Author: jwithrow

The Austrian School of Economics is not based on a fictitious homo economicus, but on people as they really are and as they behave. It adequately takes into account the economically relevant aspects of the real world and is consistent with the nature and psychology of human action. In this way, it also corresponds to man’s common sense. 

This is how the Austrian Institute in Vienna describes the Austrian School of Economics. It cuts right to the heart of the matter – economics is simply the study of human action. The scientific term for this is praxeology.

That said, Austrian Economics is not contained within Austria. Its origins span the globe… as does its impact today. In fact, the Austrian school is far more prevalent in America than anywhere else on the planet right now.

Yesterday we talked about Frédéric Bastiat. He was a 19th century French economist of the classical school.

Bastiat is credited as the first to illustrate the economic concept of opportunity cost. He also intelligently dismantled the premises underlying protectionist policies and government wealth redistribution.

But Bastiat did not operate in a vacuum. His work built upon that of earlier classical economists. Among them were Richard Cantillon, Anne Robert Jacques Turgot, Adam Smith, and Jean-Baptiste Say.

Each of these gentlemen advocated for individual liberty and free-market capitalism. True capitalism. Not the corporatism we have today. And they did so by demonstrating how these conditions enable a rising standard of living for the greatest number of people possible. They rejected the notion that we should favor certain groups over others.

If we look at it this way, Bastiat continued the work of those who came before him. He was a direct link to the past.

And in just the same way, he was a bridge to the future. The modern school of Austrian Economics advances the principles of Bastiat and the other classical economists today.

An Austrian-born economist by the name of Carl Menger effectively founded the Austrian school when he published his Principles of Economics in 1871. Menger’s work built upon that of the earlier classical economists. And it sparked what’s called the “marginalist revolution”.

Menger’s key contribution was that economic value is subjective. Consumers assign value to economic goods based on their marginal benefits. Producers do the same.

That is to say, the price one is willing to pay for a particular good is not related to how much time or money goes into producing that good. Instead, it’s a function of how much one thinks that good will benefit them.

This may sound like a simple thing, but the earlier economists struggled with the concept of value. They were generally fixated on value being tied to production costs. But that completely ignores individual preference and supply/demand dynamics.

Menger’s marginal theory is what connected it all. This is easy to understand. The more there is of a particular good, the less each individual unit of that good will benefit people. Thus, that good’s value will be lower.

Let’s use consumer electronics to illustrate this concept…

Suppose we just bought our first home and it has nothing in it. The first television or computer we buy will have high marginal utility for us… because we didn’t have one before.

But we won’t value televisions and computers as much afterwards. They won’t be as big of a priority because we already have one of each. Maybe we’ll buy a second TV for another room… and maybe a third for a different room. But each new TV brings less benefit to us. Thus we value them less.

That’s the concept of diminishing marginal utility. It ties in directly with supply and demand dynamics. And it explains how goods are priced in the marketplace.

This was a huge breakthrough. And it officially marked the origin of the Austrian School of Economics.

Another Austrian named Eugen Böhm-Bawerk took Menger’s framework and built upon it. Böhm-Bawerk was especially good at illustrating how individual time preferences impact market-based interest rates.

From there, Austrian-born Ludwig von Mises picked up the torch. And he was an absolute force.

Mises was the first to succinctly present the Austrian theory of the business cycle. And he spent most of his life combatting the rise of socialism in Europe.

In fact, Mises had to flee Austria in the 1930s to escape the German national socialists (Nazis). They were not at all pleased with his work. Mises fled first to Geneva and then to New York to escape.

Around that same time Friedrich Hayek began building upon the Austrian school’s tradition in his own way. Hayek also had to flee Europe in the 1930s to escape the socialists. And he eventually won the Nobel Prize in 1974. The more popular economist Milton Friedman was a big fan of Hayek’s.

From there, both Henry Hazlitt and Murray Rothbard picked up the torch – each in their own way. And both gentlemen helped found the Mises Institute in 1982. Housed in Auburn, Alabama, the Mises Institute is the global center of the Austrian School of Economics today.

Though it gets no coverage in the mainstream press or in academia, the Mises Institute has had an impact on millions of people worldwide. That’s in no small part thanks to the presidential campaigns of Dr. Ron Paul in 1988, 2008, and 2012.

