your survival in emergencies, stuff can also be used as barter when the shit hits the fan (SHTF).
b) If you have a lot of money, make like Warren Buffet, the master of indirect exchange and buy assets that pay an income such as farmland that can be rented or rental property that generates revenue. Use that income to buy more assets. Yes, you may take a hit when the SHTF but it’s better than losing it all to the government. It’s better to have half than none.
c) If you’re Ultra rich, you don’t need my advice; you can afford to buy investment advice tailored to your individual situation.
DIVERSIFY
Never put all your eggs in one basket. Spread it around by diversifying countries, safety and types of assets. Don’t buy just gold. Diversify into silver and necessities. Don’t store everything in one spot. Have several. If there’s a gun pointed at your head, give up one location. It’s better to lose one third and still have two thirds left.
And if you haven’t already read it, be aware of dangerous thinking habits that could prevent you from saving yourself by reading Beware Your Dangerous Normalcy Bias.
Stay tuned. You ain’t seen nothin’ yet.
Gerold
September 8, 2013
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Gerold,
I don’t care much for economics either (switched out of econ to pursue a business degree instead), but I meant ‘aggregate’ in the dictionary term as in ‘summing up’ or a ‘composite’. And I’m not sure the “on aggregate” examples you gave really worked – I think you’re thinking of the saying “on the whole”, which is slightly different.
Aggregate is concept of measurement to suggest several instances added up together, which in this case either have a predominately inflationary or deflationary force, to determine the total change (inflationary/deflationary) on the system.
To use the guy with a baseball bat example – if the guy who comes to my house and beats me with a baseball bat labelled “INFLATION” 20 times, but I go over to his house and beat him 50 times with a bat labelled “DEFLATION” – from an aggregate perspective the deflationary force at play is 2.5 times greater than that of the inflationary force, and anything inflationary is cancelled out leaving whatever deflationary forces remain.
Were that example applied to a system (i.e. the economy), one would have to conclude that despite the fact inflationary pressures were in play (e.g. Quantitative Easing, increasing consumer and public debt levels), deflationary pressures are stronger (e.g. Detroit default, falling retail sales, collapse of the velocity of money) and thus the results of deflation will start to play out and become more apparent than inflation.
“…but we as individuals operate in a microeconomic system where we can have both inflation (of necessities) and deflation (of assets)”
Again, that is price inflation / changes in price. To be more accurate, we’re actually witnessing the INFLATION of assets (i.e. more houses built than ever before, more gold mined than ever before, more consumer products than ever before) and the DEFLATION of necessities (i.e. less energy than ever before, increased pollution thus less clean air & water than ever before, increased population thus less free space/land than ever before). And while I agree that talking in “aggregate” Macroeconomic terms is probably a waste of time, I do think “aggregating” (as in the dictionary term) inflationary & deflationary forces we are witnessing in the global economy to try to determine which force is more prevalent is something important we should reflect on, as it impacts all of our lives.
Its ironic/funny that you have dealt so much with government over the course of your life and witnessed their inability to distinguish price vs. value – I’m actually on the opposite side of the coin in that I work within procurement for government, but I can offer an anecdotal conformation of your view. That being said, some people within government are finally waking up to the idea of price vs. value, but it’s a slow change that some cannot (or refuse?) to comprehend combined with the fact that determining value is, at least in my view, more of a science than an art. Several times I have witnessed Request for Proposals where the components meant to give a greater weighting to quality were “gamed” by the proponents, much to our disappointment. As of today (though my views may change in the future), I’ve found that a procurement/contract are very important to getting value for money, but just as important is the administration of that contract – diligence in both is the only way to guarantee the delivery of value (i.e. value is identified and promised in the development of a contract, but delivered through strong administration and ensuring the successful proponent delivers on what is promised).
Back to inflation/deflation…
I generally agree with what EvG is suggesting, but I think he too quick to dismiss paper money when what he is talking about (debt, derivatives) are “illusory” or “phantom” wealth that have no basis in reality. Pull a $20 out of your wallet and try to “default” on it – you either have to rip it up or set it on fire. Much easier to default on debt or a derivative (“I declare bankruptcy!” – http://www.youtube.com/watch?v=hiCilTzhXrA). The point being that people will absolutely default on debt before money will be as worthless as EvG predicts, unless the government starts to print (and distribute!!!!!!!) physical dollars (not electronic debt-based promises) on a grand scale as the current amount of physical dollars in circulation is something to the tune of 1% of the entire outstanding monetary base.
