Blog/ ArticlesThreats to Your Economic Future
Written by Hank Brock, CPA, MBA, CLU, ChFC
What is ahead? Let's take a look:
Increased psycho-media risks. Select industries may be sacrificed in order to sell newspapers and magazines. If your industry or company gets in the cross-hairs, you are dead. More on psycho-media risk in future posts.
Class warfare. We have an increasing risk of a wealth tax, increased income taxes on the most productive in society, and riots and strikes incited for political gain by closed organizations. Those who went to college -- who got training and education, took risks, worked hard, saved money -- may be targeted by those who did not.
Increasing natural disasters. Drought, hurricanes, earthquakes, and blizzards may cause company and geographic shutdowns, resulting in increasing volatility in investment markets as well as shortages of food and the supply of raw materials.
Spiraling budget deficit. Spiraling inflation and volatility in the financial markets may cause capital to dry up as investors are unwilling to finance the budget except at super-high interest rates.
Diminished financial incentive. Inflation, a confiscatory tax structure, and instability may result in diminished financial incentives to grow a business, hire employees, and take risks.
Curtailment of freedom and economic incentive. Stifling government regulations, red tape, and involvement in a myriad of complex laws will cause those who would invest in a company to look elsewhere.
Tort risks. The average American already pays more than $1,000 per year in the increased cost of goods and services to pay the unnecessary costs of frivolous and exorbitant lawsuits, claims, class-action suits, and damages. Everyone is at risk, and everyone pays for it.
Sin taxes. Taxes will be increased to cover the increasing costs of social programs gone awry and the natural consequences of lifestyle: We will be financing increased numbers of latchkey children, teenage mothers, prisons, AIDS carriers, and substance abusers. While most people despise drug dealers, the entertainment industry (rock bands, Hollywood sitcoms, etc.) are usually subtle, but occasionally overt in their role as the new drug pushers to children. The additional taxes paid by those involved in the societal shifts cannot begin to pay for the increased governmental programs or costs to society.
Diminished productivity. An increasing number of people simply do not know how to work. And people who do not know how to work are vulnerable in a layoff.
Debt. Those in debt will be especially vulnerable to economic volatility, unemployment, or loss of their homes. What do we do as individuals if our highly leveraged economy hits a flash point and begins a domino collapse? What might cause such a flash point? Perhaps another president who re-ignites inflation, causing investors to begin selling their government bonds. Do you recall when the Mexican peso collapsed in late 1994 and the United States stepped in with $20 billion to support their economy? Unlike Mexico, there is no economy in the world large enough to save us.
A society without laws. At this writing, a new threat called "jury nullification" is gaining ground. The press is presenting it as though it has broad support. It says that jurors should vote however they want in determining guilt, regardless of whether facts prove a law has been broken.
(Proponents call this "vote your conscience.") An article in the Yale Law Review argues it is the "moral responsibility of black jurors to emancipate some guilty black outlaws," and that the slum drug dealer or thief who robs a wealthy white family should be acquitted. Their argument is that these criminals are actually victims of unfair laws. Sophisticated lawyers know how to stack a jury. The rule of law is lost. Where there is no consequence, there is no law. Anarchy reigns. No one is safe. The laws of our elected representatives are rendered impotent.
Isolationism. Without free trade, our standard of living is suppressed. That is not all: Isolationists are more prone to war. History shows those countries with a closed society are more apt to be the aggressors in pursuing the wealth of their neighbors.
Closed organizations. These secret societies have learned to manipulate a sympathetic press and society with their agenda. Without discernment, their rumors, "facts," sophisticated arguments, "rights," and "calculated courtesies" become social norms and are foisted upon the unorganized majority. They distort, disrupt, deceive.
They talk about the rights of owls, children, and anything else that cannot accept responsibility. The result? Diminished rights for everyone. By detaching rights from responsibility, they rob freedom from those who are responsible citizens. Rights can only belong to those who can be responsible, because without one you cannot truly have the other. (The correct relationship of responsible citizens toward those who cannot accept responsibility is that of sacred stewardship.)
Closed organizations are subtly promoting most of these threats to our future.
Covetousness of the idle. People who will not work -- but who want the same things as those who will -- will lead to increased crime, threats, robbery, rioting, and class warfare.
Usurping power from the governed. Increasingly, the governed are being led to believe that they get their rights from the government. The opposite is true: The government gets its privileges from the consent of the governed. Regulators write regulations with the force of law (legislative function), execute their enforcement (executive function), and adjudicate resolutions (judicial function) without any checks and balances. They have become all-powerful dictators over their serfdom.