Dr. Paul credits what he learned studying Austrian Economics as one his primary motivations for running for president. And he tirelessly promoted the core tenants of Austrian Economics out on the campaign trail.

I know this kind of exposé isn’t for everyone… but I find this kind of study fascinating.

If we look at it this way, we can clearly see an unbroken chain of people, ideas, and events going back 250 years. It’s all connected. And this shows how the work of our ancestors helped build the world we live in today. That’s amazing to think about.

So I guess all this is to say – dead economists matter. Let’s honor them accordingly.

-Joe Withrow

P.S. For those who find this stuff fascinating like I do, I would highly recommend Tom Woods’ Liberty Classroom. Tom’s program provides a world-class education on both history and economics. And it does so in a compelling and entertaining way. If you would like to review Liberty Classroom’s course listings, just go right here: Tom Woods Liberty Classroom Course Listing

I’ve got just one question for you I can’t figure out – who is Frédéric Bastiat?

This is the question my local computer whiz posed to me over the weekend. My laptop crashed on me last week… and I asked this gentleman to take a look and let me know if it was salvageable.

As he was doing his analytics, he noticed that the name of the computer owner was Frédéric Bastiat. That’s what sparked the question. Since we’re talking economics this week, a discussion on Bastiat seems appropriate.

Frédéric Bastiat was a 19th century French economist. He lived from 1801 to 1850.

Bastiat was very much of the classical school. His work built upon that of Adam Smith – famed author of The Wealth of Nations in 1776.

And Bastiat may have been the first economist to illustrate the concept of opportunity cost. He did so in an essay titled Parable of the Broken Window.

In the essay, Bastiat demonstrated that money spent on repairs is money that cannot be used to expand production or buy new goods. As such, the economic activity that occurs when a window is broken and repaired does not grow the economy.

It’s a simple thing. But that’s the principle of opportunity cost. When we spend money on one thing, that act reduces the amount of money available to us for other uses.

Bastiat also demonstrated the folly of protectionist policies in his essay The Candlemakers’ Petition.

Protectionist policies are laws and regulations designed to favor the incumbents in a given industry. This is typically done by making it hard for competitors to challenge them…. even when the competitors can do it cheaper, faster, and/or better.

Bastiat demonstrated this concept through satire in his essay. In it, the candlemakers’ guild petitioned the government to pass laws requiring citizens to keep their curtains closed. They suggested this was necessary because sunlight represented unfair competition to them. In fact, it could put them out of business.

The point here is that laws favoring specific industries are likely to be bad for society as a whole. That’s why protectionist policies are folly.

And the most famous of Bastiat’s work is a great pamphlet titled The Law. It was published the year of his death in 1850.

The Law points out that there is no such thing as group rights. There are only individual rights. And the purpose of government and law is to protect the equal rights of each individual.

But when people use the law to favor specific groups, the government must extract money from everybody else in society to do so. Bastiat called this act “legal plunder”. And he suggested that the moment you go down that path, you create a dynamic where society becomes a “war of all against all”.

We can look around today and see that Bastiat was way ahead of the curve on this one.

And get this – Bastiat may have coined the terms “left” and “right” to describe political beliefs.

Bastiat was elected to the French National Assembly in 1848. At the time Napoleon III was President of France. And he was quite a polarizing figure. Napoleon III had both strong support and strong opposition within France.

Supporters appreciated that he was the nephew of Napoleon Bonaparte and he favored a strong French government. But the opposition were wary of his autocratic tendencies. And they were critical of his policies that curtailed civil liberties.

It’s reported that when Bastiat walked into the French National Assembly for the first time, he noticed that all Napoleon III’s supporters sat on the right side of the room. All those who opposed him sat on the left.

Thus, “right” became synonymous with conservative. It referred to those who wanted to conserve the existing order.

“Left” became synonymous with liberal. It referred to those who believed in individual liberty and free market capitalism. The liberals wanted a government focused on protecting individual rights. They opposed lofty political ambitions.

I find this fascinating. Mind you, that’s coming from someone who absolutely disdains partisan politics. I find it to be barbaric.

