Category: simonblack

According to Jacques Necker, everything was just fine.

The year was 1781, and Necker, France’s finance minister, had just published a report called Compte Rendu au Roi, an accounting of French public finances.

Necker’s report showed that, despite extraordinary public services and military spending, France had a net credit position of +10 million livres.

In other words, the country was in perfect fiscal health.

It turns out that Necker had cooked the books.

Rather than being 10 million on the positive side, France had racked up 520 million livres worth of debt and could no longer afford to pay interest.

France had spent decades accumulating prodigious debts. They built monuments, parks, and splendid cities that still inspire awe today.

They explored the world and expanded their empire. They engaged in almost constant military conquest in far-away lands.

This all came at great cost. But it never seemed to matter.

The French government knew they were the world’s dominant superpower, and they overspent their national income as if it were their divine privilege to do so.

As William Olphus describes in his book Immoderate Greatness: Why Civilizations Fail, the French “tended to see the natural world as cornucopian– that is, as a banquet on which they were free to gorge without limit.”

Nearly all superpowers see the world in this way. ‘We’re #1 therefore we no longer have to be fiscally prudent.’

Sir John Glubb, having seen his own British Empire fade as the world’s superpower throughout the 20th century, wrote The Fate of Empires in 1978.

Glubb argues that great civilizations start with an Age of Pioneers– those who work hard and build wealth.

It then progress rapidly through an Age of Commercial Expansion, Affluence, and Intellect, before decaying in an Age of Decadence in which the entire society feels entitled to a level of wealth that they neither earned nor can longer afford.

Even when faced with obvious fiscal realities, they make no changes.

Only when a crisis erupts does the society demand action. And of course, at that point, it’s too late.

Such was the case of France in the late 1700s– a situation so desperate that the finance minister resorted to all-out lies in order to conceal their true condition.

Most of the West is in this position today– summed up by Jean-Claude Junker’s (former President of the European Council) explanation of the Greek debt crisis in 2011: “When it gets serious, you have to lie.”

Over in the United States, the Congressional Budget Office (CBO) recently published its own projections for America’s grim public finances.

Bear in mind that US debt is already $19+ trillion and climbing. The CBO sees at least another $10 trillion in debt in the coming years, and projects that the US budget deficit will increase every single year.

The evidence is already so clear.

Military retirement spending rose by 8.7% last year. Medicare costs were up 10%. Certain government employee benefit programs rose by 17%.

Overall mandatory outlays rose on average by 6.6%, three times faster than US GDP.

So essentially the US government’s spending growth is far outpacing US economic growth.

It doesn’t take a rocket scientist to see how dangerous this is.

Yet like nearly every major superpower before, the US government is completely oblivious to its own insolvency.

With each passing year as they ignore the problem, they only make things worse, and more unfixable.

This is no small matter. The terminal fiscal decline of the world’s most dominant superpower is one of the biggest trends of our time.

And it’s coming. Soon.

You see, this isn’t some wild conspiracy theory, or an opaque idea that could take decades to play out.

The CBO is telling us how deep the fiscal consequences are just over the next several years.

This comes on the heels of the recently-published Social Security annual report, which shows that the entire program is rapidly running out of money.

And, of course, there are the US Treasury’s annual financial statements, which already state that the US government is bankrupt… today.

Somewhere Nero is fiddling.

There are basically two ways to look at this–

First, is what most people are going to do. Nothing.

They’ll kick the can down the road like everyone else and cling to the phony belief that everything will be OK because ‘Merica is the #1 country in the world and the government will fix it.

The second way of looking at this is to consider that, maybe just maybe, this time is not so different. Maybe WE are not so different.

Maybe it’s not such a wonderful idea for a government to be completely bankrupt, and to become even more bankrupt with each passing year.

And that maybe there might be some consequences on the day that reality catches up, whether that day is tomorrow or years in the future.

We can already see many of these consequences today.

Civil Asset Forfeiture (government confiscation of private property at gunpoint without due process) is at alarming levels.

Capital controls are rising around the world. There’s strong talk of banning physical cash, and even wealth taxes.

These aren’t things that fiscally strong, solvent governments do. And they tend to get worse as their conditions deteriorate.

In light of so much obvious data, are you really willing to bet everything that your politicians can fix the unfixable?

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Have you lost that loving feeling? If so, the United States federal government might just be able to help.

Before you swipe right on Tinder or update that eHarmony account, consider instead taking a quick trip out of the country.

Because on your way back home into the Land of the Free, US Customs and Border Protection will have agents standing by ready with heaps of government stimulus.

It happened to a Jane Doe (the name has been withheld to protect what little remains of her dignity), a 54-year old US citizen who had recently been on a trip to Mexico.

As she was returning home via the Cordova Bridge border crossing in El Paso, she was randomly selected for extra special screening and escorted to a private area.

I’ve been there. It’s not fun. They don’t tell you anything, and they don’t say why.

They act very aggressively and start barking orders at you as if you’re already a prison inmate.

Quite frequently you can sit there wasting away for hours. Fortunately for me, nothing particularly sinister ever happened. For Ms. Doe, it was quite the opposite.

According to the published case files, she was frisked, and then ordered to squat so that a drug-sniffing dog could check out her nether regions.

Apparently the dog liked what he smelled, because Ms. Doe was then taken to yet another room, ordered to pull down her pants, and crouch.

At that point an agent from Customs and Border Protection “inspected her anus with a flashlight.”

She was then ordered to lean backwards in a crouched position, after which another agent inserted a speculum into her vagina to search for drugs.

Another agent then “parted Ms. Doe’s vulva with her hand, pressed her fingers into Ms. Doe’s vagina, and visually examined her genitalia with a flashlight.”

