Please Don't Shoot the Messengers

When a doctor delivers an unwelcome prognosis, one may seek a second opinion, but attempts to disparage or discredit the physician would not be a logical response.

A select few individuals have stepped into the spotlight by speaking their minds about the global financial crisis, a troubling outlook for the U.S. economy, and the impaired condition of the fiat U.S. dollar. Despite the bravery they exhibit by sticking to unpopular opinions just as the masses grow hungrier for green shoots and mustard seeds, these bearers of frightening forecasts are often battered by detractors.

The time has come to stop shooting the messengers. I suggest a Foolish approach, where diverse perspectives are weighed on the merits of evidence in a spirit of mutual respect. To get started, I've selected three individuals with timely and compelling economic forecasts. Peter Schiff, Jim Rogers, and Jim Sinclair have each communicated their holistic perspectives, and all three have absorbed negative responses as a result of their views.

Peter Schiff
Fools will recall Schiff's many guest appearances on cable news outlets just as rifts in the housing market were beginning to materialize. Famously, as pundits sought to ridicule his dire forecasts, Schiff turned out to be absolutely correct about the unsustainable nature of America's debt-fueled consumption. In August 2006, Schiff advised that "rather than the recession being resisted, it should really be embraced, because the disease is all this debt-financed consumption."

After the indiscriminate sell-off in global equities and the collapse of commodity prices that defined the second half of 2008, Schiff's detractors mounted an offensive. When punishing declines hit shares like BHP Billiton (NYSE: BHP  ) and China's CNOOC (NYSE: CEO  ) , blogger Mike "Mish" Shedlock declared the decoupling theory debunked. Undeterred, Schiff replied that it would "take time for the world to realize that what had been decoupled from the economic train was not the engine but the caboose." I believe Schiff is right, and I have been busily documenting a range of re-emerging indicators that the decoupling debate is far from over.

What is Schiff saying now? He sees the present rally as a mirage, opining that the "premature conclusion ... that the crash of 2008/2009 is now a fading memory, is just as delusional as [the] failure to see it coming in the first place." On the massive fiscal response to the crisis, he believes that: "By throwing money at the problem, all the government is creating is inflation. Although this can often look like growth, it is no more capable of creating wealth than a hall of mirrors is capable of creating people." As much as I'd love to believe otherwise, I share Schiff's view that the entire reflation strategy is fundamentally unsound.

Jim Rogers
The legendary adventure capitalist and co-founder of the Quantum Fund shares Schiff's disdain for the reflation strategy. In March 2008, Rogers cautioned CNBC viewers that: "Inflation is not good for the world. A collapsing currency is not good for the world. It means worse recession in the end." When asked what his first two actions would be if he awoke in Ben Bernanke's shoes, he boldly replied: "I would abolish the Federal Reserve, and I would resign."

Where is Jim Rogers investing now? In December, I posted this Bloomberg interview to my CAPS blog, in which Rogers lamented: "I'm afraid that the U.S. dollar in our lifetimes is a terribly flawed and maybe even a doomed currency." He recommends exposure to commodities rather than "impaired" blue chips like Citigroup (NYSE: C  ) and General Motors (NYSE: GM  ) :

The fundamentals for Citibank are impaired. The fundamentals for General Motors are impaired. The only thing I know where the fundamentals are not impaired are commodities. In fact, the fundamentals for commodities are improved by what's happening.

Rogers' own commodity-focused index, tracked by the Market Vectors RVE Hard Assets Producers (NYSE: HAP  ) , offers heavy weightings in energy and agriculture, including familiar names like ExxonMobil (NYSE: XOM  ) and the resurgent PotashCorp (NYSE: POT  ) .

Jim Sinclair
Take it from a Fool who knows, those proposing exposure to gold as the ultimate safe haven from currency crises are no strangers to vitriolic opposition. Jim Sinclair, a leading precious-metals expert, has been forecasting $1,650 gold since 2001. Sinclair summarized some of the perspective that readers of his blog enjoy in a Bloomberg Radio interview on Feb. 20. The interview is too packed with golden nuggets to capture in selected passages, so instead I recommend a trip to my blog to discover the treasure yourself.

At this particular moment, when sheer human nature leaves investors susceptible to unchallenged optimism, I believe that insights from these straight-talking messengers provide a critical wake-up call. In tumultuous times, the line between hopefulness and denial can grow quite thin, and Fools are reminded to remain alert.

But enough about what I think. Tell me what you think in this Motley Fool Poll. Use the comments box below if you want to expand on your vote.

One advantage of our modern financial system is that investors can defend themselves against dollar weakness by looking abroad. The Motley Fool Global Gains newsletter team is constantly scouring the globe to identify investment opportunities, and they're ready to share their findings with you.

