The Laws of
Economics Are Stubborn Things – Asset Protection in Hard Economic Times
May 5, 2009
I was recently
asked whether, after its first 100 days in office, I believe that the new
administration is honest or corrupt, and whether I supported our new overlords
in Washington and their efforts to “turn things around” economically. I’ve been
asked variants of that same question ever since Barack Obama’s election,
generally with the addition about whether I think that asset protection –
particularly offshore asset protection – will survive the next four (or eight)
years. My reply is that this is the wrong question. My observations follow.
I am willing to
give Barack Obama the benefit of whatever doubt there may be about his integrity
and his intentions – at least for the time being. He is certainly smarter than
his predecessor, and is certainly able to say the seemingly right thing at the
seemingly right time. This is not necessarily a sign that he's not corrupt, of
course. Bill Clinton, who I believe was corrupt in the sense that you couldn't
trust that he had any overriding principles, personal or political, was also
smart and articulate. That having been said, I think that the question of
whether Obama is actually corrupt may actually be of little relevance to the
overriding question of whether he and his administration are heading in the
wrong direction. In my view, the question of which direction the country is
headed in has huge relevance to whether one's assets can be protected, and how.
As far as asset
protection is concerned, I believe that it is vital that one be aware of certain
immutable economic truths – things that are true whether they are consistent
with one's particular political prejudices or not. For example, after some
serious reflection, I think that the following are fairly self-evident:
The laws of supply and demand can’t be broken. They exist whether
we want them to or not – like the law of gravity. The more supply of something,
the lower its value will be relative to something of scarcer supply. The more
demand there is for something, the higher price it can require for its payment.
If there are 50 people who want “Guitar Hero,” but only 25 available, a seller
can command a higher price for the game than if there are 500 available.
In order for an exchange system to work, it has to be based on
relative tangible values. For example, if you have a car that you want to get
rid of that I want and I have an electric generator that I want to get rid of
that you want, we can trade them because the tangible items have value to us …
in fact, each side to the transaction comes away a winner – he’s gotten
something he wants in exchange for something he doesn’t want.
In order for a monetary system to be stable, it has to be linked
to something of tangible value. Over the years, that “thing” has varied. In
Holland in the 1600s, for example, tulip bulbs were the tangible “things” that
had value … at least for a while. In primitive cultures, it might be shells.
Over the millennia of human existence, the things that have maintained a
universal tangible value have been precious metals – especially gold and silver.
If money isn’t linked to something of tangible value, its worth
can be manipulated by whoever happens to be in charge of producing the money.
If, for example, there are more “silver certificate” notes than there are silver
ounces that they can be exchanged for, the value of each note goes down. If
whoever is producing the notes decides to keep on printing them without any more
backing for them, the worth of each note goes down – more notes are required to
exchange for an ounce of silver – and “inflation” occurs. The price goes up
because the money’s value relative to the tangible asset that it’s linked to has
Now, add to
those the following practical principles:
If you borrow more money than you can pay back, your creditors
will eventually get really angry at you and stop lending to you. Your credit
will be shot. You can’t borrow your way through life indefinitely.
You can only keep borrowing so long as someone is willing to lend
If you are going to live a happy and responsible life, you need
to earn more than you spend, save some money, and don’t borrow any more than you
can afford to pay back.
These laws apply just as uniformly to large groups of people, to
companies and to governments as they do to individuals. You can’t change them by
trying to vote your way out of them anymore than you can change the law of
gravity by taking a majority vote.
Now, tied to
these basic laws are some lessons of history, in which the following can be
demonstrated fairly convincingly:
A free market is more efficient and provides more freedom and the
ability for each individual to reach his goals than does any other economic
Some government is necessary in order to maintain smooth human
relations in any society.
Government is nothing more than a fiction that people agree on.
It does not exist in a vacuum.
The power of all government is ultimately based on deadly force.
The less government intervenes in the free market, the better and
more efficiently it functions.
Governments that are based on the principle that a group of
people have no more intrinsic right to control people than an individual has to
control another person tend to have more freedom and economic efficiency than
governments based on the principle that groups have a right to control people
that individuals do not have.
Governments that are based on the principle that people are born
with certain “inalienable” rights – to life, liberty, property and the freedom
to pursue happiness in a way that does not infringe on other people’s
“inalienable” rights, are far more efficient and free than governments that are
based on the principle that rights are granted to people by government and can
be taken away by government.
