Category: simonblack

Hot off the presses, the US government just published its audited financial statements this morning, signed and sealed by Treasury Secretary Jack Lew.

These reports are intended provide an accurate accounting of government finances, just like any big corporation would do.

And once again, the US government’s financial condition has declined significantly from the previous year.

For 2015, the government reports $3.2 trillion in total assets.

This includes everything from financial assets like bank balances to physical assets like tanks, bullets, aircraft carriers, and the federal highway system.

Curiously, the single biggest line item amongst these listed assets is the $1.2 trillion in student loans that are owed to the government by the young people of America.

This is pretty extraordinary when you think about it.

37% of the government’s total reported assets are student loans, which is now considered one of the most precarious bubbles in finance.

$1.2 trillion is similar to the size of the subprime mortgage market back in 2008. And delinquency rates are rising, now at 11.5% according to Federal Reserve data.

Plus, it’s simply astonishing that so much of the federal government’s asset base is tantamount to indentured servitude as young people pay off expensive university degrees that barely land them jobs making coffee at Starbucks.

On the other side of the equation are a reported $21.5 trillion in liabilities, giving the government an official net worth of negative $18.2 trillion.

This is down from last year’s negative $17.7 trillion and $16.9 trillion the year prior. It just keeps getting worse.

But there’s one thing that’s even more incredible about all of this.

You see, each year these financial statements are audited by the government’s in-house agency known as the Government Accountability Office (GAO).

All big companies do this. They publish financial statements, which are then reviewed by an independent audit firm.

Auditors are a critical component of the financial reporting process.

It’s their responsibility to make sure that shareholders and the public can have confidence in a company’s financial statements.

When Apple publishes an annual report, auditors go through all the books of the company and make sure that management is accurately representing the company’s true condition.

Thus when an auditor issues a failing grade, or what’s known as a qualified opinion, there’s usually hell to pay.

At the very hint of impropriety a company’s stock price will tank immediately. People get fired. SEC investigations are launched.

And now based on US securities law and section 404 of the Sarbanes-Oxley Act from 2002, senior executives can face criminal charges if their companies receive a failing grade from their auditors.

This is serious stuff.

Yet year after year the GAO gives the federal government a failing grade in its audit report of America’s financial statements.

In this latest report, not only did the GAO chastise the federal government for its “unsustainable fiscal path”, but they state that the federal government consistently fails to prepare “reliable and complete financial information– both for individual federal entities and for the federal government as a whole.”

The Department of Defense, Department of Housing and Urban Development, and the Department of Agriculture are all singled out for their failure to prepare complete and accurate financial statements.

This is corroborated by a report published last year stating that the Defense Department has somehow “misplaced” $8.5 trillion of taxpayer money over the last 20 years.

The GAO cites other material weaknesses in the government’s reporting of supposed cost reductions in Medicare and Social Security.

In all, the GAO calculates that these financial uncertainties total $27.9 trillion, suggesting that the government’s true financial condition is far worse than reported.

Bottom line– if this were a private company, Barack Obama and Jack Lew would be wearing dayglo orange jumpsuits in court while facing felony fraud charges.

It’s not just the $18.2 trillion in negative net worth. Or the $41+ trillion (by their own calculations) in the Social Security shortfall.

It’s the fact that they can’t even stand in front of the American people with an honest accounting of how pitiful the financial situation really is.

The government of the United States is totally, desperately, hopelessly bankrupt. And they become even more insolvent with each passing year.

Nearly every single dominant superpower throughout history was eventually consumed by its unsustainable finances.

And in their decline from power, bankrupt governments rely on a simple playbook to desperately try to maintain the status quo by every means available.

They destroy freedom. They impose a police and surveillance state. They seize assets. They wage campaigns of violence and intimidation.

They impose capital controls. Cash controls. People controls. Whatever it takes.

This time is not different. The finances of the US government are obvious, as is the trend.

We’re not talking about what ‘might happen’ or ‘could happen’. We’re talking about what IS happening.

And this is not a consequence free environment.

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Last week the Canadian Island of Cape Breton, Nova Scotia, off the Atlantic Seaboard near Maine, made an unusual offer to the American public.

If Donald Trump wins, move to Cape Breton.

There’s even a whole website about this, though not one officially affiliated with the local government.

This is something that happens in every election cycle.

Politics is invariably polarizing. Strong candidates have an uncanny ability to strike tremendous hope in their supporters and incredible fear in their detractors, and it’s commonplace for people to threaten strong responses if someone they don’t like is elected.