They then took her to a hospital for a further 6 hours of involuntary testing, which included forcing her to have a bowel movement as they all watched, plus X-rays, CT scans, and more.

I know what you’re thinking– they probably found a treasure trove of cocaine and methamphetamine shoved deep inside Ms. Doe’s womanhood.

Except they didn’t.

Ms. Doe was “brutally probed against her will” for hours and hours without judicial oversight, due process, or even reasonable suspicion. And they found nothing.

Here’s the really disgusting part: at the end of this ordeal, they released her without charge… with one catch.

They told her that if she signed a consent form, retroactively giving her permission to be abused and violated, that the government would pay for all the tests and various medical expenses.

But if she didn’t sign the consent form, she’d have to pay for them all herself.

Ms. Doe refused to sign, and the United States government sent her a bill for more than $5,000, essentially demanding that she pay for her own sexual assault.

Emotionally shattered she went home feeling like a rape victim. She sued.

And, as the pitiful justice system in the Land of the Free is far from swift, it took over three years for the case to gain any traction.

Finally, as of a few days ago, the case has been settled. And the US government agreed to pay Ms. Doe $475,000.

But as you can imagine, there were strings attached, specifically that the settlement should “not be taken as an admission of liability or fault.”

I guess it’s Ms. Doe’s fault. She must have been asking for it. It’s like a classic rape story from the 1950s. Absolutely appalling.

But just think about what this means–

Gun-toting government thugs are running around committing sexual assault on US citizens so they can continue waging a costly and utterly ridiculous war on plants.

Apparently doing so is quite typical. So typical, in fact, that they have a consent form ready to be signed by their gang rape victims in the hopes of keeping it quiet.

And even if it doesn’t stay quiet and one of the victims goes public, the government refuses to admit its own culpability and pays them off with taxpayer funds.

Just think about that: YOUR tax money is going to pay off the US government’s sexual assault victims.

This is so disgusting, so vile… I would ask you just one simple question: have you reached your breaking point yet?

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It was only a few weeks ago that I told you about the government’s annual report on Social Security.

It was a veritable death sentence for the program.

The Board of Trustees for Social Security (which includes the US Treasury Secretary) wrote that major parts of the program have already run out of money, and the rest of Social Security will run out of money in the next decade.

Amazing. Even Social Security knows that they’re bankrupt and unable to keep their promises to taxpayers.

This is going to cause an unbelievable crisis in the United States.

Think about it: half of Americans have ZERO retirement savings and will be fully dependent on the Social Security once they retire.

But by the time their retirement comes, the program will have likely already run out of money.

Well, the government has figured out a solution. And it’s genius.

Two weeks ago a new bill was introduced on the floor of Congress that, just like all the other really dangerous legislation, i.e. USA PATRIOT Act, this bill has a catchy acronym.

It’s called the SAVE UP Accounts Act, which stands for. . .

. . . “Secure, Accessible, Valuable, Efficient Universal Pension Accounts Act”.

I just tasted vomit in my mouth.

In short, SAVE UP mandates certain employers and businesses in the United States, including many small businesses, to start contributing a fixed amount of money per employee into a brand new national retirement fund.

Based on the contribution requirements and the average wage in the United States (about $50,000 annually), the bill is slapping a 2% wage tax on employers.

Funny thing, employers are already paying 6.2% to Social Security.

So an additional 2% tax effectively constitutes a 32% proportional increase.

This idea is such a classic example of government thinking.

Social Security is failing and will be unable to keep its promises to taxpayers in the next decade.

So there’s a pretty convincing track record suggesting that government-managed retirement funds are a very bad idea.

And yet the best solution these people can come up with is to raise your taxes, steal more money, and establish a brand new government-run retirement fund.

Their logic is unbelievable: “If at first you don’t succeed, keep trying the same loser tactics.”

Sadly, SAVE UP is not isolated.

A similar bill was introduced in the US Senate a few months ago.

The Senate version aims to create an “American Savings Account”, i.e. another national retirement fund to be managed by the government.

Then, of course, there’s President Obama’s “MyRA” program, where workers contribute a portion of their paychecks to a retirement account managed by the federal government.

And MyRA has already been launched.

(The SAVE UP bill, by the way, could also make it mandatory for a business to sign up all of its employees for a government MyRA account.)

The trend here is pretty clear.

Social Security is rapidly running out of cash, and they’re solving the problem by having American citizens and businesses essentially “bail in” the program with higher taxes and more contributions to government retirement funds.

And this is just what’s happening right now, at a time when very few people are paying attention to the problem.

Just imagine how much more they’re going to steal once the looming Social Security bankruptcy becomes front-page news in a few years.

Right now time is on your side. They’re not going to unveil any hideous new program tomorrow morning.

But there are two key lessons to take away here:

1) It’s imperative to consider these long-term “bail-in” implications and structure yourself accordingly.

The more assets you keep within a bankrupt government’s jurisdiction, the more likely you are to become a victim of future taxation and confiscation.

2) You absolutely cannot depend on the government for your retirement.

These programs are going broke. That is not a sensational statement. It is a direct representation of the facts as they have been laid out by the Treasury Secretary of the United States.

Again, time is on your side.

If you invest it wisely, you can develop the skills to supplement your income in retirement (for example, how to generate extra income online), and how to manage your finances to generate higher returns while taking less risk.

Education is the greatest tool we have to solve this retirement problem… as long as you start early.

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I’ll be brutally honest– I’m so tired right now I can barely write this email.

For the past five days I’ve been going on almost no sleep.

