Stocks and Monetary Policy

I’ve been investing in individual stocks since 2005, when I was just 12 years old. The idea of owning part of a business fascinated me. Over the past several years probably 95% of all the money I earned doing odd-jobs around my community went into individual stocks that I researched and analyzed on my own time. Unfortunately for me, I started investing in a very inflationary, bubble environment. At the time it didn’t get much attention and I thought I would easily ride out any downturn. I subscribed to the belief that bubbles and recessions are the “side effects”, or something of that sort, to a capitalist free market. I even consistently wrote that there’s always something to complain about and used that as an excuse to avoid thinking about the possibility of a serious downturn. Certainly, I’m not saying optimism is a bad or dumb thing. I consider myself a skeptical optimist. Today I believe a lot of “optimism” is really just ignorance or avoiding looking at all of the facts because they are a nuisance to one’s beliefs.

My stock portfolio has never really made money. I can remember only a couple times in the past four years that I was worth more money than what I put in. However, this isn’t something that frustrates me, because now is the time when I can afford to make mistakes and (hopefully) learn from them. I made mistakes and really I think I got careless, and I take responsibility for a losing effort so far with my investments. I’ve always believed and written about long-term investing with individual stocks, and there is good evidence from past investing legends such as Warren Buffett and Peter Lynch to show that this is a very worthwhile method. I still strongly believe that the philosophy of finding businesses you know, love, and understand is the way to go if you want to invest in businesses through stocks.

In early 2007 I watched an online video of the 2008 Republican presidential debates. Ron Paul was among the candidates, and at first I wrote him off as a loon who was simply being overly pessimistic about foreign policy and the U.S. economy and didn’t really know what he was talking about. After months of job growth in the economy and jumps in U.S. production and exports, it sounded crazy when he talked about a major recession being not too far off. However, he just wouldn’t go away! He stuck in the presidential race, and in October of 2007 I decided to take a closer look at what he was saying. I watched his speeches, read his articles, and researched his voting record. He was not simply a pessimistic looking to get attention. He analyzed everything, and that’s something that drew me in to research him further. And most impressive of all, his objections to both foreign and domestic policy weren’t based on only his personal opinions, but rather on the Rule of Law and what the Constitution says on every issue. It wasn’t long before I was a full fledged Ron Paul supporter, but I still couldn’t help but wonder if his predictions and constant warnings of a deep recession were a bit far fetched and overdone.

“We are at the verge of bankruptcy; we are moving into a New Era, believe it or not, with the dollar and our economy and the world economy. This is a New Era.” — Ron Paul; January 24, 2008

The economy seemed strong. Unemployment was dropping, exports were rising thanks to a lower dollar, and companies were reporting strong earnings. But over time I started to realize that his reasoning actually made a lot of sense to me and, evidently, a lot of other people around the U.S. and the world.

The Federal Reserve was something that got me scratching my head once I looked into it more myself. How could we call the U.S. a “free market” economy when we have a couple dozen people at the Federal Reserve controlling money and credit with no oversight from Congress? Under the Constitution, money is Congress’s reponsibility and only gold and silver can be legal tender. Yet somehow in 1913, Congress passed its monetary duties onto a central bank. Today, the Federal Reserve prints and hands out trillions of dollars, even though none of its members are elected nor is the Fed regulated and overseen by Congress. A central bank has no place in a free market and there is no way to call a market free when a massive central bank has a monopoly over money and credit enforced by the government through Legal Tender laws.

On top of the central bank, we have a fiat monetary system. The only thing that makes our dollars not worthless paper is because the government says it is legal tender. The credibility of the government is really the only thing that backs the dollars we use every day. I find it very questionable and discouraging that people, especially economists, don’t know the full story of the Federal Reserve and monetary history in general. No country has had a fiat monetary policy that lasted. Every time throughout history, paper money has failed miserably and crashed and burned. Even the Founding Fathers got to experience it firsthand with the failure of the Continental Dollar, which was a paper money started by the Colonies in an effort to pay off debts from the Revolutionary War. The painful and quick collapse of the system prompted the Continental Congress to put in the Constitution that only gold and silver could be legal tender. They knew that paper money failed and they surely did not want to experience that pain again.