Johnny Depp famously threatened to move overseas if George W. Bush won the election.

Bush won. Depp left.

With this year’s election we’re sure to see much more of this, as emotions are already boiling.

There are so many people right now amazed that they lived to see the day when a card-carrying socialist is a leading contender to become President of the United States.

Of course, it’s not about any single person.

As Douglas Adams wrote in the Hitchhiker’s Guide to the Galaxy (from which this headline also comes), “anyone who is capable of getting themselves made President should on no account be allowed to do the job.”

Throughout my travels I’ve met a lot of people who have done the same, having reached their breaking points with one national election or another.

That feeling is totally understandable. Sometimes it requires powerful emotions of shock and astonishment to make us reach our breaking point, to shake us from our apathy, and to finally propel us into taking action.

But there’s a big danger here. These are important decisions. And such decisions should not be made emotionally. They should be rational, data-driven, and well-planned.

To say “I’m leaving the country if [insert most despised candidate] wins” is a knee-jerk, emotional response.

Look, moving abroad may very well the right answer for many.

There are tremendous tax and legal benefits of doing so, unique financial opportunities, and a host of other advantages that can lead to having a nearly unparalleled lifestyle abroad that is richer, fuller, and healthier.

But again, this should not be done emotionally and haphazardly. It should be based on rational analysis and a credible plan.

Where would you go? Where would you live once you got there? Where would your kids go to school? How would you establish legal residency? And so on.

These are important details and require research and careful thought.

The bottom line is—it makes a lot of sense to have a place to go if things in your home country ever got really uncomfortable.

Maybe you never even need to exercise that Plan B. But even if nothing ever gets as bad as you fear, you won’t be worse off for having a backup option.

Yet if the trend continues and the day ever came when you did need to get out of Dodge, you don’t want to start figuring it all out while you’re packing your bags.

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Last week the FDIC released its annual financial statements, giving the public a glimpse into the financial condition of the organization responsible for backing up the entire US banking system.

The numbers are pretty incredible.

The FDIC maintains the Deposit Insurance Fund (DIF), which is the emergency stash for nearly all bank deposits in the Land of the Free.

DIF financial statements show an incredible 54% drop in cash equivalents since last year.

This means the DIF’s immediate liquidity is now just 1.2% of its total assets. In other words, nearly 99% of the insurance fund is tied up in various investments that may lose substantial value in the very financial crises that they’re meant to insure.

The FDIC has stuffed much of the DIF funds in an expanding bond portfolio. Yet by its own admission, this portfolio is down $10 billion, or roughly 14%.

Plus, a good chunk of that bond portfolio has been invested in securities that earn negative interest.

It’s incredible; the organization insuring the US banking system has actually purchased bonds that yield negative interest!

Now, including the losses, the fair market value of the DIF is about $62 billion.

That might sound like a lot of money. But total bank deposits in the US exceeds $13 trillion, according to the Federal Reserve.

This means that the DIF has net assets available to cover less than 0.5% of all bank deposits.

In fairness, the FDIC’s insurance fund doesn’t need to maintain a 100% cash backing of all bank deposits; that’s not how insurance works.

If your home is covered against fire damage for $300,000, the insurance company won’t set aside $300,000 specifically for your home.

Their actuarial tables suggest that the risk of loss is much less than 100%. So they’ll only set aside a fraction of that amount.

And admittedly, the risk of a 100% loss in the banking system is almost zero. They don’t need anywhere near $13 trillion to properly insure it.

But even the FDIC itself acknowledges that their insurance fund is totally insufficient.

For starters, the fund doesn’t come close to meeting the minimum legal reserve requirement that was established by law following the Global Financial Crisis several years ago.

Even more, the FDIC states in its own report that they need TWICE the current reserve balance as “the minimum level needed to withstand future crises of the magnitude of past crises.”

Bottom line, the FDIC has stated in black and white that they are not equipped to deal with another bank crisis.

This is where the government is supposed to come in, with an explicit guarantee to bail out the banks.

The real irony, of course, is that the government doesn’t have any of its own money. They only have your money. Taxpayer money.

So in essence, the government is guaranteeing your bank deposit with your own money. It’s mind boggling.

The larger problem is that the government hasn’t done a good job hanging on to any of your money.

With the Treasury Department’s financial statements showing the US government’s net worth at negative $60 trillion, Uncle Sam is in no position to bail anyone out.

Deposit insurance may have been a well intended idea. But the hard facts show that this blanket guarantee of bank safety is ultimately a ruse.

