When an entity has no savings and the entity spends more money than it gains in revenue it must be going into debt.
This basic truth applies to people, households, businesses, governments and any other organization.
Many people and most governments don’t particularly care about this fact. Spending today and paying for it in the future is more politically popular than saving and fiscal discipline.
A great example of this recklessness and the ensuing crisis is Illinois. But the dire warnings aren’t coming from some fringe blog or conspiracy theorist. They come from Illinois Comptroller Susana Mendoza.
“I don’t know what part of ‘We are in massive crisis mode’ the General Assembly and the governor don’t understand. This is not a false alarm,” said Mendoza, a Chicago Democrat. “The magic tricks run out after a while, and that’s where we’re at.”
As of today the state of Illinois has a payment backlog of $15.1 billion. It’s not because the state isn’t making the payments fast enough. It’s because the state of Illinois doesn’t have the money to make the payments.
Illinois hasn’t had a budget in 2 and a half years. The state’s debt has the lowest credit rating of any of the United States.
It’s also very telling what “solutions” are being proposed. Raising taxes and printing money.
Mendoza channels her inner Yellen stating: “Once the money’s gone, the money’s gone, and I can’t print it.”
The answer is never that there has been financial recklessness and irresponsibility. The answer is never that spending should be reduced. It’s borrow more, print money and raise taxes.
Illinois is a preview of the United States
The borrow, print and tax is a tired set of plays from an old playbook that doesn’t work. But I think it’s the same set of strategies the Federal United States government has been and will continue to use. The main difference is that the Federal government has a virtual printing press and can monetize the debt. Illinois doesn’t have it’s own currency that it can create more of out of thin air.
When the US Federal government has a debt that is due, they can issue more debt (US Savings Bonds, Treasuries, etc) and they find a willing buyer in the United States Federal Reserve as well as private investors and other governments.
When the Federal Reserve buys US government debt it is very harmful to the economy and it’s the reason why the US dollar has lost most of it’s value.
But knowing the playbook the government uses allows you to pick appropriate defensive plays. Insolvent governments try to raise taxes so investing in tax advantaged retirement vehicles is smart.
The government inflates the money supply so invest in assets like gold and silver that can’t be devalued by money printing.
Some folks like Simon Black even recommend US citizens getting a second passport so that if things get really bad, one can simply leave the country.
I’ll be keeping an eye on Illinois. It’s a example of how a government will react when it’s insolvent. I think it will look very similar to what the US will do when it’s debt problem hits the fan. The X factor is that Illinois does not have a printing press, so the effects of fiscal recklessness are much harder to paper over (pun intended). But the printing press only delays the inevitable. If a government could print wealth then Zimbabwe, Venezuela and Weimar Germany would be the richest countries in the world.
I think the vast majority of my readers get it. I think my readers are smart, critical thinkers. However, I’ve gotten a few comments from people who somehow think that because ETH is now trading upwards of $300 that somehow my article Ethereum Cloud Mining is Not Profitable is no longer valid.
I’ll make myself clear. It does not matter how high ETH goes, Ethereum cloud mining was not profitable for me.
Did I make more money as a result of Ethereum cloud mining compared to simply holding onto the $561? Yes. But the fact remains that the Ethereum cloud mining contract was a slow, expensive way to acquire ETH.
Owning ETH was profitable. I made money on the appreciation in dollar value of ETH. I would have made more money if I had bought ETH directly, versus Ethereum cloud mining.
I wrote this very clearly three months after I purchased the Ethereum Cloud Mining contract from Hashflare.io:
I would also be better off if I had just bought ETH.
If I bought $561 of ETH for $9 (where it was trading when I started mining). I would have 62 ETH…
Through Ethereum cloud mining I mined 41.27 ETH.
I would rather have 62 ETH immediately than wait a year to get 41.27 ETH. The cloud mining contract increased my cost basis.