Insidious taxes. Tax on wealth lays a heavier burden on the backs of the productive while the unproductive reap the benefits. Natural economic laws dictate that this system proliferates the poor. You simply can't give people incentives not to work, then expect them to work. By the same token, you can't punish the workers and expect increased productivity and an improved standard of living for all.
Divorce. If you want to kill your financial program, security, and growth, get divorced. The traditional family will always be the most efficiently designed and supreme economic unit, unequalled in its power to yield a superior standard of living.
Speculation. A something-for-nothing attitude causes increased volatility in the financial markets. This get-rich-quick mentality is promoted in the financial press, magazines, on late-night television, and elsewhere because it sells magazines and appeals to the greed motive.
Ignorance. As our schools have issued revisionist history books, they teach politically correct attitudes about society, yet leave untaught the founding principles upon which our nation was established. Our children are left ignorant of their heritage of freedom. They don't understand true economic and political principles about our inalienable rights and responsibilities as citizens. As a result, they will be left unprepared to counter the onslaught of sophisticated arguments.
How can you be prepared for the future?
Simple: Put your own house in order. You may not be able to influence political, social, or economic trends, but you can do things to prepare your own financial security. When you are prepared, you will not fear.
Those intent on self-destructive lifestyles always destroy themselves. That's the natural result of breaking oneself against correct principles.
But if you make correct principles work for you, you will survive. Those correct principles include freedom, prudence, balance, conservatism, savings, self-reliance, work, and all other laws that naturally yield money happiness, security, success, and peace of mind.
The economic principles discussed here are natural economic laws. They occur just as surely as the sun rises in the morning. In their pursuit of power and gain, closed organizations will use whatever means necessary to achieve their ends, which includes usurping the rights of free people. The economy will never grow in the absence of free specialization and exchange. Wealth cannot survive without economic incentive and freedom. And no individual can be completely secure without adherence to correct principles.
For more ways to insulate yourself from these volatile times, schedule a time to meet with our qualified financial consultants.
Hank Brock is president of Brock and Associates, LLC, a personal and business consulting firm specializing in asset protection and wealth preservation. Portions of this post were taken from "Your Complete Guide to Money Happiness," written by Hank Brock and published in 1997.
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Who Can Really Veto the President or Congress?
Written by Hank Brock, CPA, MBA, CLU, ChFC
While the American public thinks economic policies are determined by the President, Congress, or the Federal Reserve Board, there is a select body of voters that maintains virtually instantaneous veto power. They aren't elected, and many are citizens of other nations.
They are those people who finance the U.S. deficit by buying government bonds. They come from all around the world; many are Chinese, Japanese, and middle-easterners. Because of them, we are able to live in our excesses without re-igniting inflation. (Foreign buyers of government bonds are the major reason we haven't had our day of reckoning with our massive deficit.)
But if our government proposes unwise policies that will drive up inflation, chances are world bondholders would swiftly begin selling their bonds, driving bond prices down and interest rates up, perhaps even plunging the country into recession. They can be tough disciplinarians.
In the early 1990s Sweden saw how swiftly this could occur. After a particularly unwise bill was signed into law, their bond market rapidly drove interest rates up to almost 200 percent on government bonds, forcing the government to reverse itself.
The U.S. bond market is four times the size of the stock market, with trillions of dollars of government debt. With our enormous deficit, bondholders are rightfully concerned about inflationary spending policies.
Currently, interest on the national debt is about one-fourth of the federal budget. What would happen if interest rates doubled within just a couple of years, as they did 1979-1981? Our economy is more highly leveraged today than it was then. The U.S. government has engaged in short-term borrowing (Treasury bills) to finance long-term projects. This mismatch means rising interest rates are felt more quickly as it rolls over its debt.
Corporations and people understand that you don't borrow short-term to invest long-term. That is like buying a home with a one-year mortgage. So what happens? If government spending exceeds the government's ability to tax or borrow, all it can do is turn on the printing press and inflation skyrockets.
Hank Brock is President of Brock and Associates, LLC, a fee-based financial planning firm specializing in asset protection and generational wealth preservation. For more information on how to protect yourself during these volatile times, schedule a free consultation.
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The Truth About the Insidious Tax: Inflation
Friday, 17 October 2008 09:17
Someone has said, "Inflation means that your money won't buy as much today as it did when you didn't have any."
We smile, but inflation is no laughing matter. Some people even think that a small amount of inflation is good. They think it demonstrates that demand is slightly higher than supply -- or that the economy is growing.