Still, it’s interesting that the terms “left” and “right”/“liberal” and “conservative” no longer mean what they used to. And if we look at the history of the late 19th and the 20th century, we can clearly see the evolution of these terms. But that’s a story for another day.

More importantly, Bastiat advanced the field economics a great deal in his short life. Far more so than he’s given credit for… though that’s a low bar.

Our Universities today reject many of the economic tenants that Bastiat demonstrated. So do our top political institutions. This is why very few people have ever heard of Frédéric Bastiat. The institutions swept him and quite a few other prominent historical economists under the rug.

That’s because the classical economists simply observed what was happening in the economy. Then they formulated theories to explain it all.

The classical view was that the economy is simply an aggregation of individual acts and decisions. All made by people – each with their own thoughts, goals, motivations, and preferences.

Meanwhile, the form of economics favored by our institutions today focuses on action… not observation. It seeks to influence all those countless decisions taking place in the economy.

It’s not content with observation and explanation. Modern economics wants to affect desired political outcomes. And it does so by intervening in the economy in various ways.

This approach has been quite popular over the last one hundred years. But it’s now coming to the end of the road.

Tomorrow we’ll talk about Bastiat’s legacy today.

-Joe Withrow

P.S. For those who find little-known historical figures like Frédéric Bastiat interesting, I would highly recommend Tom Woods’ Liberty Classroom.

Tom’s program provides a world-class education on both subjects. And it does so in a compelling and entertaining way. No kidding – I’ve learned far more from Liberty Classroom than I ever did in seventeen years of public education.

If you would like to review Liberty Classroom’s course listings, just go right here: Tom Woods Liberty Classroom Course Listing

I, Franklin D. Roosevelt, President of the United States of America, do declare that said national emergency still continues to exist and pursuant to said section do hereby prohibit the hoarding gold coin, gold bullion, and gold certificates within the continental United States by individuals, partnerships, associations and corporations…

All persons are hereby required to deliver on or before May 1, 1933, to a Federal Reserve Bank or a branch or agency thereof or to any member bank of the Federal Reserve System all gold coin, gold bullion, and gold certificates now owned by them or coming into their ownership on or before April 28, 1933.

This declaration was made in Executive Order 6102 on April 5, 1933.

In it, president Franklin D. Roosevelt (FDR) made private gold ownership illegal in the United States. And he required all Americans to turn in their gold in exchange for $20.67 per ounce.

Private gold ownership remained illegal in the U.S. until 1975. Since then Americans have been free to buy and sell gold coins and bars at will.

But the U.S. government has held onto all the gold it collected from Americans back in 1933. As it stands, the United States’ total gold reserve is officially 8,133.5 metric tons. That’s worth $506.3 billion at today’s gold price.

According to official central bank records, this is the largest stockpile of gold in the world. And that raises a question – why does the U.S. still hold all this gold?

After all, gold hasn’t played any role in the global financial system since 1971. That’s the year President Nixon closed the international gold window. Doing so cut the dollar’s last link to gold.

What’s more, prominent financial officials have downplayed the purpose of gold ever since then. When asked, former Fed Chair Ben Bernanke said that gold was nothing more than tradition.

Okay… so why hold it? And why do all major central banks in the world hold gold? Many central banks have been adding to their stockpiles in recent years.

I think the answer is because they know that one day they’ll need it. They will have to reintroduce gold into the system in some capacity.

Yesterday we examined a curious interaction from the Federal Reserve’s (the Fed’s) June press conference. Fed Chair Jerome Powell decided to keep rates steady in June… but he suggested two more rate hikes are likely coming.

This prompted a financial reporter to ask a good question…

The reporter pointed out that the U.S. government was on track to run annual deficits of nearly $3 trillion in the next ten years. And if that trajectory continues, federal debt will surpass $52 trillion by 2033.

He then asked Powell directly – will the Fed lower interest rates to help the U.S. Treasury finance this debt? The implication here is that lower rates would reduce the annual interest payments the Treasury must make on the national debt.

Powell’s response was direct. No. Under no circumstances.

This should force us to stop and think.

If Congress is dead-set on blowing out the budget like this… and if the Fed isn’t willing to cut rates to help keep debt service costs manageable… well, something is going to break in a big way.

