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The Downside of Information

Dear Reader,

March in Northwest Argentina finds the grapes ripening to that special moment when wine makers sense that just the right balance of sugars, tannins, polyphenols and so forth has been attained.

It is then, with the knowing nod of the resident oenologists, that the harvest begins. An army of workers aided by tractors and harvesting machines flood into the sea of vineyards hereabouts and work pretty much around the clock until the harvest is complete.

It is also the time of year when the community here at La Estancia de Cafayate comes alive with almost 200 owners and guests from around the world attending back-to-back harvest celebrations.

It's a proper home-coming weekend with old and soon-to-be friends gathering for a full slate of social events, including al fresco luncheons in the vineyard, Argentine asados, glittery cocktail parties, bodega tours, leisurely meals at the clubhouse or at restaurants on the plaza and so much more.

For those of us in residence, it amounts to almost three weeks of non-stop socializing - leaving your correspondent feeling akin to what a Roman patron might feel after a round of marathon feasting and orgies. Over the past few weeks, I haven't even managed to muster the forward momentum needed to set a foot into the Athletic Club and Spa that's a five-minute walk from our house for a health-promoting workout or massage.

All of which compels me to apologize in advance should you find today's musings to be less than sparkly. I might have even given in to the temptation to roll over this morning, pull a pillow over my head and let my stalwart co-writer Vedran Vuk once again cover for me... but in the end decided against it because in the midst of all the partying, golf and general gluttony, there were some important ideas tossed around that I very much want to share.

And so, having fortified the mind with more than a few bowls of mate and Put Your Lights On by Carlo Santana and Everlast, it's time to get back to business.

The Downside of Information

Bill Bonner, editor of the Diary of a Rogue Economist writes about "public information." This is the sort of information that people believe is "true," but only tangentially and without having personally observed it. In other words, it is extremely poor-quality information, the sort of thing regularly ginned up in modern times by the media to attract eyeballs on advertisements, or promoted by politicians or businesses to further their own interests.

It's Bill's hypothesis that because the evolution of the human mind occurred against a backdrop of life-and-death decision-making based on hard information, our modern minds are genetically ill-equipped to deal with public information. In other words, we evolved trusting that the information we were receiving was reliable, leaving us susceptible to believing that substantially all the information we receive today is reliable.

Making the point, Bill referred to the case of the villagers being alerted by a fellow villager to a pending attack. So alerted, the villagers knew all they needed to know in order to decide which of the aforementioned actions to take.

But what happens when, in today's world, someone comes running into the virtual village shouting "The globe is warming, the globe is warming"? Or, "The economy needs quantitative easing!"

Because of the entirely understandable evolutionary prerequisite that we pay attention to hard information or risk being erased from the genetic pool, the human mind is essentially wired to accept that the threat from global warming is real... or that quantitative easing is needed. Or that Iraq somehow posed a threat requiring the spending of trillions of dollars and wasting untold lives to blow it to pieces.

How can we really know that any of this public information is true? We can't. Yet with a sufficient amount of arm waving in the global media, large swaths of the populace accept the information as true, setting in motion a giant snowball of political policy and the attendant massive misallocation of resources.

Rather than getting all worked up over something like global warming, you might reflect on the observable fact that virtually every generation has been plagued by prophets of doom - overpopulation, the coming ice age, Ebola, HIV, bird flu, swine flu, global warming, etc., etc. - and so simply don't concern yourself with it.

(The doomsters seem to be tuning their Hype-O-Matics into the idea that the world is about to be wiped clean by a super-meteorite. In fact, the threat is so severe that the US Senate is now holding hearings, with one legislator actually asking that Bruce Willis make an appearance... you know, because he starred in a sci-fi movie dealing with the topic.)

In prehistoric times, anyone running into the village shouting that the enemy was about to attack when they weren't would quickly find themselves hanging upside down over a fire. By contrast, in modern times, with the warnings cloaked in pseudo-science or religiosity and rebroadcast globally by the complacent and complicit media, the purveyors of such bad information tend to end up being feted at rubber chicken dinners and padding their pockets with grant money from universities and governments.

Last night over yet another dinner, I got into a discussion on this general topic with a fellow Estanciero, and we both concurred that living far from the "noise" of the modern world has had a tremendously beneficial effect on our stress levels. The "news" - or public information, as Bill would term most of it - has almost zero presence in our daily lives.

Why Bifurcating Your Information Matters

In addition to saving yourself time and worries by mostly ignoring public information, learning to discern the difference between the two can lead to better decision making, in your everyday life and in your investments.

