“Capitalism is dying.” — Marxist economist Michael Harrington, “The Twilight of Capitalism” (1977)
“The bottom line is that the Reagan program is all talk and no action.” — Austrian economist Murray Rothbard (1981)
Last month, my wife Jo Ann and I were privileged to be the first guests on the new Tom Woods School of Life program, doing a two-part series on “personal finance.”
We emphasized the three basic steps to financial independence: Save regularly, live within your budget and invest wisely. If only the government would do the same!
The Triumph of the Optimists
The second half of the program was on investing wisely. We recommended investing in stocks, bonds, real estate and some gold as a hedge against inflation.
We said that most liquid assets should be invested in the U.S. stock market, which has outperformed all other country funds over the past 120 years — American exceptionalism is alive and well.
Enter the Prophets of Doom and Gloom
The series ended with a debate about the future of the world and whether the country was headed toward disaster and a stock market crash. Quite a few viewers were convinced that our best days were behind us, and we were headed for disaster due to excessive debt and spendthrift policies.
Many of Tom Woods’ followers are students of Austrian economics, the school founded by Ludwig von Mises and Friedrich Hayek, both of whom left Austria during World War II and settled in the United States.
Both Mises and Hayek became famous for predicting the stock market crash of 1929 and the Great Depression of the 1930s.
Ever since then, each new generation of Austrian economists tends to be pessimistic, arguing that any economic boom is artificial and unsustainable and must inevitably collapse. For example, Murray Rothbard was highly critical of the Reagan era. He was never convinced that we were in a long-term economic recovery characterized by a 40-year period of low inflation and low interest rates.
Over my career, there have always been a remarkably high number of doomsayers among us, what Wall Street calls “bears” and what Ben Franklin called “croakers.”
All my life, I’ve heard their warnings that the sky is falling, that we are headed for bankruptcy, runaway inflation, World War III, a pandemic, a breakdown in society and riots in the streets. Yet, despite economic depressions, world wars, inflation, pandemics, unfunded liabilities and excessive taxation, we seem to have managed to survive and even prosper.
You can only cry wolf so many times before people become jaded.
Last week, I heard a veteran on Wall Street (Art Cashin, a floor trader on the New York Stock Exchange for UBS) say it best: “Never bet on the end of the world. It only comes once, which is pretty long odds.”
I plan to add this quotation to the next edition of “The Maxims of Wall Street” under the section, “Doomsayers and Cassandras.” (p. 112-113)
The following quotation by J. Paul Getty is already in the “Maxims” book: “Businessmen can profit handsomely if they will disregard the pessimistic auguries of self-appointed prophets of doom.” (p. 112)
Over the years, I’ve collected a bunch of books written by prophets of doom, including Howard Ruff’s “How to Profit from the Coming Bad Year.” It was published in 1980, right before Ronald Reagan was elected and turned the bad years into good years.
‘Reaganomics Will Work!’
I well remember speaking at the New Orleans Gold Conference in 1980, right after Reagan was elected president. My friend Gary North and I held back-to-back sessions into the night. They were so crowded that my wife, Jo Ann, had to issue tickets.
The Reagan election was a watershed event in American history and meant a reversal of the destructive policies of the past. I wrote my first promotion for my newsletter, Forecasts & Strategies, with the headline “The Financial Shock of 1981.” Inside the envelope, there was a paper which said, “Reaganomics Will Work — Sell Your Gold and Silver and Buy Stocks and Bonds!”
Despite the accuracy of my prediction (gold and silver floundered for 20 years, while stocks and bonds enjoyed a 40-year run), the promotion bombed. Nobody believed it in 1981.
In fact, at the New Orleans Investment Conference, the gold bugs strongly disagreed, including Jim Blanchard. They thought nothing had changed and that inflation would continue to rage. Even my friend Gary North was skeptical and joined forces with Howard Ruff to predict a financial Armageddon. (Gary passed away last week at the age of 80. You can see my tribute to him at https://mskousen.com/2022/02/gary-north-r-i-p/).
Austrians vs. Marxists
Austrian economists are, in large measure, the opposite of the Marxists. Austrians believe in free markets, limited government and the invisible hand, while Marxists condemn capitalism as exploitive and socially unjust. For them, the invisible hand is actually the iron fist of exploitation.