CNOOC is a Motley Fool Global Gains selection. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Christopher Barker thinks derivatives is a dirty word. He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns shares of BHP Billiton and CNOOC. The Motley Fool's disclosure policy has zero exposure to derivatives.


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  • Report this Comment On May 22, 2009, at 3:12 PM, niphtrique wrote:

    Yes they are right about things going wrong. But they never come up with a solution. However, it is possible to end the depression within a few months. I will explain this in the text below.

    Natural Money: The most efficient monetary system

    Introduction

    Natural money was the result of the discovery of the most efficient monetary system. The natural money monetary system will create an economy with constant economic growth at maximum potential that will destroy all other monetary systems in competition. Therefore the natural money monetary system will become the dominant monetary system in the world at some point in the future. Natural money has the following features:

    - a hoarding tax, which amounts to 0.5% to 1.0% a month;

    - a complete ban on usury, which is charging interest on money;

    - a money supply that is constant which only can be changed by a democratic vote;

    - a complete ban on credit, which is creating money out of nothing.

    History

    * Joseph in Egypt

    Money with a hoarding tax was already introduced by Joseph when he was viceroy of Egypt. When the pharaoh had dreams about seven fat cows being eaten by seven lean cows and seven full ears of corn being devoured by seven thin and blasted ears of corn, Joseph explained the dreams to the pharaoh. He told the pharao that seven good years would come and after that seven bad years would follow. Joseph advised the Egyptians to store food on a large scale. They followed his advise and built storehouses for food. In this way Egypt survived the seven years of scarcity.

    What is less known, because it is not recorded in The Bible, is that the storing of food resulted in a financial system. The historian Friedrich Preisigke discovered that the Egyptians used corn receipts for money. Farmers bringing in the food, got receipts for corn. Bakers who wanted to make bread, brought in the receipts, which could be exchanged for corn. It did not take long before the receipts where generally accepted as money. Because of the degradation of the corn and mice eating it, the value of the receipts was steadily decreasing. This enticed people to spend the money fast.

    The corn receipt system lasted for many centuries. It made sense to store food to provide for hard times. This currency remained in function in Egypt until it was replaced by the Roman currency during the late Ptolemaic period. The introduction of natural money may have enabled Egypt to remain a stable civilisation for another 1,500 years. The Egyptian civilisation lasted for more than 2,000 years, far longer than any civilisation ever.

    * The miracle of Wörgl

    There are a number of successful examples of the introduction of money with a hoarding tax. Wörgl is the best known example. During the Great Depression, the Austrian town of Wörgl made economic history by introducing a complimentary currency. The mayor Michael Unterguggenberger had a long list of projects he wanted to accomplish, but there was hardly any money with which to carry them out. Rather than spending the 40,000 Austrian schillings in the town’s coffers to start these projects off, he deposited them in a local savings bank as a guarantee to back the issue of a type of complimentary currency known as 'stamp scrip'. The Wörgl currency required a monthly stamp to be stuck on all the circulating notes for them to remain valid, amounting 1% of the each note’s value.

    Because nobody wanted to pay what was effectively a hoarding fee, everyone receiving the notes would spend them as fast as possible. The 40,000 schilling deposit allowed anyone to exchange scrip for 98 per cent of its value in schillings. This offer was rarely taken up though. Over the 13-month period the project ran, the council not only carried out all the intended works projects, but also built new houses, a reservoir, a ski jump, and a bridge.

    The key to its success was the fast circulation of scrip within the local economy, 14 times higher than the Schilling. This in turn increased trade, creating extra employment. At the time of the project, Wörgl was the only Austrian town to achieve full employment. Six neighbouring villages copied the system successfully. In January 1933, the project was replicated in the neighbouring city of Kirchbuhl, and in June 1933, two hundred Austrian townships were interested in adopting the idea. At this point the central bank panicked and decided to assert its monopoly rights by banning complimentary currencies. The people unsuccessfully sued the bank and later lost in the Austrian Supreme Court. It then became a criminal offence to issue 'emergency currency'.

    12 steps to freedom and wealth

    The natural money system brings freedom and wealth in 12 steps:

    1. Interest on money should be banned. Return on capital is a good thing, and should not be abolished.

    2. Raise a tax on money. This is not a tax on wealth, so shares, real estate and money lent, are not taxed.

    3. Do not create more money, so there will be no monetary inflation.

    4. Because there is a tax on money, people will soon use the money to invest, to consume or to lend without interest.

    5. Because on money lent, no interest may be charged:

    - money will only be lent to reliable people and companies.

    - less money will lent and more money will be directly invested in equities and real estate.