That is, unless there’s a wild card. And if we think about it – gold re-monetization could be that wild card. I’ll explain…

When interest rates were effectively at zero, the U.S. government’s debt load was manageable. That is to say, the Treasury could afford to make interest payments on the debt without blowing up the budget.

But most of the national debt will need to be rolled over in the coming years. That means the current Treasury bonds are maturing, and the Treasury will need to issue new bonds to pay off the old ones. These new bonds must be issued at today’s higher interest rates.

So the problem is – how do you service the gargantuan debt as rates rise?

Gold re-monetization is a potential solution. To understand why, we have to understand how Treasuries work.

When an entity buys a Treasury bond, they are loaning money to the U.S. government. The government pays a rate of return on the bond for its duration, then it repays the entire principal balance at maturity.

As good investors, we understand the Time Value of Money principle. A dollar today is worth more than a dollar tomorrow. Specifically because the government creates new dollars from nothing every year.

So, those entities investing in Treasuries need a strong rate of return to make it worth their while. Because they know that when they get paid back at maturity, those dollars will buy less than they would have originally.

But suppose the U.S. government agrees to settle a specific portion of Treasuries in gold. That’s gold re-monetization. When investors get paid at maturity, part of that payment comes in the form of gold.

This could lend itself to a tiered system of sorts. The Treasury could sell bonds with various degrees of gold backing at corresponding rates.

For example, a 5% gold-backed bond would carry a higher rate than a 10% gold-backed bond. But both would pay lower rates than a standard U.S. Treasury bond with no gold backing.

See how this works?

Gold re-monetization would allow the Treasury to sell bonds at a lower rate than they otherwise could. In turn, this could allow the government to manage debt service costs even as rates rise.

This would also serve to attract foreign countries and central banks to Treasury investments… which is what the Treasury needs in order to sell all the bonds it needs to sell if the Fed is no longer the buyer of last resort.

Obviously this isn’t something that would make the U.S. government’s fiscal path sustainable long-term. There’s only so much gold to go around.

That said, something like this could serve as a band-aid. It could buy the U.S. Treasury some extra time.

Of course, there are tons of wild cards and unknowns in here. We can’t be sure exactly how it would all play out.

But what we can know is this: if gold re-monetization happens, the price of gold is going much higher. Now’s probably a good time to add to our stack.

-Joe Withrow

P.S. If you’re interested in building a gold into your personal investments, our flagship Finance for Freedom program will show you how. More information right here: Finance for Freedom

Looking ahead, nearly all Committee participants view it as likely that some further rate increases will be appropriate this year…

That’s Federal Reserve (Fed) Chairman Jerome Powell speaking to the financial media earlier this month.

The Fed’s Federal Open Market Committee (FOMC) decided to keep its target interest rate steady in their June meeting. But Powell didn’t want the market to get the wrong idea. The Fed won’t be cutting interest rates again any time soon.

In fact, Powell said that if the Fed does cut interest rates again in the future, those cuts will only be in proportion to a falling Consumer Price Inflation (CPI) print.

Powell explained that his Fed will keep the “real” interest rate steady. By this, Powell means that he intends to keep the Fed’s target rate a certain percentage above the rate of consumer price inflation.

This speaks to an important concept. Within a fiat monetary system – a system where governments and central banks can create money from nothing – nominal numbers don’t tell the real story. This is true when it comes to annual incomes, investment returns, and interest rates.

Continue reading “End of the Road”

We’ve been talking all things finance, investing, economics, and even moral philosophy this week – all snippets of a much longer discussion I had with Tain Nix on his Expat Phyles podcast.

That podcast is over an hour long though… and I know not everybody has that much time to spare. So I’d like to try something new today.

I’m experimenting with a video production platform that’s powered by artificial intelligence (AI). I used this platform to quickly condense our podcast discussion into a 5-minute segment of highlights. The AI decided which clips made the final cut.

Here it is:

And as a reminder, you can access the full Expats Phyles podcast at the following links. See you again Monday afternoon!

Apple Podcast Link: https://podcasts.apple.com/us/podcast/joe-withrow-a-world-class-libertarian-analyst-talks/id1686906959?i=1000617572575

YouTube Link: https://www.youtube.com/watch?v=XZ7qwTXTd0Y

-Joe Withrow

This is a situation where the narrative has made even institutional investors very wary… all of this is false. There’s this thing out there called reality. And there’s no way the world’s going to run on sunlight, solar panels, and wind power. It’s just not going to happen.

