Responsible Investing in an Irresponsible World

Not so long ago the idea of negative interest rates seemed absurd. Now, as The New York Times reports, over $7 trillion in debt the world over make lenders yield instead of the other way around. But negative rates haven’t stimulated anything but the occasional bubble.  What monetary treachery do the money mandarins have up their sleeves beyond creating enormous amounts of central bank credit and driving rates underwater?

It’s those large bills that are the problem says Larry Summers. Benjamins and the 500 euro note make the world a more dangerous place.  “The fact that — as [Peter] Sands points out — in certain circles the 500 euro note is known as the ‘Bin Laden’ confirms the arguments against it,” Summers wrote in the Washington Post.

The “crime” that has Summers crying foul is hoarding. “Hoarding behavior demands intervention when it causes clinically significant distress for a person, or impairment in his or her social or occupational functioning. Governmental authorities may step in when the hoarding behavior endangers the health and safety of the hoarder and others in the community,” writes Nisan Steinberg, Ph.D., JD, who specializes on dementia- and psychosis-related issues and their intersection with the law.  Austrian School for In... Rahim Taghizadegan, Ro... Best Price: $24.68 Buy New $31.24 (as of 05:20 EDT - Details)

Keeping cash under your mattress or stuffed in a coffee can at the back of your freezer seems downright sensible given where rates are. It is central bankers who are psychotic for demanding that money be in bank deposits so it may be lent out and multiplied upon their command. Are we all to emulate the amenable Swedes who intend to go cashless in five years?

Amidst this craziness is a book on investing that tells readers, “Hoarding of money is the first aspect of a long-term investment strategy.” The authors go on to write, “the Austrian School defends its economic necessity.”

Austrian School for Investors: Austrian Investing between Inflation and Deflation is the book devotees of the Austrian school of economics have been waiting for. Elegantly written by Rahim Taghizadegan, Ronald Stöferle, Mark Valek, and Heinz Blasnik, Austrian School for Investors answers the question many Austrians have; “how can I make money from this madness, or, at least, protect myself?”  And if you don’t have a nickel to invest and just want an enjoyable economics read, this book works for that as well.

Unlike typical investment books, the authors provide a foundation for an investment and life strategy with Austrian theory.  For example, a lengthy chapter asking the question “What is Money?” is answered with the work of Carl Menger, Ludwig von Mises, and William Stanley Jevons.  But the authors don’t pretend we’re still on the gold standard or going back to it. Another chapter is devoted to paper money and near the end, Taghizadegan, et. al, provide a solid section on digital cirrencies.

The results of central banking like those of any central planning is to make a mess of things. Yellen, Draghi, and Kuroda desperately want to raise our collective time preference nudging us to consume and take more risk to jumpstart a stagnant, debt-sodden world economy.

The authors urge the opposite: save, keep liquidity, and think slow and long-term. They make the interesting, and very true, observation, “Anyone who has made five good investment decisions throughout his life has already been blessed with a lot of luck.”

Many believe investment pros bat a thousand with their picks. The fact is, most of their picks are losers. Investment gurus publicize a couple of fortunate selections they’ve made, create a reputation, get on TV, and then look to cash in by managing funds or selling newsletters, enticing the investing hoi polloi into following their lead, often to the amatuer investors’ detriment.  Be careful taking the advice of investment gurus that are constantly on TV or in print. We’ve never heard of the real pros because “good investors should not seek publicity.”

Meanwhile, government, in what is called financial repression, directs bank and insurance companies to purchase government debt. While this serves the state, it misdirects capital, as the authors point out, “into politically desired channels.”  But, like anything else, there are diminishing returns from debt financing.

When the Fed raised the Fed funds rate a few months ago, what wasn’t noticed was the Fed’s increase from 25basis points to 50 basis points (bps)  in the rate it pays banks on excess reserves held at the Fed. If one wonders why the authors explain. It was thought that to raise the funds rate just 25bps, the central bank would have to drain millions from its balance sheet, likely creating a severe recession. Instead, “Paying interest on excess reserves allows the Fed to circumvent this problem: it can now hike the Federal Funds rate, as long as it increases the rate paid on excess reserves in tandem, without having to reduce its balance sheet.”

The Fed has the plan to stay in the bubble making business even while raising rates. A friend who works in the financial services industry spoke with a low-level Fed employee who said the central bank expects to pay 2 percent or more on excess reserves in the coming years.  “It can be assumed as a virtual certainty that the Fed will never actively shrink the money supply,” Taghizadegan, Stöferle, Valek, and Blasnik predict.

With European authors and mises.at being the publisher, the book is by no means U.S.-centric and addresses more than investment choices. To embrace the Austrian view includes value- oriented consumption and value-oriented endowment. The “Austrian School calls on individuals to shape their lives in a more conscious fashion: to deal with life carefully and appreciatively.”

Of course, the Austrian Business Cycle is highlighted, along with The Skyscraper Index, stagflation, hyperinflation, and hyper deflation. Harry Browne’s Permanent Portfolio is prominently featured and as you would expect, the authors appreciate the marketability of precious metals and see bonds as a bubble. But, as Austrians, the authors know the future is uncertain. To think otherwise makes one “either a fool or a scammer.”

There are plenty of those, as Zero Hedge reports, “One of the core aspects of mainstream financial media in general, and outlets like CNBC in particular, more so even than their chronic permabullish bias, is the seemingly endless gallery of ‘experts’, ‘pundits’, and other talking heads whose only requirement is wearing a business suit (in some very notable exceptions) who show up on TV, offer trade advice and recommendations – while either pitching their own trading services or hoping to offload their own existing positions  – and if (or rather when) said advice leads to material losses are not heard from again until a certain period of time passes, and those who suffered listening to said ‘experts’ have moved on, at which point the farce repeats itself.”

If you seek speculative plays to make you millions, this is not the book to read. The authors of Austrian School for Investors have a much more important goal: to make the reader “more sober, steadfast and responsible.”

That’s the only way to survive in a world ruled by irresponsible central bankers creating money and instability with drunken abandon.