During a recent conference , someone in the audience asked a question about quantitative easing. Doug Casey took hold of the microphone and replied along the lines of, "People need to stop using constructs such as 'quantitative easing.' Those are just terms that politicians have come up with to obfuscate the truth. The proper term for quantitative easing is currency debasement, plain and simple."

Going back to the observable, we know from history what happens when a king or officialdom adopts a policy of energetic currency debasement: the currency units being debased invariably become worth less and less. There is no example in history where debasing a currency doesn't drive the purchasing power down over time. And certainly none where debasing a currency causes it to appreciate over time.

Jumping back to public information, "everyone" knows that the dollar is king. The best car in the junkyard, the two-ply toilet paper in a world where all other currencies are mere single ply. But is that accepted truth actually true?

Take a look at the following two charts, taken from the presentation that Frank Trotter, president of EverBank Direct, gave in Cafayate. The first shows the US dollar against 19 major currencies. It's hard not to note that the mighty dollar has been in a long-term downtrend.

(Click on image to enlarge)

The second of Frank's charts shows the one- and ten-year performance - through 2012 - of some of the EverBank World Currency team's favorite currencies against the dollar.

(Click on image to enlarge)

(For the record, EverBank World Markets offers what may be the only FDIC-insured world currency accounts and certificates of deposit, allowing you to diversify your currency holdings extremely efficiently. For more information, click here.)

Of course, not shown in this mix is the performance of gold, the über-currency, over the same time periods. In 2012 gold rose by only about 3.5%, but for the ten-year period, it rose from $278 to $1,657, a gain of about 500%.

I'll have a bit more to say about gold, and particularly gold stocks, momentarily... but before that, I want to toss out one more item of observable information as it relates to today's economy, political environment and the outlook for the dollar.

The chart here is of federal spending in trillions of inflation-adjusted dollars. That means that the increase in spending shown accurately reflects the growth in government in real terms (as opposed to reflecting the decline in purchasing power from the currency debasement).

It also shows the scale of the purportedly draconian cuts in federal spending to be made as part of proposed austerity measures... revealing all the hand waving about the severe consequences of said cuts as just so much public information... or, if you prefer, misinformation.

What you can also observe from this chart is that the federal government has grown into a behemoth, a huge prop under the economy... the world's largest economy, for the record. The idea that the politicians will find the backbone to cut this level of spending back to the point where it balances the budget is ludicrous. Even if enough of them wanted to make such cuts, the ensuing depression would trigger a public backlash that would see them voted out of power in the proverbial blink of an eye.

Which is to say that the current trend of currency debasement is almost certainly going to continue until it simply can't anymore.

Just Whose Money Is It Anyway?

By Dennis Miller

At some point in our life, I am sure most of us have had the experience where we start to accumulate our own personal small pile of money. Whether our money was a birthday gift, came from paper routes or baby-sitting, our little cash pile was burning a hole in our pocket. Our elders decided it was time for us to march down to the bank and open up our very own savings account. They told us it was for safe keeping. After all, if we kept our money at home, we could get robbed. In a bank, it is safe and insured by the government.

Part of those early life experiences was the concept of putting away our money, in a safe place, and accumulating wealth that we would need down the road. The contract was implied. It was our money and safely protected in the bank.

Our confidence was shaken when the first TARP bill was passed to bail out several banks deemed "too big to fail." Indeed, the government kept its promise; our money is safe.

Recently many of us have read articles about Cyprus, where the European Union has decided to confiscate money in people's bank accounts in the form of a tax. Here is what our own Marin Katusa said about it in the Casey Daily Dispatch, on Tuesday, March 19.

For those with bank accounts in the Mediterranean island of Cyprus, this past weekend was a disastrous one. In what is an unprecedented move in the Eurozone, Cyprus is planning to impose a tax on bank accounts as part of an agreement to be bailed out by the European Union.

Those who have under 100,000 euros in their accounts will be taxed 6.75%, while those above that figure will be taxed almost 10%.

Technically, the depositors do not lose the money, but would gain shares in banks guaranteed by future natural-gas revenues - not a very good guarantee at all, given how incompetent the Cyprus government has been to date.

People are outraged: wouldn't you be, if you were to lose 10% of all your bank savings because your government had to be bailed out by foreigners?

The banks were closed, and at the time this is being written, nothing has been finalized. In the meantime, citizens have hit the ATM machines and emptied them out in an effort to get as much money out of the banks as possible. Regardless of the outcome, this should send up yet another red flag for all Americans, even if this is happening on the other side of the world.

The underlying problem is worldwide. For decades, politicians have been spending more money than their governments have taken in, and the bills are piling up at an ever-increasing rate. These bills are now coming due, and basically they have reached their credit limit. As a result, central banks are simply printing money to pay the bills. Governments are desperate to generate revenue because they know the citizens will riot and throw them out of office if they try to cut social spending. The riots we are seeing in Europe are certainly a preview of things to come. They would rather rob from the working class than face the real spending issues that need to be addressed.