None of the institutions involved has the financial resources to back up their promises.

So instead of blindly depositing money in a dangerously illiquid banking system and expecting an insolvent government and undercapitalized insurance fund to fix everything, a rational person ought to consider other options.

There are other jurisdictions in the world (like Norway) where the banks are far more liquid and more capitalized, backed up by well-capitalized insurance funds or governments with minimal net debt.

Holding physical cash is an even easier option to reduce this banking system risk; just make sure to avoid high-denomination notes like 500 euros or $100 bills.

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

For the benefit of non-subscribers, there are two versions of the Financial Times newspaper. One of them is the hard copy edition, still printed on pink paper, an exact digital replica of which is available on the paper’s website to subscribers. The second is the website itself, at www.ft.com. The difference between the two is subtle, but crucial. In the formal, hard copy edition, ‘reader response’ is strictly edited and controlled. Occasionally a despatch critical of one of the paper’s columnists (normally and deservedly Martin Wolf) will make its way through enemy lines, but as the ‘edition of record’, hostility to and criticism of the newspaper’s editorial staff is, as you might expect, strictly rationed.

On the website, however, the gloves come off.

Last week the FT published an article, ‘Central banks: negative thinking’, co-authored by Robin Wigglesworth, Leo Lewis and Dan McCrum, that was atypically sceptical of the received wisdom on QE (i.e., that it works). The article began, as is probably compulsory these days, in Japan:

“Forums have seen a flood of commentary from Japan’s retirees decrying negative rates and the “torture” that the BoJ’s policy is already inflicting..

“The Japanese can be conservative at the best of times, and few think these are the best of times.”

But as the authors rightly point out, Japan is not the only country affected by negative interest rates, a policy that John Stepek, the editor of MoneyWeek, has nicely called

“the weaponisation of compound interest”.

As Messrs Wigglesworth, Lewis and McCrum rightly observe,

“With quantitative easing seemingly losing its power to dazzle markets, and many governments either unable or unwilling to countenance raising spending, central banks have felt compelled to try new tools.”

What is alarming is that central banks are brandishing these new tools without any viable evidence or theory that they will even work. This itself presupposes that central banks have any idea of what “work” might even mean in this brave new context. It is as if the central bankers of the world have all been given hammers, and they have been sent out into the world to hit all the nails therein. But we don’t distribute hammers as a matter of course to babies, for obvious reasons.

The financial world is growing increasingly crazy-looking. 10 year bonds issued by the government of Japan – the developed world government that comes closest, by any objective measure, to being deemed ‘insolvent’ – now offer a yield below zero. Come again? According to JP Morgan, there is now more than $5 trillion of sovereign debt offering a yield below zero. ‘Risk-free rate’?

As the authors fairly point out,

“..some investors and analysts say the most insidious aspect of negative interest rates is what it signals: that central banks are at their wits’ end over how to invigorate growth and dispel the spectre of deflation. The concern is that the US is poised to join in.”

That seems ever more plausible, if grotesque. The analyst and financial historian Russell Napier, in a recent interview, concurred:

“So [with negative rates] there are business models that don’t make any sense. Elsewhere, the more the rate on deposits comes to negative, the more risk there is that people start asking for bank notes…that’s a bank run if we ever get to that stage, but even with negative rates where they are it’s destroying the returns for banks.

“When you’ve built over hundreds of years a system that runs on positive nominal rates and you suddenly deliver negative nominal rates, then you are creating lots of problems for lots of existing business models and it’s going to cause havoc and I think it is causing havoc…

“Can [negative rates] come to the United States? ..the answer is probably yes. Once again, it really depends on how quickly the politicians get in gear. Central banks I think are crying out for help from the politicians in terms of getting some form of reflation going…so I would forecast that America probably will get to negative nominal rates.

“I do think that what’s going on in the world with European banks and in the high yield market in the United States and the potential defaults in the emerging markets, I do think that’s negative for US economic activity; I do think inflation will continue to come down in the US; I do think the US will report deflation, so probably the United States has to go the same place as most other places have gone to.

“The most important thing that your listeners need to remember is that just because central banking has played out doesn’t mean to say that the [political] authorities have played out. So they’ll be back with some sort of political machinations to try and produce this higher level of nominal GDP growth…and eventually they’ll succeed but, crucially, it needs a crisis to galvanize the political process…”

FT readers growing increasingly concerned at the absurdity of current monetary policy occasionally get a polite hearing in the Letters page, like a demented elderly relative who is reluctantly granted an audience out of pity. But on the less heavily intermediated website, they give it all with both barrels.