That’s my friend Tain Nix again. We were chatting on his Expat Phyles podcast last week and the conversation veered towards the investment markets. And we both agreed that energy is likely the biggest opportunity out there right now. At least when it comes to investing in the stock market. That’s thanks to the environmental, social, and governance (ESG) push of recent years.

It’s important to understand that the equity markets are constantly pricing every publicly traded stock out there based on the information that’s available. But every now and then external distortions cause the market to misprice assets. And that’s exactly what’s happened in the energy sector.

On one hand, the ESG narrative has pushed the idea that we need to put a damper on traditional energy production. As such, it’s been taboo to invest in traditional energy like oil & gas in certain circles.  

At the same time, there’s been a tremendous effort to keep a lid on the price oil and gas in recent years. 

For one, the current administration in the U.S. drained the country’s Strategic Petroleum Reserve (SPR) specifically to push down oil prices. At the same time, the Brent Crude benchmark index changed its weightings in April to artificially lower oil prices. Then there’s been heightened activity in the oil futures market that’s almost certainly been used to keep prices down. Oh, and several key oil refineries and pipelines have mysteriously blown up recently as well.

Put it all together and it’s clear that there have been immense distortions in the oil and gas markets. At some point those distortions will be ironed out… and the price of oil and gas will rise sharply. Top-tier energy stocks should do very well as this happens.

We have a similar set up with uranium right now. Uranium is the key component that powers nuclear fission reactors. But the ESG movement has demonized nuclear in recent years – despite the fact that these reactors produce no carbon emissions.

However, that trend appears to be reversing. 

Most countries have awakened to the fact that their energy costs will skyrocket if they close down their nuclear reactors. Germany learned this the hard way. German energy costs had increased by a factor of six at the height of summer last August. 

Meanwhile, Finland put a new nuclear reactor online this year. It was the first nuclear reactor to open in Europe in sixteen years. And guess what? Finland’s energy costs fells by about 75% on average. 

That’s hard to ignore. And if this becomes a trend, demand for uranium will increase significantly. That’s another great investment opportunity. 

So smart energy investments could serve as a cornerstone of a great stock portfolio for the years to come. Then a few blue chip property and casualty (P&C) insurance companies could be the other cornerstone…

If we think about it, P&C insurance is probably the best business in the world. Let’s use homeowners insurance to demonstrate why that is.

We all buy homeowners insurance just in case our house were to burn down. We have to pay premiums to the insurance company annually or semi-annually to keep our coverage in place.

But here’s the thing – our house probably won’t burn down. That means we are paying the insurance company for a future service that they likely will never have to provide.

It’s the same dynamic on the enterprise level. 

Large corporations buy P&C insurance to protect their buildings, assets, equipment, labor force, and everything else. Yet most of the time they don’t have any claims… so the insurance company gets paid without having to do anything for the money. I can’t think of any other business that enjoys this luxury.

At the same time, the insurance companies invest these premiums to earn even more money. They compound their returns year after year. 

So if we can identify the insurance companies that are good at what they do, and then if we can buy them at the right price, we’ve got an investment that will anchor our portfolio for years to come.

Simply building a portfolio around energy and P&C insurance today will set us up for strong performance for the rest of this decade. But we can take it one step further…

With the two cornerstones in place, I think it’s a good idea to sprinkle some small bleeding edge technology stocks into the portfolio. 

These are more speculations than investments. But if we can find a few companies that are doing something potentially world-changing… well, that’s how we can really juice our portfolio returns.

These are the three major investment themes on my radar for the coming decade. The Age of Paper Wealth is over… but there’s still plenty of opportunity out there if we are disciplined with our approach.

-Joe Withrow

P.S. I talked with Tain Nix about these ideas and a lot more on his Expat Phyles podcast last week. Here are the links if you would like to give it a hearing:

Apple Podcast Link: https://podcasts.apple.com/us/podcast/joe-withrow-a-world-class-libertarian-analyst-talks/id1686906959?i=1000617572575 

YouTube Link: https://www.youtube.com/watch?v=XZ7qwTXTd0

“Man, Florida drivers are nuts,” I muttered to myself as rows of Florida license plates weaved back-and-forth in front of me as we headed south on I-95.