Unfortunately for countries like India, Indonesia, Vietnam and any other developing nations their dollars are worth far less than US dollars as they are simply derivatives of the reserve currency – a photocopy of a photocopy if you will. Even the CanuckBuck will take its hits for the very fact it is not the reserve currency of the world. I worry that China and Russia are well aware of this phenomenon which may explain their drive to buy up physical assets (i.e. gold) despite the fact they must know that the price of those assets will absolutely collapse in another Lehman-2008-financial-system-aneurysm event (coming to a theatre near you, likely between now and next year?).
“We’ve created our own man-made economic disaster where the purchasing power of our wages is falling and along with the value of our assets. That’s my definition of stagflation”
What’s interesting is that stagnating (and then falling) wages is actually a sign of deflation. When no more debt is created (and as I mentioned before, the issuance of debt over the past 30+ years has been one of the largest inflationary forces to the point that only 1% of the monetary base within circulation is physical cash), wages must stagnate and then inevitably retract. Deflation is very, very, very bad for us wage slaves.
But, conversely, it is very beneficial for dollar-holders (i.e. savers). The purchasing power of each dollar you have will increase dramatically, despite the fact your wages are plummeting absolutely (i.e. what you have will be worth so much more, but you’ll have a hard time adding anymore to what you have). Thus the reason to try to save (hoard?) as many dollars now as possible, as the future will offer all of us little in terms of wages. Consider the shockwave that would cause to our ever-consuming economy if people were to realize and accept that concept as our collective future over the next 10 – 20 years; you’d see the system absolutely freeze up as everyone would hold onto whatever dollars they have left and asset (both financial and real) prices would absolutely plummet when no buyers materialized to support their markets.
You’re correct that wages have been stagnating, but that example was simply to illustrate the importance of looking at wages in relation to price. Price alone is irrelevant. Going back to my prediction of a deflationary future outlined above, consider what happens when your wages shrink and prices collapse – despite the falling price, the true cost of those necessities increase due to our reduced wages. This is textbook deflation; textbook, at least, prior to the 1960’s when for whatever reason the economics profession started confusing everyone by suggesting inflation/deflation is “changes in price” as opposed to “changes to the amount of money in circulation (which may result in changes in price)”.
I do think “digital or paper” does make a different, as increased digital money are promises based on promises (again, going back to a “photocopy of a photocopy”). Physical money is bad enough in the sense that it is a promise to repay… basically an IOU; no more, no less. But consider that digital money is a promise to pay backed by a promise to pay – a derivative of money!!! When I started thinking of digital money in this sense it really struck me how ephemeral/illusory our whole financial system really is.
Onto backwardation…
i admit, I know little about backwardation and contango, but have bothered my downtown Toronto banker friend about it a few times. I don’t think it’s the bogeyman most gold bugs make it out to be… consider how Investopedia describes Backwardation:
“When backwardation does occur in a futures market it has been suggested that an individual in the short position would benefit the most by delivering as late as possible.”
Or in other words, as the time comes closer for the short to deliver on gold the price of the gold goes up. I can’t say I understand (nor have I heard a compelling argument as to) why backwardation would get to a point where the Expected Future Spot Price would be a higher value than all the money in the world – and that basically sounds like what Keith Weiner is suggesting.
All backwardation of gold suggests to me is that the market is predicting that the future spot price of gold will be higher. The market is made up of several different ‘market makers’, and there’s nothing to suggest that those ‘market makers’ are infallible or misguided in their future pricing of gold. As new information comes to light, the Expected Future Spot Price may be revised downwards – in fact, I suspect that will be what will happen if everyone recognizes another large deflationary event (i.e. Lehman collapse) cannot be averted.
Again, my understanding of backwardation/contago is fairly limited. But I used to read commentaries by individuals like Keith Weiner or go to places like TFMetalsReport to read about it and took it as gospel. It wasn’t until I spoke with someone in Finance that I realized it isn’t (necessarily) as big an indicator as these sources make it out to be, and that much can (and likely will) change before their predictions come to fruition.
Lastly, risk.
You’re certainly right about that risk existing. I lose sleep worrying over it and the decisions I make, as it’s next to impossible to mitigate all risks in life. However, baring some sort of huge black swan event (as in a meteorite strike or Carrington Event EMP that knocks out most power grids and leads to multiple nuclear meltdowns), I’m not sure there are any events that could do away with all of the deflationary risks we are currently facing and replace them with that of inflationary ones.
Thus, I do my best to resist purchasing things now and try to hold off to purchase them later. I tend to fail spectacularly at this with lower-priced items ($200 and under, as well as firearms up to around $1,000), but have managed to maintain my resolve when it comes to things like land and transportation as those items tend to be the most costly consumer purchases we make over the course of our lives. In doing so I open myself up to huge risks – no land if I need to grow food & harvest energy, and no transportation to relocate in times of emergency.