Here, for example, are some of the reader responses to ‘Central banks: negative thinking’:

“If all depreciate their currency with this latest coordinated gimmick, none does, as matters remain as they were before. So that excuse for this nonsense (negative rates) is invalid”;

“It’s rather odd how, when QE is intended (or so they say) to stimulate demand, they give the money to a relative handful of people with plenty of it already”;

“NIRP is supposed to make us spend the money that we carefully saved for future needs. This madness will bankrupt us all – in old age (if not sooner). The 2008 crisis taught us: Never. Trust. Banks. The years since then have taught us: Never. Trust. Central. Banks. Either”;

“There is no way on God’s earth that a free market would ever result in negative interest rates. If anyone had asked you ten years ago if you’d stand for this – you’d have said ‘no’. The fact that this seems almost normal to many people is an indication of just how insidious these moronic policies are. We are like frogs in a pot being boiled alive one degree at a time. Time to get out of the pot before we’re all too drowsy to notice”;

“Central banks will also need to explain just how they think that taking money from savers with low rates – lower than inflation – is going to give governments more taxes or businesses more customers. All it does is reduce private consumption and lower prices i.e. what they claim to be trying to stop”;

“Economists rather than face reality, come up with new solutions such as negative interest rates rather than face the fact that their theories were plain wrong. At the heart of the problem is that a small group of academics or anyone for that matter can forecast the economic future better than a marketplace. In fact they are worse, market participants know they can be wrong so act more cautiously ( unless of course they know they will be bailed out ) hedging, spreading risk, using futures if you produce commodities etc.

“Central Banks, by falsifying interest rates, herd markets in a direction determined by the Central Bank. From day one these ideas were implemented, they were doomed for failure. Central Bankers do not believe in the business cycle which if left to run their course, and too much leverage employed, are normal and healthy. But for an economist that means their profession loses influence; they won’t let that happen”;

“NIRP is madness. The only possible positive objective may be to weaken the currency, which in itself is a self-defeating move, leading to currency wars. Switzerland adopted NIRP for this purpose. BOJ followed suit, for lack of any other alternative, and is failing miserably. The only winners of NIRP are governments and borrowers. Credit demand remains strong only with risky borrowers, including governments. Well financed borrowers borrow to buy back shares or engage in M&A not to expand the economy, but to retrench. All others are losers of NIRP, including financial institutions, all investors and household. NIRP is not a zero-sum game, but a minus-sum game. One does not have to be very bright to understand this equation, including myself.”

“The FT appears to be finally seeing some chinks in the armour of the QE policies it advocates with such enthusiasm”;

“What is it that central bankers and economists do not see?

“For any human being making economic decisions, everything changes at 0%. The decision making for savers, consumers, SMEs, etc. grinds to a standstill. If you are prudent and don’t want to speculate on buying various financial assets, 0% kills any reason you may have had to take any positive action. If all you can expect to get from your efforts is to still have the same as when you started, why bother? We as humans need a positive “Narrative” to get out of bed in the morning, work, take risk, etc. Risk free interest at 0% translates into a clear statement that there is no future to discount cash flows over or to believe in. If an individual cannot imagine a positive result from his/her actions, he/she prefers to do nothing. Prolonged periods of 0% rates and no positive (inflation) price movement will lead to reduced economic activity. Not exactly the stated purpose of the QE experiment. QE will go to the history books as one of the greatest mistakes in history.”

This is only a snapshot. At the time of writing, there were 175 comments from readers. There will doubtless be more, unless the FT decides to close down the conversation.

Faced with a terrible threat, we can do nothing, or we can do something. One logical response is to agitate for greater public awareness of the threat. Writing as a fiduciary investor, another is to try and identify defensive investment choices that will go some way to putting capital to productive work without incurring entirely unacceptable levels of risk.

In an environment of heightened financial repression and the growing likelihood of the imposition of negative nominal interest rates, we think those investment choices should include objectively creditworthy debt; high quality and unconstrained equities offering an explicit margin of safety; uncorrelated systematic trend-following funds, and hard assets, notably gold.

It used to be said, ‘Don’t fight the Fed’. Now as investors, if we want to protect our capital, we are all obligated to fight the Fed, and its international cousins, with whatever we have.

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I remember several years ago in the Land of the Free when the big wave in the banking industry was to offer “free checking”.