I’ve been on my feet almost all day, every day, with an absolutely sadistic schedule trying to cram a year’s worth of education into a single long weekend.

We even spent several hours engaged in rigorous outdoor exercise and physical activity, to the point that I started to feel like I was in the military again.

(My legs are still quivering from a calisthenics exercise that my friends and I have dubbed ‘the Punisher’.)

But despite all this stress and physical exhaustion, I wouldn’t change it for the world… it was the only place I wanted to be.

As I mentioned to you in my last letter, this past weekend was our annual Liberty and Entrepreneurship Camp.

Each summer we host roughly 50 people from all over the world at a lovely lakeside resort in beautiful Lithuania.

My fellow instructors and I, all successful entrepreneurs who espouse the philosophy of personal freedom, lecture about business, freedom, and finance.

We cram A LOT into five days. It’s intense.

For many students the camp is a transformational growth experience.

For me it’s been life-changing.

Sovereign Man spends a lot of money to sponsor these camps, but I come away each year more and more energized about the future generation of problem solvers who will tackle the world’s big challenges.

It’s a tremendous honor to invest in their knowledge and growth at an early stage, and I have no doubt that many of them will be major disruptors on a global scale.

And the world certainly needs disrupting.

Nearly every major western government is bankrupt. The United States. The United Kingdom. Japan. Etc.

These are among the largest economies in the world. And their governments are flat broke.

This isn’t even a sensational statement to make.

Each government publishes its own financial statements showing in black and white that they are insolvent.

(In the case of the US government, its “net worth” is currently NEGATIVE $60 trillion. It’s astonishing.)

On top of that, the global financial system is breaking down at an incredible rate.

Central bankers, who are nothing more than unaccountable, unelected bureaucrats, have been awarded totalitarian control of the money supply and given the ability to conjure unlimited amounts of paper currency out of thin air.

The end result is that our financial system now boasts more than $13 trillion worth of bonds that have NEGATIVE yields.

The mere concept of essentially paying someone else for the privilege of lending them your money is intellectually offensive.

That there’s $13 trillion of those toxic assets in the financial system seems almost fantastical.

And yet it’s true. Even more, this dangerous trend is growing at an almost exponential rate.

Plus, these negative rates are starting to cause serious problems in the banking system.

Right now we’re seeing this unfold most notably in Italy, where one of the country’s largest banks is nearing failure and in need of yet another bailout.

This cancer will continue to spread.

Even many of the central banks themselves, the biggest institutions at the top of the global financial system, are themselves technically insolvent.

I find it very difficult to look at so much objective data… so much debt, insolvency, negative interest rates… and conclude that this is a consequence-free environment.

As I pointed out to our students this weekend, it’s probably not a good thing that most western governments and central banks are insolvent, and their banking systems are in need of a bailout.

History is full of examples of previous global financial crises that share similar characteristics, and it really seems foolish to believe that this time is any different.

But this isn’t any kind of doom and gloom prediction. Nor is it controversial.

This is merely common sense: an objective, truthful look at reality based on publicly available data.

But just because the data and conclusions are negative doesn’t mean that we should panic.

If you understand what’s happening, you can take preventative steps to reduce the ways these risks impact your life.

If your banking system is dangerously insolvent (i.e. today in Italy), don’t hold the majority of your funds there.

Instead, seek safer banking jurisdictions abroad and alternative means to hold savings (gold, physical cash).

If your government is confiscating citizens’ assets at record levels (Civil Asset Forfeiture in the US), don’t hold all of your assets within its reach.

These are simple concepts. And the tools do exist to dramatically mitigate the risks.

But as I told our students over the weekend, it’s important to not live in fear and panic about the next financial crisis, no matter how big it may likely become.

This bizarre financial system, with all of its insolvency and negative rates, could implode in spectacular fashion next week.

Or it could persist for several more years. No one has a crystal ball.

If we’ve learned anything since the last crisis, it’s that the political and banking establishment is incredibly adept at kicking the can down the road.

So the most important thing anyone can do about it is learn about both the problems AND solutions, then take some common sense steps to ensure you’ll always be in a position of strength no matter what happens (or doesn’t happen) next.

Then, and only then, you will be able to take advantage of the incredible abundance of opportunities out there.

Every big problem is an opportunity in disguise. And we’ve barely scratched the surface of the big problems.

Education systems are broken. Pension systems are broken. Healthcare systems are broken.

But these problems are all fixable.

And that creates nearly limitless possibilities for investors, entrepreneurs, and skilled workers to create value– the most important currency of all.

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I’m excited.

Tomorrow starts our summer Liberty & Entrepreneurship camp, an annual event that our foundation sponsors in which some of my most accomplished friends and I mentor young students from all over the world.

This year we have students from dozens of countries, places like Indonesia, Ecuador, Nigeria, Brazil, New Zealand, Ukraine, Canada, Estonia, China, Venezuela, Singapore, India, and the United States.

We’ll spend five days together at a beautiful lakeside resort here in Lithuania helping them build real skills in value creation, business development, investing, and more.

Before I sign off for the next few days, though, I wanted to pass along an impressive speech that was recently given by this year’s recipient of the Templeton Prize.

The Templeton Prize is named after legendary investor Sir John Templeton, who passed away in 2008.

In addition to being an enormously successful asset manager, Templeton was an unparalleled philanthropist.

He even renounced his US citizenship in 1964 during the Vietnam War, which saved him over $100 million in taxes that would have gone to fund a destructive war.

Instead, that money went to fund charitable efforts around the world.

This year’s recipient of the Templeton Prize is a British rabbi and philosopher named Jonathan Sacks.

His recent acceptance speech is a succinct and fantastic summation of WHY the West is in such decline.