To be honest, the later scares me more than the former. With regards to land, squatting is always an option (trees, tress everywhere so let’s all cut one down…) and even if you did have land you wouldn’t be able to utilize it instantly (growing food takes time) so having freeze-dried foods with a long shelf life seems like a better solution (and one I pursue). Also, who knows where Fukushima fallout might land or where meteorite XYZ might strike – by not bunkering down on a piece of land and investing all your resources into it, you can maintain some flexibility to relocate if the land you are on becomes compromised.
But with transportation, I recognize that if something bad befalls the city of Toronto I am stuck here… and that is of great concern. Unfortunately I must sit on a pile of physical cash until prices collapse to buy my very own Ford F-150, sailboat and Airbus A400M (which would only get me as far as Costa Rica… d’oh!).
Sorry for the novel!
Cheers,
-GBV
Yikes, quite a few errors in that last lengthy comment…
“more of a science than an art”
Meant the other way around, but hope you got my meaning!
Cheers,
-GBV
Good post by Mish on trying to calculate price inflation here:
http://globaleconomicanalysis.blogspot.com/2013/09/reader-question-how-can-one-calculate.html
Cheers,
-GBV
How about hiding the money you extract from the system for a rainy day?
I get the idea of buying goods (particularly income-generating ones), but I suspect many of these will be available for cents on the dollar when everyone realizes there is no liquidity left in the system and goes rushing for dollars to save what little of their leveraged-assets that they can.
Nicole Foss over at the Automatic Earth talks about this to some degree when she comments on the “perversity” of the Great Depression – farmers pouring out milk to protest lower prices (and thus try to raise said prices by destroying Supply), and some of the best farmland going bidless at auctions because people were holding onto their money so tightly (rightfully so – in their mind they couldn’t see any opportunity to make more money at any reasonable point in the future).
Liked Jim Sinclair’s list – I and my family are doing pretty well on it, save for the big items like owning my own hobby farm and a good vehicle for said farm. It’s a gamble, but I’m hoping that Canadian housing/land & consumer good prices will come down to affordable (for me) levels before the market totally shits the bed and collapses spectacularly onto itself.
But now that we’re getting into Sep-Taper, I’m thinking things are going to start to get interesting (beyond the sideshow which is Syria – though I will admit it’s certainly stolen a lot of my attention as of late). I’m sure you’re getting antsy for the show to start as well Gerold 🙂
Cheers,
-GBV
Thanks for you considered comments as always, GBV.
Hiding the money is one way but again consider diversifying and don’t put it all under the mattress. Spread it around in different ‘things’.
Don’t expect consumer prices to come down. Remember , the stuff you owe (food & energy) goes up with inflation. The stuff you own (house, stocks) goes down in value. It’s called stagflation.
Also, timing is going to be tough. Where is the bottom? Won’t know that until prices start rising. Also consider missing out on revenue by not buying income producing assets. No easy answers.
You’re right about things getting interesting this fall. I hear the flutter of Black Swan wings.
I’m working on a post comparing today to 2,000 BC Egypt where, with Joseph’s help the Pharoah (today the banksters) ended up owning everything.
I’m not holding my breath for a Syrian circus ‘shock & awe’ show. It’s just a distraction. Russia & China don’t want the attack and together own trillions in US gov’t bonds which they can threaten to sell en masse and destroy the Amerikan economy.
The British parliament handed PM Cameron his ass and refused to go along. Obama is all alone except for strutting Italy and the French who never saw a war they couldn’t run away from.
Obama realizes he can’t go it alone without being impeached. So he foists the decision off on Congress so he can blame them for being dovish. He’s talking tough because the Republicans are calling him a dove. Russia’s Putin and Obama are comparing penis sizes and Putin is playing Obama like a fiddle. So far everything Russia’s asked for Obama’s caved in to.
Now it’s Putin’s turn to give in a bit so the last I heard from CNN was Putin demanding the U.S. ease off the pressure on Syria so the U.S. can say no they’ll keep the pressure on but the bombs off. So the Russians get what they want, China sits on the sidelines and Obama distracts the great unwashed. It’s all just a game.
– Gerold
I got into a huge email debate with Brandon Smith from Alt-Market about stagflation – it is a silly concept, and one which I can’t believe still persists today (or at the very least,is strewn about as the bogeyman that it is today).
I say “silly”, because the system can only experience either inflation or deflation in aggregate terms – i.e. if you take all the money printing, debt issuing, etc. and aggregate it against all the defaults and destruction of money / credit within the system you’ll ether have a positive (inflationary) or negative (deflationary) net force at the end. Thus inflation or deflation.
Stagflation is the idea that the price of necessities (energy, food, water) are going up at the same time that asset prices are falling. I get it, I really do – but price is irrelevant. It’s like telling me the population of Toronto without letting me know how much land Toronto actually covers and/or how many domiciles are located within Toronto. It’s just a number, not a metric, and thus is somewhat meaningless.