There used to be a time (that a lot of people probably don’t remember) when banks charged monthly or annual fees to maintain your bank account.

This changed several years ago. Banks even started running commercials encouraging customers to open their “free checking” accounts right away.

Of course this is total nonsense. Banks aren’t exactly charitable organizations, and they have an uninterrupted track record of screwing their customers to make money.

In this case, “free checking” is just a ruse to get you to open an account so that they can make stupid investments with your money.

Banks in Europe, for example, are taking your money and buying government bonds that have negative yields and are hence guaranteed to lose money.

That’s what they’re doing with your savings. It’s insane.

In the Land of the Free, banks are once again stocking up on mortgage-backed securities as the most popular investment fad today, as if they have no memory of the 2008 financial crisis.

There’s even one bank in San Francisco that’s offering $2 million loans with no money down, and no private mortgage insurance, to buy real estate in one of the most overpriced areas of the country.

This isn’t “free checking”. It’d be more appropriate if they called it “high-risk checking”.

And the trend shows that it’s getting worse.

On top of everything else now, slowing economy growth almost assures that negative interest rates will be the norm across the entire developed world.

They already have negative interest rates in Europe and Japan.

And as Fed Chair Janet Yellen indicated recently, this is an option that’s on the table even in the United States.

This kind of insanity has serious consequences to the entire financial system, putting your money at even greater risk.

You’ll never hear it from the financial elite. Your banker is never going to say, “open a high-risk checking account today!”

But by holding your money in such a precarious system, that is precisely what you are doing.

This is our topic for today’s podcast: the trend towards “high-risk checking”, and why negative interest rates and capital controls are an almost forgone conclusion.

You can listen in here.

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Years ago back in my days at the academy and in the military, I used to hear this phrase “freedom isn’t free” over and over again.

It was almost a sort of motto for a lot of military units– a self-motivating expression that freedom came at a price, and it was our solemn responsibility to pay that price.

It’s a true statement. Freedom is NOT free.

History shows that the path to liberty almost invariably involves conflict, whether it was the American Revolution, or Brown vs. the Board of Education.

And these conflicts often demand a very steep price from those who fight them.

Today we are in the midst of another great conflict. I’m not talking about hostilities in Syria or even the Global War on Terror.

This conflict is between the individual and the state.

Governments around the world have demonstrated that they are willing to trample on individual liberties with no thought to the larger implications.

They tell us what we can and cannot put in our bodies. They take our children away when they deem us unfit parents in their sole discretion.

They tell us to be afraid of men in caves… or angry teenagers in the desert… or bad people lurking in the night… and then use that fear as an excuse to dismantle the freedoms that previous generations paid such a steep price to achieve.

We’ve now found out that the US government has demanded that Apple, in the words of CEO Tim Cook, “build a backdoor to the iPhone.”

Cook’s letter to customers describes how the government wants to access data on the iPhone of the man who perpetrated the 2015 San Bernadino mass shooting.

Apple’s iPhone operating system automatically encrypts data and only makes it available to a user who knows the password.

Since Apple doesn’t know the shooter’s password, they cannot access the data through normal means.

That’s why the FBI wants them to build a backdoor, and the government has commanded Apple to comply under the authority of a law dating back to 1789.

As Tim Cook points out,

“[W]hile the government may argue that its use would be limited to this case, there is no way to guarantee such control.

“The implications of the government’s demands are chilling. If the government can use the All Writs Act to make it easier to unlock your iPhone, it would have the power to reach into anyone’s device to capture their data.

“The government could extend this breach of privacy and demand that Apple build surveillance software to intercept your messages, access your health records or financial data, track your location, or even access your phone’s microphone or camera without your knowledge.”

The government may very well be acting in the interest of ‘protecting the American people’.

And US presidents often point out these days that their #1 responsibility is to keep American safe.

Actually, it’s not.

Nearly all federal officials, including the President, take an oath to support and defend the Constitution of the United States against ALL enemies, foreign and domestic.

That is their #1 responsibility– to uphold the principles of freedom that define an entire nation.

They have routinely broken that oath, trading other people’s freedom for the illusion of greater security.

It’s easy to sing songs about how free you are… to cheer Lady Gaga’s rendition of the national anthem at the Superbowl when she hits the high note on the word “free”.

But none of that comes at a price.

Our price is making a difficult choice between liberty and security– to choose fear or freedom.

When we feel that our families’ security is threatened, the knee-jerk reaction is often to say “give the government whatever it needs to make us safe!”

But the harsh reality is that such short-term thinking creates a much more ominous world in the long-term.