This is not some message of doom and gloom by a tin-foil-hat-wearing conspiracy theorist.

On the contrary, it’s an inspiring look at what made the West great to begin with. And, maybe, just maybe, how it might be once again.

I’ve provided some excerpts below:

This is a fateful moment in history. Wherever we look, politically, religiously, economically, environmentally, there is insecurity and instability.

It is not too much to say that the future of the West and the unique form of freedom it has pioneered for the past four centuries is altogether at risk. . .

To mention just a few [risks:]. . .

Artificially low interest rates that encourage borrowing and debt and discourage saving and investment.

Wildly inflated CEO pay.

The lowering of living standards, first of the working class, then of the middle class.

The insecurity of employment, even for graduates.

The inability of young families to afford a home. . .

The collapse of birthrates throughout Europe, leading to unprecedented levels of immigration that are now the only way the West can sustain its population, and the systemic failure to integrate some of these groups.

The loss of family, community and identity, that once gave us the strength to survive unstable times.

And there are others.

Why have they proved insoluble?

First, because they are global, and governments are only national.

Second, because they are long term while the market and liberal democratic politics are short term.

Third, because they depend on changing habits of behavior, which neither the market nor the liberal democratic state are mandated to do.

Above all, though, because they can’t be solved by the market and the state alone.

You can’t outsource conscience. You can’t delegate moral responsibility away.

When you do, you raise expectations that cannot be met.

And when, inevitably, they are not met, society becomes freighted with disappointment, anger, fear, resentment and blame.

People start to take refuge in magical thinking, which today takes one of four forms: the far right, the far left, religious extremism and aggressive secularism.

The far right seeks a return to a golden past that never was.

The far left seeks a utopian future that will never be.

Religious extremists believe you can bring salvation by terror.

Aggressive secularists believe that if you get rid of religion there will be peace.

These are all fantasies, and pursuing them will endanger the very foundations of freedom.

Yet we have seen, even in mainstream British and American politics, forms of ugliness and irrationality I never thought I would see in my lifetime.

We have seen on university campuses in Britain and America the abandonment of academic freedom in the name of the right not to be offended by being confronted by views with which I disagree.

Most societies, for most of history, have been either tradition-directed or inner-directed. People do what they do, either because that is how they have always been done, or because that’s what other people do.

Inner-directed types are different. They become the pioneers, the innovators and the survivors.

They have an internalized satellite navigation system, so they aren’t fazed by uncharted territory.

They have a strong sense of duty to others. . . . They take daring but carefully calculated risks. When they fail, they have rapid recovery times.

They have discipline. They enjoy tough challenges and hard work. They play it long.

They are more interested in sustainability than quick profits.

They know they have to be responsible to customers, employees and shareholders, as well as to the wider public, because only thus will they survive in the long run.

They don’t do foolish things like creative accounting, subprime mortgages, and falsified emissions data, because they know you can’t fake it forever.

They don’t consume the present at the cost of the future, because they have a sense of responsibility for the future. . .

Cultures like that stay young. They defeat the entropy, the loss of energy, that has spelled the decline and fall of every other empire and superpower in history.

But the West has, in the immortal words of Queen Elsa in Frozen, let it go.

It’s externalized what it once internalized. It has outsourced responsibility. It’s reduced ethics to economics and politics.

Which means we are dependent on the market and the state, forces we can do little to control.

And one day our descendants will look back and ask, How did the West lose what once made it great?

Every observer of the grand sweep of history, from the prophets of Israel to the Islamic sage ibn Khaldun, from Giambattista Vico to John Stuart Mill, and Bertrand Russell to Will Durant, has said essentially the same thing: that civilizations begin to die when they lose the moral passion that brought them into being in the first place.

It happened to Greece and Rome, and it can happen to the West.

The sure signs are these: a falling birthrate, moral decay, growing inequalities, a loss of trust in social institutions, self-indulgence on the part of the rich, hopelessness on the part of the poor, unintegrated minorities, a failure to make sacrifices in the present for the sake of the future, a loss of faith in old beliefs and no new vision to take their place.

These are the danger signals and they are flashing now. . .

We owe it to our children and grandchildren not to throw away what once made the West great, and not for the sake of some idealized past, but for the sake of a demanding and deeply challenging future.

If we do simply let it go, if we continue to forget that a free society is a moral achievement that depends on habits of responsibility and restraint, then what will come next – be it Russia, China, ISIS or Iran – will be neither liberal nor democratic, and it will certainly not be free. . .

[Editor’s note: You can read the full speech here.]

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Now it’s $13 trillion.

That’s the total amount of government bonds in the world that have negative yields, according to calculations published last week by Bank of America Merrill Lynch.

Given that there were almost zero negative-yielding bonds just two years ago, the rise to $13 trillion is incredible.

In February 2015, the total amount of negative-yielding debt in the world was ‘only’ $3.6 trillion.

A year later in February 2016 it had nearly doubled to $7 trillion.

Now, just five months later, it has nearly doubled again to $13 trillion, up from $11.7 trillion just over two weeks ago.

Think about that: the total sum of negative-yielding debt in the world has increased in the last sixteen days alone by an amount that’s larger than the entire GDP of Russia.

Just like subprime mortgage bonds from ten years ago, these bonds are also toxic securities, since many of are issued by bankrupt governments (like Japan).

Instead of paying subprime home buyers to borrow money, investors are now paying subprime governments.

And just like the build-up to the 2008 subprime crisis, investors are snapping up today’s subprime bonds with frightening enthusiasm.

We’ll probably see $15 trillion, then $20 trillion, worth of negative-yielding subprime government debt within the next few months.

