Despite the welcome cut in taxes and regulations in 2017-18, your investments are still in need of protection. Why? In March, the Federal Reserve projected that interest rates could possibly triple to a high of nearly 5% in 2020 from a low of almost 1.5% in 2018. This momentous announcement went curiously under-reported.
These are the federal funds rate, which in turn largely determine the prime rate. The Fed doesn’t set these rates as such, but instead drives them through the supply side using so called monetary policy. In a ‘nutshell’, this is the process of creating money and credit (physical and digital). More means lower rates; less means higher rates. The latter spells trouble for many loans, stocks and other investments.
The Fed is at the base of this. This year has finally signalled the end of Quantitative Easing (QE), as can be seen in such money supply measures as M0, M2 and especially M1. Although admittedly, QE has been slowing down in the past couple of years or so.
So what does this all really mean and what can be done to protect your investments? The right answers can only be found where there are the right questions. And neither of these can be found from the mainstream media nor from their mates in mainstream academia. One is the primary source of fake news; the other, fake economics. Mainstream investment advice heavily relies on these two sources.
The reasons why there is a problem with mainstream economics, and the investment advice that tends to follow from this, is too large to list here. But in summary it tends to assume that the economy is some sort of static equilibrium model that government can both scientifically predict and positively impact.
Worse still, it assumes government is a wise and selfless player outside this system and that key economic phenomenon like inflation and business cycles are purely generated from within. The reality is very different. Government, not the free market, is the ultimate cause of inflation and business cycles through bad fiscal and monetary policies. In other words, high tax-and-spend policies along with excessive money and credit creation. This means less real returns; plus more uncertain returns.
The Austrian School of Economics, or simply Austrian Economics, is the only school of thought that understands the largely negative and chaotic role of government in the economy and, thus, for your investments. In particular, this school ‘gets’ the crucial importance of the cartel between Big Government and Big Banking for manufacturing unsound money and credit. This was even recognized in the award in 1974 of the Nobel Prize in Economics to the Austrian economist Friedrich von Hayek.
“Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”
“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some.”
Inflation and business cycles are, in fact, ‘flip sides’ of the same ‘coin’ of the uneconomic and unsustainable rise in values and prices. This effect is caused by Fed money printing and bank credit entries. In a very pleasant surprise, the Bank of England describes this world-wide process online. The boom-bust cycle typically happens first; followed by price inflation. The former is driven by a less general and uneven price rise for some; the latter a more general and even one for all.
Nothing short of a revolution will be needed to truly protect your investments. Fortunately, one is in the making. It is called Austrian Style Investing or Austrian Investing for short. The ‘seeds’ of this sound way of investing comes from the ‘plant’ of sound economics otherwise known as Austrian Economics.
I was originally a mainstream economist from the mid-1990s until the mid-2000s. For the past ten years, I have been an Austrian economist. And I finally got around to writing an Austrian Economics 101 recently for LibertyWorks. Amongst other things, I highlight that:
“Why Austrian Economics is the best single foundation for real-world, over text-book, economics and politics [as well as investment] can be shown in many ways. One way is that it best shows why market freedom is always and everywhere superior to government control. A second way is that, although it is more concerned with truth than prediction, the Austrian School has best predicted critical economic phenomena such as economic booms, busts and recessions. A third way is that it best gives practical policy solutions, whether in the short or long term.”
I have not yet written an Austrian Investing 101, and this article is not it. One reason for this is, although Austrian Economics has been around for about 150 years: Austrian Investing has been around informally for something like 150 months (or in other words a decade or so); and more formally for much less time than that.
By informal, I mean the growing (but still relatively small) numbers of investment professionals that I have been coming across in recent years taking an Austrian approach. These practical experts do so not because they have read economic treatises and academic journals by such luminaries as Ludwig von Mises, Murray Rothbard or Jesús Huerta de Soto. They do so because they have discovered over time, through bad as well as good experiences, that this approach works best in the real world of investing.
By formal, I mean that in recent years there are now some books on the subject. The most popular, and perhaps the best, is the The Dao of Capital: Austrian Investing in a Distorted World. It is authored by a non-economist in Mark Spitznagel, with a forward by former Congressman and presidential candidate Dr Ron Paul. In conclusion, and to give you a very small taste of Austrian Investing, Spitznagel states:
“The concept of a framework, as opposed to a formula, is an important one. Even Austrian Investing, rather than providing precise instructions, is meant to be scaffolding for the roundabout process from which anyone’s degree of capitalistic investment can be better understood and gauged.”
Please ‘watch this space’ for more by me on Austrian Investing and Economics and so much more.
Mr Darren Brady Nelson is the Chief Economist at, and on the Advisory Board of, LibertyWorks. He is also a Heartland Institute expert who has previously worked for an Australian Senator and on a Presidential Campaign.