And every tacit acquiescence to intrusive government authority is a brick laid on the road to tyranny.

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This is starting to become very concerning.

The momentum to “ban cash”, and in particular high denomination notes like the 500 euro and $100 bills, is seriously picking up steam.

On Monday the European Central Bank President emphatically disclosed that he is strongly considering phasing out the 500 euro note.

Yesterday, former US Treasury Secretary Larry Summers published an op-ed in the Washington Post about getting rid of the $100 bill.

Prominent economists and banks have joined the refrain and called for an end to cash in recent months.

The reasoning is almost always the same: cash is something that only criminals, terrorists, and tax cheats use.

In his op-ed, Summers refers to a new Harvard research paper entitled: “Making it Harder for the Bad Guys: The Case for Eliminating High Denomination Notes”.

That title pretty much sums up the conventional thinking. And the paper goes on to propose abolishing, among others, 500 euro and $100 bills.

The authors claim that “without being able to use high denomination notes, those engaged in illicit activities – the ‘bad guys’ of our title – would face higher costs and greater risks of detection. Eliminating high denomination notes would disrupt their ‘business models’.”

Personally I find this comical.

I can just imagine a bunch of bureaucrats and policy wonks sitting in a room pretending to know anything about criminal activity.

It’s total nonsense. As long as there has been human civilization there has been crime. Crime pre-dates cash. And it will exist long after they attempt to ban it.

Perhaps even more hilarious is that many of these bankrupt governments have become so desperate for economic growth that they now count illegal drug activity and prostitution in their GDP calculations, both of which are typically transacted in cash.

So, ironically, by banning cash these governments will end up reducing their own GDP figures.

What’s really behind this? Why is there such a big movement to ban something that is used for felonious purposes by just a fraction of a percent of the population?

Cash, it turns out, is the Achilles’ Heel of the financial system.

Central banks around the world have kept interest rates at near-zero levels for nearly eight years now.

And despite having created massive bubbles and enabled extraordinary amounts of debt, their policies aren’t working.

Especially in Europe, the hope of stoking economic growth (and even the sickening goal of inflation) has failed.

So naturally, since what they’ve been trying hasn’t worked, their response is to continue trying the same thing… and more of it.

Interest rates across the European continent are now negative.

Japanese interest rates are now negative.

And even in the United States, the Federal Reserve has acknowledged that negative interest rates are being considered.

They have no other choice; raising rates will bankrupt the governments they support and derail any fledgling economic growth.

Look at how low interest rates are in the US– and yet 4th quarter GDP practically ground to a halt. They simply cannot afford to raise rates.

As global economic weakness continues to play out, central banks will have no other option but to take interest rates even further into negative territory.

That said, negative interest rates will be the destruction of the financial system.

Because sooner or later, if banks have to pay negative wholesale interest rates to each other and to the central bank, then eventually they’ll have to pass those negative rates on to their customers.

Many banks have already started doing this, especially on larger depositors.

We’ve seen this in Europe where some banks charge their customers negative interest to save money, and in some extraordinary circumstances, pay other customers to borrow money.

It’s total madness.

There’s a certain point, however, when interest rates become so negative that no rational person would hold money in the banking system.

Eventually people will realize that they’re better off withdrawing their money and holding physical cash.

Sure, cash doesn’t pay any interest. But it doesn’t cost any either.

If you have a $200,000 in your savings account at negative 1%, you’d have to pay the bank $2,000 each year.

Clearly it would make more sense to buy a safe and hold most of that money in cash.

Problem is, the banks don’t have the money.

For starters, there’s literally not enough cash in the entire financial system to pay out more than a fraction of all bank deposits.

More importantly, banks (especially in the US and Europe) are extremely illiquid.

They invest the vast majority of your deposit in illiquid loans or securities of dubious long-term value, whatever the latest stupid investment fad happens to be.

And many banks have been engaging in a substantial balance sheet shift, rotating bonds from what’s called “Available for Sale” to “Hold to Maturity”.

This is an accounting trick used to hide losses in their bond portfolios. But it also means they have less liquidity available to support bank customer withdrawal requests.

The natural side effect of negative interest rates is pushing people to hold money outside of the banking system.

Yet it’s clear that a surge of withdrawal requests would bring down that system.

Banks don’t want that to happen. Governments don’t want that to happen.

But since central banks have no other choice than to continue imposing negative interest rates, the only logical option is to ban cash and force consumers to hold their money within the banking system.