So this trend will continue to grow for now, until, just like in 2008, the bubble bursts in cataclysmic fashion.

It took several years for the first subprime bubble to pop. This one may take even longer. But even still, we can already see the consequences today.

A few months ago I told you about the remarkable $3.4 trillion funding gap in the US pension system.

Remember, we’re not talking about Social Security– that has its own $40+ trillion shortfall.

I’m talking about private companies’ retirement pensions, or public service worker pensions at the city and state level.

(By the way, this is NOT strictly a US phenomenon. Europe suffers its own $2 trillion pension shortfall.)

There’s zero mathematical probability that these pensions will be able to meet their obligations.

They’re already underfunded. And the problem is getting worse, thanks in part to this plague of low and negative interest rates.

You see, most pension funds must achieve a low-risk investment return of roughly 8% in order to stay solvent and pay their beneficiaries.

And making an 8% return used to be a reasonable assumption.

25-years ago, government bonds often yielded more than 8%.

So unsurprisingly, the average return for pension funds over the last 25-years has been around 8% according to the National Association of State Retirement Administrators.

But that’s no longer the case.

With such a huge portion of the bond market now with negative yields, it’s virtually impossible for pension funds to keep their promises.

Even Warren Buffett has written that “[pension] funding is woefully inadequate,” and, “In a world where people are living longer and inflation is certain, those promises will be anything but easy to keep.”

Bottom line: anyone who is ever considering retirement must heavily discount the future promises of unfunded pensions and Social Security.

The younger you are, the less likely you are to receive benefits they’ve promised.

But this also gives you time to prepare and take matters into your own hands. Consider the following:

1. Establish a better retirement plan.

Millions of people currently have their retirement savings trapped in some generic retirement package, like a managed 401(k) that’s directed by a gigantic financial institution.

You could easily be paying 1% to 2% per year in fees. In other words, your investment return is 1% to 2% less than what it should be.

That might not sound like much, but over time it makes a huge difference.

Over the course of a few decades, even a 0.5% difference in your average annual investment return can add up to hundreds of thousands of dollars.

It’s imperative to cut unnecessary costs on your retirement plan.

Depending on the investments you make, establishing a more flexible retirement structure like a solo(k) or self-directed IRA is one way to potentially reduce those costs.

It’s possible to fix your expenses to a particular dollar amount (typically just a few hundred dollars each year) rather than a percentage of assets.

So if your retirement account is somewhere between $50,000 to $100,000, you could save a lot of money and really boost your retirement.

2. Expand your investment universe.

Just like saving on your retirement structure’s costs, or being able to put more money away, raising your average annual investment return by just 1% can have a profound impact on your retirement.

This means being willing to step outside of the crowd and go beyond traditional investments like stocks, bonds, and mutual funds.

It’s not to say you can’t make money with these assets classes.

But the more solid investment options you have to choose from, the more likely you’ll be able to generate higher returns.

Again, this is where a flexible retirement structure really makes a difference.

With a solo(k) or self-directed IRA, you’ll be able to invest in numerous asset classes beyond the mainstream retirement options, including physical precious metals, private equity, venture capital, cash-producing real estate, and more.

3. Start a business.

I’m not talking about the next Google or any major enterprise. But with a little bit of education and effort, it’s possible for absolutely anyone to learn the basic skills needed to make extra money.

In the Digital Age where e-commerce prevails, there are countless options to generate independent income.

And again, with the right structure, it’s possible to push the bulk of your side business’ income into a tax-deferred retirement fund.

[I’ll have a dedicated article on this soon with some more resources and recommendations.]

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[Editor’s note: This letter was penned by Tim Price, London-based wealth manager and editor of Price Value International.]

Japan got there first. 15 years ago, we met a Japanese equity manager who made an astonishing prediction:

“Japan was the dress rehearsal. The rest of the world will be the main event.”

That seemed an extraordinary suggestion 15 years ago. Today, not so much.

In the aftermath of the late 1980s real estate and stock market bubble, and its subsequent banking crisis, Japan became a giant laboratory experiment for novel insane monetary policies.

In 2001 the Bank of Japan tried Quantitative Easing. It was a policy that Richard Koo of the Nomura Research Institute described as the “greatest monetary non-event”.

It turned out, not for the first time, that academic economists had it all wrong.

Borrowers, not lenders, were the fundamental bottleneck in Japan’s recession:

“The central bank’s implementation of QE at a time of zero interest rates was similar to a shopkeeper who, unable to sell more than 100 apples a day at $1 each, tries stocking the shelves with 1,000 apples, and when that has no effect, adds another 1,000.

As long as the price remains the same, there is no reason consumer behaviour should change – sales will remain stuck at about 100 even if the shopkeeper puts 3,000 apples on display.

This is essentially the story of QE, which not only failed to bring about economic recovery, but also failed to stop asset prices from falling well into 2003.”

The central banks of the rest of the developed world have had more success in boosting asset prices through their own deployment of QE, but they have had just as little impact on their real economies.

What QE has done is made the asset-rich richer, and the poor relatively poorer. Inasmuch as social equality is a stated aim of most governments, QE has been a disaster.

But it has done wonders for bond prices.

John Seagrim of CLSA points out that despite having yielded very little for a very long time, Japanese Government Bonds (JGBs) have been surprise performers in 2016.

The 40-year JGB has risen by 50 percent in price since the start of the year, reducing the annual yield to a level that’s now just 7 basis points (i.e. 0.07%).

Assuming investors hold the JGB to maturity in 2056, they will achieve a total return of just 2.96 percent over the life of the bond, not accounting for inflation or taxes.

Those investors might be interested to see what they could earn from a different asset class.