Inflation is an increase in the price of a good or service without any corresponding increase in the quality of the good or service. In other words, you pay more money for the same exact item.
When you consider that definition, it's sometimes difficult to accurately measure inflation. Why? The government tries to establish the inflation rate using a static basket of goods that it measures each month.
What is wrong with that? The basket of goods does change. Take automobiles, for example. The price increases -- but you may also get "extras" like power steering, automatic transmission, and anti-lock brakes. Additionally, as certain prices increase, the consumer changes the mix of the goods he is buying: If the price of potatoes goes up, people switch to rice.
So let's look at inflation. First, inflation is a tax. American economist Milton Friedman called inflation "the one form of taxation that can be imposed without legislation." If we have 5 percent inflation, we have 5 percent tax. In fact, when we calculate the after-tax, after-inflation rate of return, the "tax" of inflation is even higher.
Want an example? Let's say your rate of return on an investment is 10 percent, and let's say you are in a 40 percent tax bracket -- how much of your 10 percent return vaporizes into taxes? Forty percent of it. That leaves you with a 6 percent return.
Now let's say we have a 4 percent inflation rate. Your 6 percent return now becomes a 2 percent return -- 4 percent of it vaporizes into inflation. Do you see what just happened? You lost 80 percent of your anticipated return to taxes and inflation. In other words, if you are in a 40 percent tax bracket and inflation is at 4 percent, you are in an 80 percent tax bracket. Your real return-after taxes, after inflation -- is 80 percent less. Four percent inflation destroyed as much of your return as a 40 percent tax rate.
Inflation is a highly regressive tax, impacting lower-income and high-consuming people the most.
Inflation is caused by a number of factors. A key factor is that the government wants it to be that way.
Think about it: Who is the greatest beneficiary of inflation? The government. Why? The government borrows. The government is the largest debtor. If inflation is high enough, they can repay their debt at pennies on the dollar. That means they can also increase the money supply and float debt to keep the government operating. Sir Frederick Leith-Ross, English economist and financier, said, "Inflation is like sin. Every government denounces it, and every government practices it." There is another reason why the government benefits from inflation.
The government is financed in two ways: directly by income taxes, and indirectly by debt and inflation. As long as we tolerate the government running deficits and financing their expenditures through borrowing, we are going to maintain the tax of inflation.
Deficit spending can work in the short term. Why? It is an artificial stimulus to the economy -- it produces a "high" that we get addicted to. It is the same thing as deficit spending within a family. They buy things, see a welcome improvement in their standard of living, and are then driven to buy even more on credit. It causes an artificial short-term improvement in their outward standard of living. But the day of reckoning comes.
When we play accounting games like the government does and we do not show that debt on our balance sheet, we are fooling ourselves. We do not understand that in the long term, we either get our spending under control or the deficit gets too far out of hand. If that happens, we have either fiat money and spiraling inflation or dramatically increasing taxes. That all falls upon the backs of future generations, namely our children.
John Maynard Keynes, the economist of Great Britain, wrote in his Essay in Persuasion, "Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.... Lenin was certainly right."
There are two different kinds of inflation: cost-push inflation and demand-pull inflation. In cost-push inflation, there is a shortage of supply, so costs increase. Want an example of cost-push? A drought in the Midwest causes a shortage of food, so farmers must charge more for the food they are able to produce in order to cover their costs. The increase in price is passed along to everyone along the manufacturing and distribution chain, until you pay more at the supermarket. Or, the cost of labor increases.
In demand-pull inflation, demand is so great that people will pay more for the same product. In the national economy as a whole, the cause of demand-pull inflation is best illustrated by the government increasing the money supply, resulting in too many dollars chasing too few goods.
How can you predict inflation?
Three basic resources go into any product in a capitalist economy: raw materials, labor, and capital. Approximately 89 percent of the cost of any good or service is labor. Capital and raw materials make up the other 11 percent. That applies to everything in the economy -- all the way from harvesting the raw material in the mine or forest to manufacturing, transportation, wholesaler, and retailer.
If 89 percent of the cost of any good or service is labor, and you want to predict inflation, what should you look at? Labor rates. The cost of labor is reported monthly on the front page of the Wall Street Journal in a graph entitled "Hourly Earnings." Watching labor rates helps predict cost-push inflation.
Which indicators help predict demand-pull inflation? The supply of money, which is reflected in the price of money. What's the price of money? Interest rates.
If you are interested in predicting inflation over the next six months to two years, look at short-term interest rates -- the prime interest rate, and the rate on Treasury bills. If you are interested in predicting inflation over the next five to 10 years, look at long-term interest rates -- those on Treasury bonds and home mortgages.