One of the things that many people have lacked when it comes to economics is basic common sense. How can a fiat monetary system survive? Federal Reserve Notes are nothing but worthless paper, and sooner or later we, and all other countries with fiat monetary systems, will have to come to the realization that a paper currency is not a sound foundation for a sustainable economy to be built upon. We’re lead to believe that too much growth is bad for the economy and that recessions are just a natural trend of the free market to correct too much production and growth. This is such an absolutely bizarre, absurd belief in economics. It isn’t high growth that hurts the economy and creates bubbles; rather it’s cheap credit and inflating the money supply that are to blame. When people can borrow money for next to nothing like they have been able to, especially over the past twenty years or so, they will take risks that they ordinarily wouldn’t have. The Fed controls money and credit, and through the process of lowering interest rates to unsustainable, artificial levels, cheap money abounds through the economy as the printing presses work at full speed churning out new money to hand out. This inflates the money supply dramatically, encourages businesses to take risks that inevitably lead to malinvestment and failure, and creates the inflationary, bubble environment. This is what we saw in the 1990′s with the tech boom, and we’re seeing the major side effects of such policies today. One must act why the people, the free market, can’t handle adjusting interest rates on their own and why the Federal Reserve makes such crucial decisions regarding monetary policy without Congress raising a finger.

As I’ve studied the Federal Reserve in great detail, I’ve started to come to the conclusion that long-term investing isn’t nearly as simple as it used to be or could be. When you have artificially created bubbles come about through irrational monetary policy controlled by a few central bankers, you have to sit back and wonder. Had you invested in the S&P 500 10 years ago you would not be making money today, especially when you factor in inflation. 10 years is a long investment horizon, but when you have an unstable and unbacked currency and really an unsound economic system, long-term investing isn’t nearly as simple as it should be. I think the long-term investment philosophy is fantastic, but I don’t believe people realize just how damaging the Federal Reserve and government are to what’s left of the market. Every time the economy goes through the booms and busts created by the Federal Reserve, the same solutions are suggested: print more money (lower interest rates), borrow more money, and spend more money. Over the past year, these interventionist, central planning policies have expanded at a scary rate. We are told by both sides of Congress that if the government doesn’t intervene we’ll have another Great Depression. We are told that capitalism failed. Considering that we’ve essentially had worthless paper money shoved down our throats, considering that we have a ridiculous tax system that completely contradicts what a free society is all about, and considering that we’ve tried government intervention for nearly a century in economic affairs to no avail, I find it sickening when capitalism is blamed for this mess and government is said to be the only solution.

I haven’t given up on stocks. I don’t invest nearly as much in stocks now as I do in hard silver, but I think it will be an interesting thing to watch how individual businesses cope with such a massive intervention by the government into the market. I have no doubt that there are quality businesses out there that will ride this out and make investors money even through these tough times. There were quite a few stocks that tripled and quadrupled during the Great Depression (such as Coca-Cola) and I believe there will be some of those opportunities over the next few years. But, I am taking a much more cautious approach and highly encourage others to do the same. However much the government and Federal Reserve try to prop up this faulty system, a day of reckoning must come. The more money that’s pumped in to this mess by the government in an effort to stall a seroius recession, the more deadly the recession will be later on. Delaying the inevitable does not help a thing, and when looking for investments in any area I think people will have to be much more careful and consider many more factors than they used to. I may be wrong; I hope I’m wrong. Ron Paul said the same thing in 2003 when he warned about the mess we are in today.

Above all, it is time for people to analyze everything. Business, economics, public policy. The more involved and informed people are about these things, the more we can learn from our mistakes and really get a better idea of why and how things are happening in the economic and political world. I’m hoping to create a new web site built on a community of people determined to stay involved and interactive in an effort to become better informed about all these things. Above all, I want to create an environment that encourages people to have smart skepticism, analysis, and discussion on current events and policies on all levels. Please comment here or e-mail me at [email protected] if you would like to help get this started or if you have ideas, criticisms, or suggestions for this effort.

In Liberty,

David Kretzmann

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