If they bought and held a Topix ETF (Japanese stocks) instead, they would earn a current dividend yield of 2.37 percent per year, not including any gains from potential appreciation in the share prices.

Of course, many government bonds are more expensive than the 40 year JGB in that they offer no yield whatsoever, or only a negative one.

10-year German bonds currently yield minus 0.07 percent. 10-year Swiss paper currently yields minus 0.64 percent. The 10-year US Treasury yield of 1.58% seems almost too good to be true at this point, a sad reflection of our investing environment.

Yet somehow, despite policy failures that are made obvious by the lowest interest rates ever recorded in human history, a persistent narrative still dominates financial markets: all-knowing, omnipotent central bankers are still in full control of the situation and will do ‘whatever it takes’ to maintain order.

As Richard Koo puts it:

“Even though QE failed to produce the expected results, the belief that monetary policy is always effective persists among economists in Japan and elsewhere.

To these economists, QE did not fail, it simply was not tried hard enough. According to this view, if boosting excess reserves of commercial banks to $25 trillion has no effect, then we should try injecting $50 trillion, or $100 trillion.”

But investors are starting to realize that ‘whatever it takes’ may not be enough.

Ben Hunt of Salient Partners writes convincingly that this status quo narrative is starting to falter very badly, and in the face of events like Brexit, becoming harder and harder to maintain:

“… status quo political and economic institutions – particularly Central Banks – have failed to protect incomes and have pushed income and wealth inequality past a political breaking point.

They made a big bet: we’re going to bail-out / paper-over the banks to prevent massive losses in the financial sector, we’re going to inflate the stock market so that the household sector feels wealthier, and we’re going to make vast sums of money available for the corporate and government sectors to borrow really cheaply.”

Narratives die hard, but when the ‘omnipotent central bank’ narrative finally and conclusively fails, bond investors will suffer a religious experience as the market rushes to reprice these heavily overvalued bonds.

Think about it: how much will a bond with a NEGATIVE yield be worth on the day that investors lose confidence in their central bankers’ abilities to control the weather financial markets?

Investors holding these junk bonds are going to take a big hit.

Here’s the rub: even if you don’t own bonds personally, you may still have significant exposure.

More than likely your pension fund and your bank all have substantial positions in low (or negative) yielding debt. So there may be a system-wide hit once this repricing occurs.

Ben Hunt again:

“Our portfolios should minimize the maximum risk the world actually presents, not maximize the reward our crystal ball models predict. . .

For me, that means real assets and real yield, fractional ownership in real companies with real cash flows from real economic activity with real people. You know, what a stock market used to mean before it became a Central Bank casino.”

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Jim Rogers told me to come here.

We were having dinner a few weeks ago in Singapore, and Jim had just returned that morning from Russia full of optimism for the improving economy.

I had been meaning to come back here anyhow to scout out private equity deals.

But after hearing Jim’s take on Russia having just met with a lot of the country’s business elite, it really lit a fire.

As I’ve written so many times in this letter, I’m really a pathetic tourist. I’ve been to Paris countless times and have never bothered to visit the Eiffel Tower.

When I travel, it’s to either build and maintain relationships, or to put boots on the ground and seek out risks and opportunities first hand.

On my return to Russia, the country has not disappointed.

You’ve probably heard about how the Russian economy has been depressed over the last few years.

Much of this was due to international sanctions imposed after Russia annexed Crimea in 2014 against the wishes of Ukraine, Europe, and pretty much the whole world.

Russia’s credit rating was downgraded, and foreign businesses and investors started pulling their money out en masse.

The capital flight was extreme. Between 2014 and 2015, $210 billion fled Russia, more than 10% of the country’s GDP. That’s an enormous figure.

Then the price of oil collapsed– from $115 in June 2014 to less than $30 just over a year later. Natural gas and other major commodities also fell.

Bear in mind that oil and gas exports are a major component of the Russian economy, so the effects were devastating to both GDP and financial markets.

Russia’s economy didn’t just contract. It shriveled. And the stock market crashed.

On top of everything else, the Russian ruble went into freefall, losing 35% of its value in a matter of months.

This made imports a LOT more expensive, dramatically pushing up the rate of inflation.

Russia has essentially been suffering the worst combination imaginable– consumer price inflation, economic contraction, capital flight, credit downgrades, international sanctions, stock market crash, currency crisis– all simultaneously.

Frankly it’s pretty miraculous this place didn’t descend into Venezuela-style chaos.

But it didn’t. In fact the situation has stabilized and a lot of data shows the economy is turning around. The worst seems to be over.

And yet opportunities still abound.

For example, the Russian stock market is still incredibly cheap.

The average Russian company is selling for just 7.5 times earnings and 20% less than its book value. Plus it pays more than a 4% dividend.

This is like buying a dollar for 80 cents and receiving 3.3 cents on top of that each year.

(US stocks sell for 25 times earnings and 200% MORE than book value, meaning they are historically overvalued and very expensive compared to Russia.)

In addition to stocks, the Russian currency is still far below its historic average.

Aside from making the country dirt cheap for anyone with foreign currency, I discovered something very interesting today:

Some of Russia’s coins are now worth less than their metal values.

I’ll explain– all coins are made of some metal, usually some combination of nickel, copper, etc. And that metal has a certain cost.

A dime coin in the US, for example, has about 1.2 cents worth of metal, mainly copper (91%) and nickel.

So if you melted down a US dime, which has a 10 cent face value, and sold off the metal for 1.2 cents, you’d lose 8.8 cents in the process.

The Russian ruble has become so cheap, however, that some of its coins are basically worthless.