Make no mistake, this is absolutely a form of capital controls. And it’s coming soon to a banking system near you.

PS. Clearly a trend with this much momentum requires some deliberate and measured action if you don’t want your savings trapped.

We’ll discuss this in our upcoming webinar.

I hate to belabor the point, but it should be obvious that these things are happening, quickly, and I can promise that you’ll get a ton of great information and solutions with the small investment of your time.

Sign up here to attend for free.

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It was close to twenty years ago that I sat in my first personal finance class, learning how to invest money I didn’t have for a “retirement” that seemed inconceivably far away.

It was my first year at the academy. And the government thought it appropriate to ensure that its future Army officers had sufficient acumen to manage their finances.

Their sage advice back then was to buy stocks, hold for 40-50 years, and then rotate into bonds.

(Funny how the government’s finance class encouraged us to buy government bonds.)

The idea was to build wealth through stocks, which conventional wisdom tells us will increase in value.

Then, generate stable income from government bonds, which are “safe” and provide much needed supplemental income for retirees.

It’s become clear to me over the years that this story is completely wrong.

The belief in finding safety by loaning your money to a bankrupt government that has no hope of ever repaying its debts is completely ludicrous, especially given that their interest rates are either negative or well below the rate of inflation.

For anyone that has the courage to look beyond the mainstream, there are a number of much more profitable and stable asset classes available to grow your wealth and generate income.

1. Private Businesses

Private businesses are almost unparalleled in wealth creation, and can offer superior risk-adjusted returns to anything out there in public markets.

I’m not talking about investing in tech startups trying to find the next Google (though investing in startups can also provide outsized, risk-adjusted returns).

I’m talking about acquiring shares of more mature, privately held businesses.

These would typically be medium-sized companies that have a 20+ year history of generating profits.

There is a limited market for these opportunities (as there usually is for any great deal). But they do exist.

Business brokers around the world often list these types of companies at between two and four times their annual earnings.

This means that it’s possible to generate a 50% return on your investment. And if you have skills or access to management that can grow the earnings, the returns can be even higher.

Mature businesses with long operating histories may even qualify for bank financing, thus reducing the amount of upfront capital you need to purchase the business.

I’ve been involved in a few of these deals myself where banks have stepped forward to provide most of the financing necessary to buy a mature business based on the company’s long-standing operating history.

In comparison to loaning money to a bankrupt government for a one-percent annualized return, this strikes me as a no-brainer asset class to consider.

2. Royalty streams and intellectual property rights

Royalty streams and intellectual property rights are another unconventional asset class to consider.

This can include anything from patents to songwriter credits, to income streams from privately held mines or oil wells.

Given the weakness in commodity prices this market is starting to become much more attractive from a value perspective, particularly if you have a long-term outlook.

Some friends of mine own the website RoyaltyExchange.com, a platform where royalty owners for film assets, patents, mineral rights, etc. are auctioned off to investors.

In one recent deal for songwriter credits, a $15,000 annual royalty stream sold for less than $29,000.

I have another colleague who holds book copyrights through his Individual Retirement Account to generate tax-deferred royalty income.

3. Agriculture

One of my personal favorites is agriculture.

Understandably most people won’t be able to achieve the size and scale of necessary to run an efficient agricultural corporation.

But even on a small scale, agriculture works. Apple trees have outperformed apple stock for 30+ years.

It’s hard to imagine you’ll be worse off for having a small organic garden or planting some fruit trees in your backyard.

Not only will you be putting real food on the table, but with an investment of just a couple of dollars you could substantially increase your property’s value.

4. Yourself

Last but not least, the most important investment I believe anyone can make is an investment you make in yourself.

For anyone looking to secure greater income and wealth, there is no substitute for real education: business education, financial education, and the development of important skills.

To generate $1,000 in monthly income through conventional investments, for example, you’d have to buy $674,000 worth of US government treasuries based on today’s bond yields.

Or you could invest a tiny fraction of that to learn a skill that makes you more valuable at work or in the marketplace.

This is one of our main focuses in our annual youth liberty and entrepreneurship camp.

Each summer we spend an intense five-day workshop developing critical skills, business education and financial education, guided by some of the smartest, most successful people I know.

It’s free of charge for those who are accepted.

We’re just about to open up the enrollment window, if you’d like to find out more about how to apply to our Liberty and Entrepreneurship camp, click here.

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According to financial research firm ICI, total retirement assets in the Land of the Free now exceed $23 trillion.

$7.3 trillion of that is held in Individual Retirement Accounts (IRAs).

