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 gone down.

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 to you.

·         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 system.

·         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 Zimbabwe today.

·         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 money.

There actually 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 Constitution;

·         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 currency;

·         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.

Unfortunately, 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 as well.

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 invest.

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 stop growing.

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 following:

·         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.

Anyway, that's 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.