When governments get into the business of spending money for the
“social welfare,” whether occasioned by war or by trying to provide social
benefits for the populace, distortions in the marketplace occur, which result in
inefficiencies. When a government borrows money, it must repay that money
promptly to restore equilibrium. When the government tries to restore balance
not through repayment of debt, but by simply printing more money that there is
no backing for, inflation occurs; when the process gets out of control,
hyperinflation occurs – which is what has happened in Germany in the 1920s, in
Brazil in the 1970s and '80s (and which I saw close up and personal), and in
No economy can sustain itself long-term unless somebody actually
MAKES something. A production economy is the only one that can sustain itself.
If I agree to mow your lawn in exchange for you agreeing to cut my hair, we can
move money around, but nothing of substantive value is produced and there can be
no long-term national economic growth based entirely on the provision of
services. In order for a national economy to grow and survive, something has to
be produced – whether industrial, agricultural or otherwise. If you move your
production base out of your country – or if, for some reason, you simply stop
producing (due to political or other concerns, such as capping oil wells because
of environmental concerns), a decline in overall prosperity inevitably occurs.
Government produces nothing of ultimate economic value. By its
nature, government can only regulate. Sometimes these regulations can be
helpful, such as a court system that can arbitrate contractual disputes or a
police force that can prevent or resolve criminal acts. More often, the
regulations hinder, rather than help, the overall economy.
Based on the
above, it is fairly simple to see whether the government is headed in the right
direction. If we are trying to borrow our way out of debt, we're going to be
headed for trouble, and our assets are going to be in jeopardy. If we are trying
to produce, save and earn, we'll be headed in a different direction. The
so-called "stimulus" seems to me to be simply a way for us to increase our
credit limit, borrow more money and then live it up until the next round of
bills comes due. When they do (and they will, since no one, not even the Chinese
or the Arabs, will be willing to continue to lend endless supplies of money to
the U.S. without eventually wanting to get paid back), the current crisis will
seem like a Sunday School picnic. Thus, whenever I hear the pundits talking
about how things are going to turn around any time now, I remember a client of
mine, whose business "turned around" temporarily while he burned through an
inheritance he had unexpectedly come into. He was able to live the high life –
at least for a while – on his newly-found money (and new loans that he'd managed
to finagle on the promise that he was good for the repayment). The "turn around"
lasted until the money ran out, and then there was hell (and all manner of
creditors) to pay. He hasn't dug himself out of his economic hole yet, and I
doubt that he ever will. He's certainly looking at a long road before he's ever
able to reach the standard of living he had while he was living on borrowed
is a political system that works fairly well and efficiently, or at least better
than any other that has ever been proposed – at least it has in the few times
it's actually been tried and stuck to. It's based on some fundamental principles
a bunch of dead white guys came up with in 1787. The principles were fairly
simple. Codified in our original Constitution, the system:
Recognized and protected the right of individuals to contract
with each other on terms that they decided on, without government interference –
in fact, the sanctity of contract was recognized and enshrined in the
Recognized and protected the right of individuals to practice
whatever religion they wanted, no matter how weird, or, for that matter, no
religion at all;
Recognized that only silver and gold should be legal tender for
the payment of debts, since they had intrinsic value and gave stability to the
Severely limited the federal government’s ability to use any
governmental power to accomplish very limited functions;
Reserved to the states all of the powers that were not
specifically given in the Constitution to the federal government;
Recognized and protected individuals to enjoy all of the rights
with which they were naturally endowed as the result of being human beings --
life, liberty and property;
Recognized that limited government would better protect the
rights of individuals than large and intrusive government.
the days of giving the U.S. constitution anything more than lip service while we
pursue our own wild agendas have long since passed. As a society and as a
people, we honor the constitution far more in the breach than in adherence to
its form or its substance.