That’s an appetizing figure, especially for a government that just passed $19 trillion in debt and is in pressing need of new funding sources.

Even when you account for all federal assets (like national parks and aircraft carriers), the government’s “net financial position” according to its own accounting is negative $17.7 trillion.

And that number doesn’t include unfunded Social Security entitlements, which the government estimates is another $42 trillion.

The US national debt has increased by roughly $1 trillion annually over the past several years.

The Federal Reserve has conjured an astonishing amount of money out of thin air in order to buy a big chunk of that debt.

But even the Fed has limitations. According to its own weekly financial statement, the Fed’s solvency is at precariously low levels (with a capital base of just 0.8% of assets).

And on a mark-to-market basis, the Fed is already insolvent. So it’s foolish to think they can continue to print money forever and bail out the government without consequence.

The Chinese (and other foreigners) own a big slice of US debt as well.

But it’s just as foolish to expect them to continue bailing out America, especially when they have such large economic problems at home.

US taxpayers own the largest share of the debt, mostly through various trust funds of Social Security and Medicare.

But again, given the $42 trillion funding gap in these programs, it’s mathematically impossible for Social Security to continue funding the national debt.

This reality puts the US government in rough spot.

It’s not like government spending is going down anytime soon; it already takes nearly 100% of tax revenue just to pay mandatory entitlements like Social Security, and interest on the debt.

Plus the government itself estimates that the national debt will hit $30 trillion within ten years.

Bottom line, they need more money. Lots of it. And there is perhaps no easier pool of cash to ‘borrow’ than Americans’ retirement savings.

$7.3 trillion in US IRA accounts is too large for them to ignore.

And if you think it’s inconceivable for the government to borrow your retirement savings, just consider the following:

1) Borrowing retirement funds is becoming a popular tactic.

Forced loans have been a common tactic of bankrupt governments throughout history.

Plus there’s recent precedent all over the world; Hungary, France, Ireland, and Poland are among many governments that have resorted to ‘borrowing’ public and private pension funds.

2) The US government has already done this with federal pension funds.

During the multiple debt ceiling fiascos since 2011, the Treasury Department resorted to “extraordinary measures” at least twice in order to continue funding the government.

What exactly were these extraordinary measures?

They dipped into federal retirement funds and borrowed what they needed to tide them over.

In fact, the debt ceiling debacles were only resolved because the Treasury Department had fully depleted available retirement funds.

3) They’ve been paving the way to borrow your retirement savings for a long time.

Two years ago the government launched a new initiative to ‘help Americans save for retirement.’

It’s called MyRA. And the idea is for people to invest retirement savings ‘in the safety and security of US government bonds’.

Since then they’ve gone on a marketing offensive involving the President, Treasury Secretary, and other prominent politicians.

(Most recently Nancy Pelosi published an Op-Ed in the San Francisco Chronicle a few days ago promoting the program.)

They’ve also proposed a number of legislative reforms to ‘encourage’ American businesses to sign their employees up for MyRA.

Just last week, Congress introduced the “Making Your Retirement Accessible”, or MyRA Act, which would charge a penalty to employers whose workers don’t have a retirement account.

The proposed penalty is $100. Per worker. Per day.

Imagine a small business with, say, 10 employees who don’t have retirement accounts. The penalty to Uncle Sam would be a whopping $30,000 PER MONTH.

There’s a word for this. It’s called extortion.

Obviously when facing a $30,000 monthly penalty, an employer will pick the easiest option.

Given the absurd amount of government regulation on the rest of the financial industry, MyRA is the fastest choice.

This isn’t about fear or paranoia. It’s about facts.

And the reality is that the government in the Land of the Free is moving in the direction of borrowing more and more of your retirement savings.

If you still remain skeptical, remember that last year the government stole more from its citizens through Civil Asset Forfeiture than thieves in the private sector.

Or that just 45-days ago a new law went into effect authorizing the government to strip you of your passport if they believe in their sole discretion that you owe them too much tax.

No judge. No jury. No trial. They just confiscate your passport.

This is happening. It’s a reality that rational, thinking people should plan for.

And yes, there are solutions for now.

For example, it’s possible to set up a more robust retirement structure that protects your savings and gives you much greater influence over your funds.

This is something that may make sense no matter what; it may be a good idea regardless to do some long-term financial planning that increases your influence over your own retirement savings and expands your investment options.

And if you want to learn more about the risks and solutions for your retirement savings, click here to access our free black paper.

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