Why Should I Be Worried?

A friend recently used an interesting analogy to try to explain the Cyprus situation. He said, suppose the state of North Dakota could not pay its bills and the federal government got tired of bailing them out. Finally they said, "Enough is enough," and simply decided to impose a tax on all money in North Dakota bank accounts. If you don't live in North Dakota, what's the big deal?

While you may want to exit the country, you are still a US citizen and all your income is taxable, no matter where in the world you live. Should you decide to give up your citizenship, you may do so; however, you must pay an exit tax.

There are many websites that explain the exit tax - here's one of them. Here is a general summary:

The exit tax was modified significantly in 2008 and now presents a serious problem for potential expatriates whose net worth exceeds $2 million (or whose annual tax liability exceeds prescribed thresholds) as the tax liability is triggered by a mark-to-market artificial tax event.

You are deemed to have sold all your property, yes even personal property, and liquidated in full all retirement plans - all on the day before the legal expatriating event.

My concern is not the fine-print details of the law, but rather the concept behind it. Just whose money is it anyway? Is it our money that we earned through our hard work and efforts, or are we just temporary custodians of the government's money?

It Couldn't Happen Here in the US, Could It?

I'm sure most of us recall the discussions taking place in 2010 where the government was investigating the possibility of requiring IRAs to hold a certain amount of US Treasury debt. Here is one excerpt:

Bloomberg reported Friday that Assistant Labor Secretary Phyllis C. Borzi and Deputy Assistant Treasury Mark Iwry are planning to stage a public comment period before implementing regulations that would require private investors to structure IRA and 401(k) accounts into what could amount to a U.S. Treasury debt-backed government annuity.

CNBC's Rick Santelli broadcast the rumor the same day from the trading floor during CNBC's "Power Lunch" show.

Spokesmen from both the U.S. Treasury and Department of Labor confirmed to WND that the federal agencies are about to enter a pre-regulation public comment phase on the proposed rule change.

So tell me again. The government of Cyprus wants to take money out of people's bank accounts without their consent to pay their bills. The money will be replaced with risky shares in banks guaranteed by future natural-gas revenues. Our Marin Katusa says it is a very poor guarantee given how incompetent the government has been to date.

Our government, also in debt, has already discussed tapping into everyone's retirement accounts, taking out our (risky) investments in some of the finest, best-run businesses in the world and replacing a portion of them with government-backed IOUs. Perhaps we could also add the same comment, "... it is a very poor guarantee given how incompetent the government has been to date."

At the time this is written, this is purely in the discussion stage and nothing has been decided. There has also been no meaningful discussion about reducing spending. That means we will soon be faced with another crisis down the road. Should the politicians get away with this theft, it will continue. I'm sure we have all heard that once you start stealing, it gets easier each successive time. I recall one hardened criminal on a TV show go so far as to say, "You steal often enough, the guilt goes away." I doubt that politicians have much of a problem with guilt.

It is no wonder that on Monday, March 18 in the Casey Daily Dispatch, the metals team reported:

".....while ETF holdings are declining, the physical market is seeing robust support. In fact, the US Mint - the bellwether for measuring demand of physical gold in the Western world - reports that sales of gold and silver coins are soaring.

We Have Come a Long Way, Baby

How many more clues do we need? When we signed up for Social Security, receiving a check was no longer an option, it had to be direct deposited. What the government puts in, they can just as easily take out.

It sure looks to me like the lessons of our youth have now become totally reversed. You put your money in the bank because it was safe, you didn't want to get robbed. Additionally, it was protected by the federal government. Now the banks are no longer safe, and we are concerned about being robbed by the federal government.

I suspect sales of PVC pipe are also soaring. If you buy the right size, you can store a whole lot of gold and silver coins in them. Are we as a nation reverting to the days of old Europe where we must hide our wealth from the taxman?

We better be very concerned about the events in Cyprus, regardless of how they turn out. If our politicians think they can continue to rob the working class in new and creative ways, they certainly will.

Friday Funnies

This first entry is technically not funny, in fact, it is quite unfunny. But I sure found it interesting that a poster commissioned by the European Union, designed as a politically correct call for unity, dropped the old hammer and sickle at the top of the star. And, yes, the poster is real and not some Internet hoax.

Sequestration on Saturday Night Live

A really funny skit - here's the link.

Funny Commercial on the Value of Paper

Until next time, thanks for reading and for being a subscriber to a Casey Research publication.

David Galland
Managing Director
Casey Research