About four or
five years ago, I started thinking seriously about which direction the U.S.
economy was heading, mostly in response to an inquiry from a couple of foreign
clients about whether they would be well-advised to invest money in the States –
in particular the U.S. stock market, in U.S. real estate and U.S.-based mutual
funds. I'm not a financial adviser by trade, and, frankly, I found that when I
spoke with my friends who were financial advisers, they were far more interested
in pushing some particular stock or insurance product or real estate development
than they were at looking at the U.S. economy from any kind of "macro"
perspective. My approach was a little different than was that of my broker
friends ... I wanted more to figure out whether the foundations of the economy
were solid enough that I could in good conscience recommend that my
international clients put their money here. I looked at government statistics, a
lot of popular analysts, and a lot of financial projections. As I mentioned, I'm
certainly not a planner or an economist, and so I had to sort of go with my gut
After all of
that, it seemed to me that the following was occurring:
Because of governmental interference in the marketplace, there
was an economic “bubble” in the stock market, the housing market, the financial
instruments market, the insurance market and other markets - much as there had
been in the dot-com boom. Prices of stocks and real estate didn't seem to have
any correlation to anything productive. For example, stock prices didn't seem to
have much relationship to dividends, and housing prices didn't seem to have much
relationship to the amount that a house would rent for. (In fact, rents were
sometimes less than half of a house payment on an identical sized house, meaning
that an investment in a house couldn't produce a positive cash flow on the
market ... something that made little sense to me from an investment standpoint;
the only way you could make money was to hope to "flip" the property to someone
who would lose even more money from a cash flow perspective, relatively
speaking, because while his monthly mortgage payment would be higher than yours,
his return from rent would be the same as yours had been). It seemed clear to me
that something – maybe everything – was going to crash.
There was an obvious imbalance between the availability of goods
and property in the United States and the ability of consumers to pay for them.
American consumers were purchasing more and bigger houses, more and bigger cars,
more and bigger televisions and more and bigger everything, without any
increases in production in the United States. Obviously, the boom was being
financed through debt that couldn’t be repaid. There would be a day of reckoning
and it wouldn’t be pretty. The banks would tighten credit; businesses would
close; people would lose their jobs and their homes; prices would increase;
strikes would ensue; civil unrest would start and could get serious; the
possibility of a police state was a real threat.
The government had somehow borrowed far more than it had
resources to pay back – from the financing of an unsustainable,
unconstitutional, undeclared and immoral war in Iraq to promises of so-called
“entitlement programs” that it couldn’t possibly afford;
The national debt was greater than the combined national
production – the country was functionally bankrupt;
There was no plan in place to balance things back – higher taxes,
spending cuts, nothing but a series of “economic stimulus” proposals that
involved essentially printing unbacked money.
There was no economically feasible “cure” to the recession that
had been caused by the imbalance … certainly not more government intervention,
which had caused the imbalance in the first place. The oncoming recession WAS
the cure. If not allowed to run its course, it could evolve into a full-scale
inflationary depression, the effects of which would be devastating for years.
In the end, I
politely but firmly told my international clients that I thought that the
American economy was going to take a dive, and that they would be well-advised
to wait until prices crashed before they brought their money into the U.S. to
I wish I could
say that I was somehow brilliantly prescient in this regard, but I don't think
so. I think that anyone who looks at our situation with cold, clear analytical
eyes will see that the mess we're in was entirely predictable and entirely
avoidable. The problem is that the so-called "cure" for our problems appears to
be more of the same - more borrowing, more deficits, more government
intervention in the marketplace, and ultimately more instability. The oncoming
disaster that is going to follow the "turnaround" is also entirely predictable
and avoidable. It won't be avoided, however, because our capacity for delusion
appears to overpower our logic and our objectivity every time. We somehow think
that if we just wish hard enough, things will magically get better. Meanwhile,
the U.S. still isn't producing anything more than it did before, Americans
aren't saving any more than they did, and instead of working to get out from
under their debts, Americans are simply declaring bankruptcy in breathtaking
numbers. Nothing fundamental has changed that should give anyone hope that we
can pull out of the mess. In fact, the "stimulus" has put the country into a
deeper hole than it has ever been in its history. And maybe I'm being naive, but
it seems to me that you don't get OUT of a hole by digging deeper into it.
Somewhere along the line, you have to stop digging.