Now, if I could buy hashing power at a low enough cost Ethereum cloud mining could have been profitable. If mining difficulty went down over time, Ethereum cloud mining would be more likely to be profitable. However, mining difficulty has consistently gone up and the cost of cloud mining contracts is too high.
Ethereum cloud mining was not a good investment for me. I would have been better off simply buying ETH directly. This is true regardless of how high the price of ETH goes.
I really enjoy baseball. It’s a great game. No timers, no clocks. The winning team has to get the losing team out at least 27 times.
A great movie about baseball is Moneyball. This film was released in 2011 and it’s about a small market team, the Oakland Athletics, and how they are having trouble competing against large market teams (like the New York Yankees) who have larger budgets and are able to pay more money for the best players. The story focuses around the Oakland General Manager, Billy Beane (played by Brad Pitt), and his quest to find a way to recruit players to form a winning team even though they can’t afford to pay the higher salaries the top talent requires.
Beane finds Yale graduate Peter Brand (played by Jonah Hill) who uses a system for evaluating players based on math. It’s a more scientific approach to player evaluation. Using metrics like on base percentage rather than a traditional batting average and looking beyond things like unorthodox pitching style or age and focusing strictly on performance they are able to find value in players that other people overlook.
Moneyball is based on a true story and the metrics they use are based on the “Sabermetrics” pioneered by Bill James and others.
It’s essentially applying the concept of value investing to baseball. While Billy Beane and Peter Brand looked for undervalued players who would get on base, get runs, and help Oakland win baseball games, value investors look for undervalued stocks that will produce earnings, positive cashflow and make an investor money.
There is a story in the Old Testament (or Torah) in which a man named Noah was instructed by God to build a large boat (called an Ark) in order to save himself, his family, and a lot of animals from a flood that would cover the entire earth.
Although it’s not clear exactly where Noah resided before the flood, and he must have had access to large quantities of lumber, there is reason to believe that he lived in a rather arid environment. We’ll call it the desert.
Put simply Noah was building a giant boat, on land, in the desert. He must have looked rather foolish. But Noah had good reason to believe building the Ark was a good idea and he built it in spite of what I can imagine would have been a lot of derision and mockery from his contemporaries.
Now, I’m not saying for a minute that the next financial crisis is going to be a biblical, extinction level event equivalent to the great flood in the bible. There are a lot of enterprising folks around the world and if the economy crashes and the government stays out of the way, entrepreneurs will be able to provide solutions to whatever problems ensue. Life will go on, even if it is painful for some or even many people.
But the point is, it sometimes takes courage to go against the common wisdom of the day and make some prudent preparations. If other people knew what Noah knew, I’m sure they would have been building boats as well.
As I’ve said before it’s important to have some moderation. After all, the excessive debt, spending, and general recklessness has gone on for some time, and could continue for some time to come. There is no reason to panic or go live in a bunker.
But some day, there will be a point in which governments will no longer be able to borrow and spend money beyond what the economy is producing. The United States in particular cannot continue to borrow money at low interest rates forever. When the marketplace equalizes and goes back to a normal level, a lot of the wealth people thought they had will no longer exist.
That’s why it makes sense to take some steps to consider building your own financial ark. I’ve written about various ways to do this, such as gold, value stocks, holding some cash and maybe even taking a chance on some cryptocurrencies, even though right now they are at the high side of their historic ranges. Silver, which I don’t write about that often, is also significantly undervalued in my opinion.
Some people will say owning gold is crazy. They’ll say cryptocurrencies are a large bubble or ponzi scheme (they could be right about that). They’ll say that buying stocks at all time highs is the only way to go. They’ll say that bonds are safe. They’ll say it’s impossible to beat the market and that if a stock is undervalued there is a good reason for it. They’ll say the dollar will always be relatively strong and that the US debt is manageable.
But that is head in the sand thinking. It’s dangerously naive. Being aware of the risks is important and it’s also important to take some practical steps to protect yourself.
Some people may think you’re silly for building an ark in the middle of the desert, but when the waters start rushing in, you’ll be glad you did.