The traffic had slowed to 45 miles per hour just south of Daytona Beach. And each Florida driver was hell-bent on breaking free. They zoomed left… then right… honking at each other with each mighty swipe of the wheel.

But they didn’t get anywhere.

They remained in the exact same spot on the road… simply alternating between being behind the car ahead in the left lane and the car ahead in the right lane.

I couldn’t help but think – this is a microcosm of the current state of humanity. We just can’t bear to sit still…

It was a sunny day in April. The first blooms of Spring were upon us. And I was on my way to meet my heroes.

My SUV was packed with stuff that might furnish a south Florida apartment. I didn’t have one yet though. Minor details.

More importantly, my head was packed with ideas that might help lift Agora’s newest publishing group from a hodge-podge collection of franchises to something more cohesive. And more profitable.

My destination was Delray Beach – an intercoastal town just north of Fort Lauderdale. That was the corporate headquarters of the Agora’s newest business. It had formed through the merger of four franchises: Bonner & Partners, Casey Research, Palm Beach Research, and Jeff Clark’s option trading service – formerly housed within Stansberry Research.

Bill Bonner was the driving force behind Bonner & Partners. And Bill’s the Godfather of the entire financial publishing industry. More on that in just a minute…

Continue reading “How I met the heroes of capitalism”

A large percentage of the people running our institutions are actually at war with reality...

That’s what my old friend Christian Nix said to me last week. I had the privilege of chatting with him on his Expat Phyles podcast… and it was a wide-ranging conversation. I’ll share it with you once the podcast is edited and published.

I met Christian – Tain, as his friends call him – five or six years ago within what used to be called the Agora network. Agora is the ancient Greek word for “gathering place” or “marketplace”.

I don’t believe that name is used to refer to the network much today, but the Agora still exists. It’s the largest financial publishing network on the planet. Except it’s decentralized.

Continue reading “On the Agora, economics, and moral philosophy”

We’ve been talking about real estate as an asset class all week. Today I’d like to wrap up our discussion by zooming out and looking at the big picture.

In every developed industrial country there is a glass ceiling of-sorts hanging over top of the middle class. This is certainly true in the U.S. Here’s what I mean…

When we add up all of the taxes across all levels of government, the average middle class person likely pays out half of their income in taxes each year.

It starts with the taxes that are typically withheld from our paychecks every two weeks. The Federal Income Tax… State Income Tax… Social Security Tax… the Medicare Tax – these taxes are each taken right out of our paycheck before we ever see the money.

Then we have to pay sales taxes on every good or service we purchase. And we pay excise taxes on things like gasoline and alcoholic beverages. We also have to pay property taxes on any real estate we own. Then we pay taxes and registration fees on our vehicles. 

These are taxes that virtually all middle class people pay – year in, year out.

Then if we happen to make any money on our investments, we’re required to pay taxes on our capital gains. Unless we defer those gains through a qualified retirement account. If that’s the case, we’ll be on the hook for normal income taxes on our money down the road.

If we were to add up the dollar amount of all these taxes each year, I bet it would equate to roughly half of our income. Which begs the question – how does one get ahead this way?

That’s the glass ceiling.

Continue reading “Shatter the Glass Ceiling with Real Estate”

Yesterday we talked about why the “nest egg” approach to retirement doesn’t work. And to illustrate, we showed how a retiree creating $70,000 a year in income from a $1 million nest egg would be completely broke in twelve to sixteen years.

A big part of the problem is that taxes eat into a significant portion of the nest egg. In our example we assumed a 15 percent tax rate. That required our retiree to sell $83,000 in assets each year just to get the $70,000 in income.

This is why I see real estate – old fashioned rental real estate – as the best vehicle for building income. It’s an incredibly tax-advantaged asset.

That’s because for every property we buy, the Internal Revenue Service (IRS) says we can “depreciate” a fixed percentage of its total value every year.

In other words, we can write off a portion of the property’s value against our income every year… even though we didn’t lose the money.

So depreciation is a phantom loss. Just for tax purposes.

And that’s just one element to it.

Continue reading “Why real estate is a better way”