Regardless, remember that the price of money (interest rates) is always going to be determined by people wanting to lend out their money and have that money paid back to them, adjusted for inflation, plus one or two percentage points based on the risk premium. The premium is going to be lower with government T-bonds; it is going to be a little higher with mortgages.
Is that going to give us a better answer on the prognosis of inflation than you can get from any economist in the country? Yes. Why? What determines the price of money? Massive supply and demand forces in the economy. So, we are dealing with an equilibrium point to get those prices.
For a look into how inflation can affect us during these volatile years, please read our article on Understanding the Economy or download our free Special Report: How to Survive the Current Economic Crisis.
Hank Brock is President of Brock and Associates, LLC, a financial consulting firm specializing in asset protection and generational wealth preservation. Hank has been a part of the financial planning industry since 1979. Portions of this article were taken from Your Complete Guide to Money Happiness published in 1997.
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Announcing Our New Economic Crisis Special Report
Tuesday, 14 October 2008 07:37
Due to the heavy response we have had from our readers regarding our recent blog postings and an article that ran in the Spectrum Newspaper, we have consolidated a free special report that is available for download. The report, How to Survive the Current Economic Crisis, provides in more detail information on the current economic crisis, how we got here, and what we can do to protect ourselves for the future.
I've included a link to the download, How to Survive the Current Economic Crisis, and also posted a banner on our homepage. We encourage you to download and read the special report, and then share the link with your family and friends.
Remember, it is not too late to protect yourself during these volatile times. After you read this special report, schedule your free consultation with one of our qualified financial advisors.
Brock and Associates, LLC is a financial planning firm specializing in asset protection and wealth preservation.
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Why Insurance Consumers Are Protected from the Crisis
Tuesday, 07 October 2008 08:18
In a recent post, we addressed concerns some of our readers had regarding the safety of their insurance policies, particularly those with policies under AIG. We again want to emphasize that the insurance industry is regulated by state laws, and held to much stricter standards and oversight. We've attached a statement that was sent out by the NAIC regarding insurance protection for consumers in this economic climate.
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FOR IMMEDIATE RELEASE
INSURANCE CONSUMERS PROTECTED BY SOLVENCY STANDARDS
Regulatory Safeguards Offer 'Insurance Policy' in Times of Crisis
KANSAS CITY, Mo. (Sept. 16, 2008) — National Association of Insurance Commissioners (NAIC) President and Kansas Insurance Commissioner Sandy Praeger today issued the following statement in response to the financial issues facing American International Group (AIG):
"We have a very strong message for consumers: If you have a policy with an AIG insurance company, they are solvent and have the capability to pay claims. Our job is to ensure that they continue to have the ability to pay.
"In this particular instance, AIG's insurance subsidiaries are being asked to provide liquid assets to the financially distressed non-insurance parent company in exchange for noaan-liquid assets. The New York State and Pennsylvania Insurance Departments are working with AIG to review the transaction. State insurance regulators will only approve this type of action if they are assured it is part of a total resolution of the liquidity issue at the parent company and fairly compensates its insurance company subsidiaries.
"As a holding company, AIG is a separate, federally regulated legal entity that is distinct and apart from its subsidiary insurers. The subsidiary insurers are governed by state laws designed to protect the interest of policyholders. State insurance regulators are committed to protecting the interest of policyholders and will work closely with AIG management and other regulators to fulfill this commitment.
"The No. 1 job of state insurance regulators is to make sure insurance companies operate on a financially sound basis. If needed, we immediately step in if it appears that an insurer will be unable to fulfill the promises made to its policyholders. This includes taking over the management of an insurer through a conservation or rehabilitation order, the goal being to get the insurer back into a strong solvency position.
"State regulators have numerous actions they can take to prevent an insurer from failing. Claims from individual policyholders are given the utmost priority over other creditors in these matters — and, in the unlikely event that assets are not enough to cover these claims, there is still another safety net in place to protect consumers: the state guaranty funds. These funds are in place in all states. If an insurance company becomes unable to pay claims, the guaranty fund will provide coverage, subject to certain limits.
"It is a state insurance regulator's responsibility to protect policyholders and ensure a healthy, competitive market for insurance products. Strict solvency standards and keen financial oversight — based on conservative investment and accounting rules — continue to be the bedrock of state-based insurance regulation."
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Brock and Associates, LLC is financial planning firm specializing in asset protection and wealth preservation. We encourage you to take control of your financial situation and protect yourself durning these volatile times. Schedule your free consultation and make sure that you are sufficiently protected from the coming storm.
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