In this regard,
I'm reminded of a friend of mine who, when he was diagnosed with cancer, decided
that chemotherapy, surgery and radiation were going to be too hard and too
expensive. He told me that he simply "didn't believe" in such things, and gave
me a rant about how the medical system in the U.S. was part of a massive
conspiracy to actually keep people sick instead of cure them. Instead of
following his doctor's advice, he opted for a dietary program and injections of
Laetrile (a "remedy" made from apricot pits). Every time I saw him after that,
he told me how much better he felt, and how well he was getting (despite the
fact that he looked worse and worse every time I ran into him). He felt great up
until the day he dropped over dead from the cancer that had eaten his entire
body. His ability to delude himself was impressive ... unfortunately; neither he
nor anyone else was able through force of delusion to convince the cancer to
The same applies
to us, I think. The relevant question is thus not so much whether Obama is a
good and honest man (as I presume that he is), but whether even the best of
intentions can somehow defy the laws of economic reality. (Or, put another way,
can even the best person you know defy the law of gravity?). In my view, things
won't turn around until there is a truly sound economic plan in place that is
based on true principles. It would require that the government engage in the
Balancing the governmental budget, in the same way that you and I
have to balance our own personal budgets or our business’ budgets. That means
cutting spending on things we can’t afford – such as a worldwide American
military empire, as well as “entitlement programs” that are neither authorized
nor even contemplated in the Constitution. It also means not borrowing any more
money, since that would only make the economic crisis worse and not better.
Trying to return the economy to one that is based on value rather
than debt. On a personal level, of course, that means having my bottom line
based on something other than a lot of promises. On a governmental level, it
means having our currency backed by gold and silver, the standard provided for
in the Constitution. It also means that the United States Congress undertake its
responsibility to manage the country’s economy on Constitutional grounds, and
not hand over the country’s economic fate to a non-elected, non-audited,
non-accountable private bank, the Federal Reserve (which is no more “federal”
than Federal Express is).
Pushing to severely limit the government’s involvement in the
marketplace. There are a couple of reasons for this. The most obvious is that
the government distorts the marketplace and causes more problems than it solves.
When it robs Peter to pay Paul, it provides a disincentive for both Peter and
Paul to continue to work – Peter, because the fruits of his labors are being
forced from him, and Paul, because he has no reason to buy the cow when the milk
is free. (Although it should be pointed out that the government can always count
on Paul’s vote in such a situation, and that there are always a lot more Pauls
than there are Peters). For example, when government gives a tax break to
Wal-Mart to situate its superstore in its town, it distorts the marketplace and
puts Wal-Mart in a much better position than, say, Joe’s Mart, which doesn’t get
the same advantage. Joe’s is going to die and Wal-Mart will prosper, not
because Joe’s is a worse store, but because Joe simply can’t compete against
both Wal-Mart and the government.
Engage in a policy of non-intervention and peace. Not only can
the United States not afford to be the world’s military nanny, but it is
prohibited by the Constitution from doing so, unless the people have been
consulted and an actual declaration of war passed … the last of which occurred
in World War II.
I'm not holding
my breath for these principles to be adopted any time soon ... or at least not
until the next round of "economic stimuli" have failed and we're staring down
the wrong end of a depressionary gun barrel. It will take a lot more
self-discipline than most Americans - and certainly most American politicians -
have, to figuratively cut up the credit card and start not only living within
our national means, but also paying down our debt. Nobody who depends on the
popular vote for his paycheck is going to be the guy who stands at the
Presidential podium and says, "We're sorry ... we can't afford all that stuff we
promised you." Nobody wants to hear that. At least, I think I'm not alone in
getting a little testy if somebody (usually my wife) reminds me that I have to
actually stop buying stuff I can't afford, and saving the money before I buy
something. We would all much rather vote for the guy who’ll tell us what we
want to hear than the hard and difficult truth.
I hope that
things will eventually recover, but I don't think it will happen until there has
been a painful sea change in our thinking, our expectations and our standard of
living. It won't be pleasant.
In the meantime,
those who would truly wish to safeguard their assets are going to have to face
some hard realities. As the government becomes more and more broke, and as its
credit becomes essentially worthless in the world market, it's going to squeeze
Americans harder and harder. As those who have lost their jobs and their houses
and their hope become less and less able to fend for themselves, they will look
more and more to grab what they can from those whose assets appear to be
available. Asset protection will be more and more important, and fewer and fewer
will have any clue as to what to do and how to do it.
the way I see it.
Randall K. Edwards,
former chief deputy City Attorney in Reno, Nevada,
practices law in Utah, Nevada, Arizona and
California from his office in Salt Lake City, Utah.