The 1 kopek coin, for example, is the smallest denomination Russian coin that’s worth 1/100th of a ruble.

At current exchange rates that’s $0.00015, or about 0.015 cents! It’s nothing.

And yet each kopek coin is comprised of 1.5 grams worth of copper, nickel, and steel; and the melt value of these metals is worth a hell of a lot more than 0.015 cents.

In fact Russian coin dealers have estimated that the metal value of this coin is worth more than THIRTY FIVE TIMES its face value.

That’s quite a return on investment.

So theoretically $1,000 worth of these coins could be worth more than $35,000 in profit because of the metal value.

Now, I’m not suggesting you book a flight to Russia to scoop up and melt down all the coins you can find.

But it’s worth pointing out that these sorts of anomalies don’t come around too often. And when they do, it’s important to pay attention.

Jim Rogers is one of many legendary investors who has been buying in Russia. Templeton’s Mark Mobius has called Russia the “bargain of the century.”

He may be right. Russia is incredibly cheap.

That’s not to say it can’t get cheaper. Or that it can’t stay cheap for a while.

There has to be a catalyst in order for all the pent-up value to be realized.

But that seems to be happening now. Slowly. Russia is mending fences with Europe. Oil prices have climbed 40% from their lows. Capital is returning. It’s getting better.

18th century British banking mogul Baron Rothschild is often quoted as saying “Buy when there’s blood in the streets [even when that blood is your own].”

That may be too hardcore for most investors.

I prefer to buy when assets are still ultra-cheap, but there are obvious signs that things have turned around.

That time seems to be now.

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Two months ago I was with the former President of Colombia, Alvaro Uribe, at his home outside of Medellin.

He was telling me some hilarious stories about his interactions in the early 2000s with Hugo Chavez, who had recently seized power in Venezuela.

Chavez was a fanatic socialist. He believed so strongly in the idea of redistributing wealth from rich to poor.

Yet even when it was clear his policies weren’t working and Venezuela was rapidly sliding into economic chaos, Chavez’s only solution was to double down and redistribute even MORE wealth.

It was the classic definition of insanity.

Chavez failed to understand what Uribe told me so succinctly: “If there’s no wealth creation, there’s nothing left to redistribute.”

We know how Venezuela turned out; its failed socialist experiment led to today’s infamous shortages of food and toilet paper.

But here in Russia is perhaps the most famous example in our modern times.

Marxists came to power in a bloody 1917 revolution with the goal of eradicating poverty and redistributing wealth.

Yet like Venezuela, the only equality the Soviet Union managed to achieve was making everyone equally poor to the point that this vast wasteland of destitution finally collapsed in the late 1980s.

These economic disasters almost invariably start with a rising gap in wealth and income– a growing percentage of the population feeling left behind who rally behind someone promising to “spread the wealth around.”

As Historian Will Durant wrote in his incredible 1969 book Lessons from History:

“The concentration [of wealth] may reach a point where the strength of number in the many poor rivals the strength of ability in the few rich. . . which history has diversely met by legislation redistributing wealth or by revolution distributing poverty.”

This is exactly what’s happening in the West now.

The statistics are obvious: the wealth gap is bigger than it’s been since the Great Depression.

Middle class wages, when adjusted for inflation, are stagnant.

2015 was the first time in years that the average wage increase in the United States actually surpassed the rate of inflation.

But on a longer timeline, household incomes haven’t kept pace with either productivity or the cost of living.

We can see the effects of this anecdotally.

Thomas Piketty’s 2013 book Capital in the Twenty-First Century, which criticized such inequality and advocated a global wealth tax, was an explosive best-seller.

A 2011 Pew Research Center poll showed that 49% of US respondents had a favorable view of socialism.

And of course, Bernie Sanders made wealth and income inequality major issues in his presidential campaign, resonating with tens of millions of people.

On the way over to Russia I was reading an article in Newsweek about Uber, the ride-sharing pioneer that is currently worth around $70 billion.

The author was upset because the company’s stock isn’t publicly traded like Apple or Facebook, meaning he’s not able to own any Uber shares for himself.

He complains that the founders of these tech companies have been “actively deciding to keep as much for [themselves] as possible and shut out the rest of the populace by avoiding public stock offerings.”

According to the author, we’re apparently all entitled to our “fair share” of other people’s businesses and private property.

Unbelievable.

He’s not alone– there’s a growing chorus of politicians beating up on Uber, evidenced by Elizabeth Warren’s statement in March 2016 that “all the benefits [of Uber and related “shared-economy” companies] are floating to the top 10%.”

What an ignorant comment to make.

Uber loses billions of dollars each year.

So if anything, investors’ capital ends up in the pockets of the hundreds of thousands of drivers who use the app to generate extra income.

In reality Uber constitutes an enormous transfer of wealth from investors to workers and consumers. So her comment was totally wrong.

But what was more amazing was that she was complaining about how it benefits the top TEN percent.

Usually these people whine about the top 0.1%, then the top 1%. Now it’s the top 10%.

When will they start complaining about the top 20%? Or those evil people in the top 55%, i.e. the percentage of households that actually pay US federal income tax.

Wealth and income inequality is real, and the gap is growing. So is the consequent rise of socialism.

People know they’re getting screwed. And they are. They just don’t know why.

They have no idea how central bankers who conjure money out of thin air have rigged the entire economy against them.

So instead they blame “capitalism” and naturally embrace its opposite.

Seven centuries ago when Europe was just a plague-infested backwater, glimmerings of economic freedom began to appear on the continent.

The West adopted core values, like the sacrosanct protection of private property; the ability for an individual to work hard and build wealth; and spirited intellectual debate.