Case-in-point: if the cost of milk skyrocketed to $20/L, but the average wage increased by a factor of 500, that increase in the price of milk wouldn’t be all that relevant, would it?
It’s also worth pointing out that even during a time of no inflation or deflation you could witness a “stagflation-like” situation where the price of necessities go up while asset prices fall. A drought or some other natural disaster could quickly realign people’s spending habits to favour now-scarce energy & food over overpriced McMansions.
The point being is that it’s more important to understand whether inflationary or deflationary forces are in play, as price changes will always take place for a multitude of reasons. And when you consider how bad it could be if the entire credit system collapsed (something like 99% of our money supply is electronic and/or credit, not physical dollars!), you can see how much the purchasing power of a dollar could rise (to the point of eclipsing any price increase to necessities) in relation to that collapse.
That being said, I would agree that “hedging” ones bets by having a bit of “stuff” and well-stocked pantry of food/water is never ever a bad investment. As I mentioned before, you never know when “stagflation-like” circumstances (i.e. increasing price of necessities and collapsing price of goods/assets) will strike due to a drought or other sort of disaster. So it’s good to be prepared.
Lastly, I’m okay with foregoing some revenue now if it protects my capital investment in the long run. I’ll take return OF capital over return ON capital any day of the week!
Cheers,
-GBV
Thanks for the comments, GBV. Thought provoking as always.
However, I beg to differ on the concept of ‘aggregate’. . I’ve never found that economic term very useful except on a macro level. It’s like saying “on aggregate the operation was a success but the patient died”. If you’re starving to death what matters if, on aggregate, the economy is healthy.
Look at it another way; everyday some big guy comes to your house and beats you twenty times with a baseball bat. One day he only beats you only ten times so “on aggregate” that’s an improvement?
You say, “the system can only experience either inflation or deflation in aggregate terms.” Beware ‘either / or’ choices because in a complex world the answer could be ’both’.
The concept of aggregate might be useful in describing the macroeconomic system and for economists discussing esoteric statistics over a beer but we as individuals operate in a microeconomic system where we can have both inflation (of necessities) and deflation (of assets). Although individuals FORM the aggregate, individuals don’t operate IN the aggregate. For most people (except economists) aggregate is a meaningless statistic.
It’s like the difference between price vs value. Price is what you pay. Value is what you get. I’ve spent much of my career dealing with pin-headed purchasing agents (especially government tenders) who “know the price of everything but the value of nothing”. They think they’re saving money awarding a tender for a product priced 10% less but it lasts only 50% as long as the slightly more expensive product.
As Egon von Greyerz says, “How can a world with $250 trillion of debt and over $1 quadrillion of worthless derivatives ever recover? Of course it can’t, especially since this is a world that is supported by legs of worthless printed paper money – legs that are just getting longer and more unstable by the day as trillions are added to the debt every year.”
The aggregate there is huge but so what? It’s worthless and it’s only a matter of time before this Ponzi scheme collapses. Again, it’s the difference between price and value.
You say, “As I mentioned before, you never know when “stagflation-like” circumstances (i.e. increasing price of necessities and collapsing price of goods/assets) will strike due to a drought or other sort of disaster. So it’s good to be prepared.” I say that we don’t need to wait for a natural disaster to cause stagflation. We’ve created our own man-made economic disaster where the purchasing power of our wages is falling and along with the value of our assets. That’s my definition of stagflation. Aggregate doesn’t matter except in a macroeconomic sense. It tells us where the economy is going but doesn’t account for the effect it has on people.
You say, “if the cost of milk skyrocketed to $20/L, but the average wage increased by a factor of 500, that increase in the price of milk wouldn’t be all that relevant, would it?” Ah, but it’s easy to overlook that conditional “IF” word. The fact is that wages are NOT keeping up with the price of necessities. That’s why the government bullshit CPI numbers exclude food and energy because these necessities are increasing almost 10% a year while wages are stagnating.
We have had an unprecedented long ‘backwardation’ in gold due to excess money printing (digital or paper makes no difference). Keith Weiner says “Backwardation in gold is a sign that the regime of irredeemable paper money based on the dollar is coming to an end. When it becomes permanent, then gold will no longer be offered in exchange for dollars (or yuan, pounds, euro, etc.) There will be no gold “price”. In other words, paper money will be worthless.”
And, THAT’S the risk inherent in waiting for the bottom. Waiting to buy assets for which there is no longer a dollar price (gold, real estate or bicycles), you may have a fistful of worthless dollars that’s nothing more than toilet paper. Timing is difficult.
– Gerold