Yet, in one way, they are alike: Both schools are pessimistic about the future, although for different reasons. Marxists are convinced that capitalism is inherently unstable and crisis-prone and is thus in its last days. Eventually, capitalism will run out of markets, profits will decline, inequality will grow and the system will collapse, the Marxists say. “The Twilight of Capitalism” is their favorite book title.
Austrians believe that the government, especially central banks, engage in easy-money policies that cause inflationary booms. But the booms cannot last, and eventually interest rates rise and turn the inflationary boom into a deflationary bust. The government then intervenes and grows bigger and bigger. Eventually, it must all come crashing down due to excessive debt and unfunded liabilities.
Armageddon Has Been Postponed…
And yet, Armageddon has once again been postponed, year after year, decade after decade. For those who stocked up on gold and silver coins, as well as survival food, it’s been a lost generation. They have missed out on a golden age of investing in the stock and bond markets.
I’m one of the few Austrian economists who believes that the inflationary boom phrase can last longer than anyone can predict, and I therefore have profited handsomely from the “Mother of All Bull Markets” over the past 10 years. I am still fully invested.
Your editor on CNBC with Rick Santelli on December 7, 2017.
Don’t get me wrong. Bull markets are not guaranteed. Runaway inflation and collapses can and do occur around the world when bad policies are pursued — witness what has happened in Venezuela.
American exceptionalism has worked because the United States is still largely a free-market capitalist society that encourages entrepreneurship. But beware, the year that free markets and free minds are rescinded, watch out below!
Know the Signs of the Times!
We must be prepared in case the good times end. We must always be vigilant. We caught a glimpse of how things could quickly deteriorate during the severe lockdowns of 2020.
It reminds me of a couple of quotations:
“Freedom is never more than one generation away from extinction.” — Ronald Reagan
“The light on Wall Street can at any time go from green to red without pausing at yellow.” — Warren Buffett (p. 113)
“Never underestimate the size of panic, nor the power of a politician.” — Sir Harry Schultz (p. 113)
Meanwhile, keep smiling.
Professional Money Manager Rates “Maxims” His Number One Classic
“As good as it gets.” — Chip Corley
This just in: William “Chip” Corley, a professional money manager and author of the book “Financial Fitness,” rates my “Maxims of Wall Street” his number one classic:
To order one or more copies of the “Maxims,” go to www.skousenbooks.com.
Special Announcement: This Friday, I am hosting “FreedomFest Friday,” a one-hour Zoom meeting to discuss geopolitics, the Russia-Ukraine war and their impact on your investments. To participate and receive the link to join us, you need to contact Hayley at email@example.com. The conference is limited to 100 attendees.
Good investing, AEIOU,
You Nailed it!
The Day I Tore Up Milton Friedman’s $20 Bill
My old friend Gary North died of prostate cancer last week at the age of 80. He was a gold bug and Austrian economist. Here is my tribute to him.
Gary North was a devoted follower of Mises, Hayek and Rothbard. He was one of the first economists who foresaw the shortage of silver coins in the early 1960s and profited handsomely.
He wrote, “In 1962, I read Rothbard’s Man, Economy and State. After reading his section on Gresham’s Law, I knew that silver dimes and quarters would gradually become scarce, and I started hoarding the coins. In the fall of 1963, the crisis hit, and silver coins disappeared from the big cities.”
This is a quote that also appears in my book “A Viennese Waltz Down Wall Street: Austrian Economics for Investors,” which is available at www.skousenbooks.com.
I had many wonderful experiences over the years with Gary North.
Here is a fun story about Gary North, and it took place when he was with me and coin dealer Van Simmons at a dinner with Milton and Rose Friedman at Commander’s Palace after the New Orleans Investment Conference in 1999, which was sponsored by Jim Blanchard, the gold bug. The story is taken from my account here.
The Day I Tore Up Milton Friedman’s $20 Bill, by Mark Skousen
My most embarrassing moment with the Friedmans came later that evening, when I invited them to dinner at the best restaurant in New Orleans, Commander’s Palace, along with two friends, Gary North and Van Simmons. After we ordered and exchanged greetings, Milton turned to me and asked in a serious tone, “Mark, why are gold bugs so passionate about gold?”