This is how western civilization became the most prosperous that history has ever known.

But this is all changing.

Being wealthy used to be a virtue worthy of widespread aspiration.

Now it’s met with skepticism and derision.

Similarly, intellectual dissent used to be embraced.

Now it’s increasingly considered “hate speech” that must be banished from university campuses and their infantile ‘safe spaces’.

And the entire west, it seems, is moving towards an ever-expanding, fiscally unsustainable welfare state that creates swelling masses of dependents.

This is a complete breakdown of western values, and that has serious consequences.

It’s incredible how rapidly this trend has unfolded– it’s a very steep line from the economic chaos of the 2008 financial crisis to where we are today.

And given the speed of this pro-socialist trend, just think about where it’s going to be in a few more years.

More than likely, it will progress straight into your wallet.

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In early 1870, the Kingdom of Prussia and French Empire were about to go to war.

It was one of countless conflicts between the dozens of European kingdoms and empires throughout the 18th and 19th centuries, and this one was over before it even started.

Prussia’s military might was legendary. They had recently beaten the pants off of Austria and Denmark, and they’d go on to neutralize or capture over 80% of French soldiers within a matter of months, while losing just 2% of their own.

Very few wars have been so one-sided.

And yet despite its nearly unparalleled military successes and clear dominance in European politics, Prussia lacked something critical: financial power.

Prussia’s economy was robust and healthy. But businesses across all German kingdoms depended almost exclusively on the British banking system to conduct international trade.

It was similar to how nearly the entire world depends on Wall Street mega-banks today for global trade. Germany lacked its own strong financial system.

So on March 10, 1870, King Wilhelm I of Prussia (soon to be German Emperor) granted a banking license to a trio of local entrepreneurs and gave them explicit instructions to establish a banking powerhouse.

And that’s exactly what they did. The bank was called Deutsche Bank, and it eventually grew into one of the largest banks in the world.

Deutsche Bank has seen a lot in its years; multiple world wars and the devastation of Europe. Hyperinflation in the Weimar Republic. Nazi Germany.

The bank even outlasted its own country, as the Kingdom of Prussia was formally abolished in 1947.

But as the world learned in 2008 when the 158-year old investment bank Lehman Brothers went bust, even giant, centuries-old financial institutions can collapse.

Banking is such a bizarre industry when you think about it.

Regular, everyday people like you and I fork over our hard-earned savings to banks.

They take our money and do some of the most insane things with it… whether loaning it to jobless, homeless people, or buying the negative-yielding debts of bankrupt governments.

You and I would never do anything so foolish with our own funds. Yet we hand everything over to banks and give them full license to engage in this madness.

And even when their decisions blow up and they go to the taxpayer with hat in hand for a bailout, they prove that they have memories like goldfish.

Today, banks are up to the same tricks as they were 10 years ago, except they’ve taken things to a whole new level.

And Deutsche Bank is leading the charge.

One of the major issues in the 2008 crisis was that banks were over-leveraged and had very thin levels of capital.

In other words, the banks’ rainy-day reserve funds as a percentage of their overall balance sheets were extremely low, so even a small loss in their investment portfolios would cause financial Armageddon.

That’s precisely what happened.

Lehman Brothers famously had a capital ratio of less than 3% of its assets. So when the value of its assets fell by more than 3%, the bank was finished.

Well-capitalized banks are supposed to have double-digit capital levels while making low risk investments.

Deutsche Bank, on the other hand, has a capital level of less that 3% (just like Lehman), and an incredibly risky asset base that boasts notional derivatives exposure of more than $70 trillion, roughly the size of world GDP.

Even the IMF has stated unequivocally that Deutsche Bank poses the greatest risk to global financial stability.

And the IMF would be right… except for all the other banks.

Because, meanwhile in Italy, nearly the entire Italian banking system is rapidly sliding into insolvency.

Italian banks are sitting on over 360 billion euros in bad loans right now and are in desperate need of a massive bailout.

IMF calculations show that Italian banks’ capital levels are among the lowest in the world, just ahead of Bangladesh.

And this doesn’t even scratch the surface of problems in other banking jurisdictions.

Spanish banks have been scrambling to raise billions in capital to cover persistent losses that still haven’t healed from the last crisis.

In Greece, over 35% of all loans in the banking system are classified as “non-performing”.

This is astounding. But what’s even more incredible is that the ratio of non-performing loans has actually been increasing for several years since the country’s supposed bailout.

Banks in Cyprus and Portugal are hemorrhaging cash and reporting widespread losses.

And banks’ stock prices across the region have practically collapsed in recent weeks as investors have started to realize that Bancopalypse 2.0 may be upon us.

(Oh, and lest anyone think that the United States is a banking safe haven, it’s worth noting that the non-performing commercial loan ratio in the US banking system has tripled in 18-months… but we’ll save that for another time.)

Here’s the bottom line: the banking crisis of 2008 never fully healed.

It just got shuffled under the carpet while the public was fed a phony narrative that everything is fantastic.

This turned out to be a gigantic farce; many of the world’s banking systems are just as risky as they were back in 2008.

Do yourself a favor: don’t keep 100% of your savings trapped in a risky banking system.

What’s the point? They’re only paying you 0.1% anyhow. Why take on so much risk?

If you have savings of even more than $10,000 (and definitely if you’re in the six to seven figure range), move some funds to a stronger, better capitalized banking system abroad.

And definitely consider owning precious metals, plus holding at least a month’s worth of expenses in physical cash in a safe at your home.

Given how low interest rates are, you won’t be any worse off. But should Bancopalypse 2.0 be upon us, cash and gold could end up being a phenomenal insurance policy.

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