    6. Therefore there will never be an economic crisis, because money is spent directly and there are no bad loans.

    7. Because all money is directly used for investment or consumption, the economy grows steadily at maximum potential and there is full employment.

    8. The financial sector is largely superfluous. That is a good thing, because this sector produces nothing and destabilises the economy.

    9. Governments also need much less to interfere with the economy.

    10. As the economy grows constantly at maximum speed, and because no more money is created, prices will fall. Therefore loans with zero percent interest will have a return that is probably higher than the interest rate you will get at the bank now. The money lent will be worth more when the loan matures.

    11. If one country chooses to apply this system, it will attract capital from other countries since the return of loans with zero percent interest rate is higher than the yield on interest in other countries. Therefore, all other countries will need to do this, if one country has changed its money system in this way.

    12. Now everyone is free. There is no fear in the economy. There will always be work for employees and there will always be customers for viable businesses. Nobody is deeply in debt.

    Effects

    Using natural money all kinds of problems we face now can be solved easily. Natural money will have the following effects:

    - Natural money will save the earth and nature by promoting sustainable investment and recycling;

    - Natural money will free people and countries from debt slavery;

    - Natural money will end unemployment without government intervention;

    - Natural money will create a stable economy without crisis which does not need government or central bank intervention;

    - Natural money will end senseless economic activities in the money system which destroy the economy;

    - Natural money will result in a dramatic rise in government income which makes it easy to lower taxes and address all social problems in society;

    - Natural money economies will perform better than all other kinds of economies. This will attract investment capital, which forces all other economies to adapt the natural money system.

    Quotes

    Natural money is the most efficient type of free money. Silvio Gesell outlined the theory of free money in the Natural Economic Order. Many famous economists and scientists saw the enormous potential of free money:

    - "I thoroughly enjoyed Silvio Gesell's brilliant style. The creation of money that cannot be hoarded will lead to a different and more real kind of property."

    Professor Albert Einstein, Nobel Prize Winner

    - "Gesell's name will be a leading name in history once it has been disentangled."

    H.G. Wells

    - "The application of Gesell's principle of circulation of money will lead the nation out of the depression within two to three weeks. I am a humble student of this German-Argentine businessman."

    Professor Irving Fisher, Yale University, America's greatest economist

    - "I believe that the future will learn more from the spirit of Gesell than from that of Marx."

    John Maynard Keynes

    - "Gesell's work will initiate a new epoch in the history of mankind."

    Prof. Dr. B. Uhlemayr

    - "Gesell's discoveries and proposals are of the greatest importance for centuries to come."

    Dr. Theophil Christen, eminent mathematician and physicist, Berne

    More information

    The following information can be found on the Naturalmoney.org website:

    - More information about the current state of the economy can be found here: http://www.naturalmoney.org/howbad.html.

    - The natural money theory in detail can be found here: http://www.naturalmoney.org/full-theory.html.

    - A realistic conversion plan to the natural money economy can be found here: http://www.naturalmoney.org/conversionplan.html.

    - A plan for the future with natural money can be found here: http://www.naturalmoney.org/buildfuture.html.

  • Report this Comment On May 25, 2009, at 12:40 PM, MusoSpuso wrote:

    "Natural" money? Nice socialist euphemism.

    Schiff and others (Jim Rogers etc.) DO offer ways to fix the problem and its simple--return to true free markets.

    Before any of you start to ape the main stream nonsense that the "free market failed" let me point out that we haven't actually had a truly free market for a very long time, if ever really.

    What we've had over the past century or so (roughly) is a combination of corporatism, socialism and fascism-lite; NOT free markets.

    A simple refutation of the "natural" money system is the modern theory of value. To "ban" usury or interest is to put an artificial price ceiling on money or to put it another way, treat money as if it had no value and therefore take away the incentive for exchange. As Rothbard pointed out, money is simply another commodity. To treat it differently (central bank interest manipulation or banning interest completely for example...) is to invite total disaster. Perhaps not immediately but inevitably in the long run as is playing out now in stark reality.

    Here's another entertaining bit of absuridity:"The destruction of capital also results in a destruction of wealth". Good grief. Capital cannot be destroyed, it can only be re-allocated. There's also some basic physics in there for ya. When a company goes bankrupt, it isn't a horrible disaster--the capital is re-allocated to competent business people away from incompetent business people (probably some subscribing to "natural" money for example).

    Time to go back to econ 101 please. And since you like suggestions on how to fix a problem here's a place to start:

    Economics in One Lesson

    What Has the Government Done with Our Money?

    Wealth of Nations (ignoring the outdated labor theory of value)

    Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse

    fee.org and mises.org are also good places to start.

    Your welcome.

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