It was a perfect opportunity to talk about the importance of “honest money,” a theme that Ludwig von Mises, Henry Hazlitt and other Austrian economists have taught for years. I pulled out of my jacket pocket a large oversized $20 banknote, a “gold certificate” issued in the 1920s. Together we read the words spelled out on it: “This certifies that there has been deposited in the Treasury of the United States of America TWENTY DOLLARS IN GOLD COIN payable to the bearer on demand.”
I then explained, “Milton, we’re passionate about gold because under the gold standard, there’s a contract between the government and its citizens. For every gold certificate issued, the government had to back it up with a $20 gold coin. Under a genuine gold standard, the Treasury can’t just print up money to pay their bills. It’s honest money.”
Me, Rose Friedman, Milton Friedman, Van Simmons and Gary North at Commander’s Palace, 1999
All along, I felt that Friedman was simply playing along, since after all, he was the world’s foremost monetary historian. I went on, “So, what kind of contract exists today between the government and its citizens? Milton, do you have a $20 bill?”
He reached into his pocket and handed over a $20 bill.
“See, the contract has completely disappeared. Now it only says, ‘Federal Reserve Note.’ And the Fed doesn’t even pay interest!” I paused and said, “Milton, this $20 bill isn’t worth the paper it’s printed on.”
And I tore it up! I ripped Milton Friedman’s $20 Federal Reserve note into a half-dozen pieces.
Suddenly, the atmosphere changed. He turned to me and said angrily, “Mark, you had no right to destroy my property!”
Rose chimed in, “Yes, Mark, you shouldn’t have done that. That was Milton’s private property.”
Gary North and Van Simmons stared in horror and didn’t say a word. Milton’s voice rose, and other dinner guests looked over at us and could see emotions rising. At this point, I was worried. My relationship with the Friedmans seemed to be ending that very night. Finally, I said, “Well, I suppose you want your money back?”
They assented heartily. So, I reached into my pocket and pulled out a $20 St. Gaudens Double Eagle gold coin, handed it to Milton, and said, “Okay, here’s your $20!”
He looked startled and stared at the coin. I thought he would be pleased, but I was wrong. Suddenly, he handed it back to me. “I don’t want it!”
I gulped, struggling for words. “But Milton, it’s a gift. Here, take it. It’s a $20 gold coin, worth a lot more than a $20 Federal Reserve note.”
“No,” he repeated emphatically. “I don’t want it.”
After an agonizingly pregnant pause, I finally figured out a solution. Setting the coin aside, I reached into my pocket, pulled out a fresh new $20 paper note, and handed it to him. “There, okay, will this help?”
He calmed down and took the $20 bill. Gathering up some courage, I brought out the gold coin again. “Look,” I said, as I handed it over to him, “look at the date.” He examined the coin again. “Oh, 1912 — my birth year!” He laughed haltingly. Rose looked on and smiled.
I explained that the entire evening was a set-up, an opportunity for me to give him a St. Gaudens Double Eagle gold coin minted in the year he was born. The coin was in a PCGS certificated plastic container with the words, “To the Golden Milton Friedman.”
I told Milton and Rose that my friend across the table, Van Simmons, was a coin dealer and had gone to great lengths to find a 1912 Double Eagle, which was rare. Van added that it had been shipped overnight from Switzerland and had arrived only an hour before dinner. I think that only then did the Friedmans recognize what was going on. The next morning, they came up and thanked me for the coin and my gesture of appreciation.
Throughout the evening, Gary North — a well-known economic historian and gold bug — said nothing. But in the morning, he came up to me at the conference and said something profound:
“Mark, I’ve thought all night about what happened at dinner at Commander’s Palace. You and I have an ideology of gold. And Milton has an ideology of paper money. Mark, last night you attacked his ideology!”
Milton and I never discussed the coin incident again. (I keep his torn-up $20 bill in my wallet as a keepsake.)
Gary North is somebody I will miss. He was a delightful source of knowledge on politics, economics, investments and even sports. He was one of those people who you could listen to for hours and never hit rock bottom.