Hello Reader,
In this letter, I’m going to describe the origin of my economic understanding, current implications and financial relations.
Money is a language. Like English, Japanese or Math, it is a language that is understood by those who have taken the time to learn it.
Economics work in the same way. If you understand economics, you understand money and thus are able to profit.
I’ve been fortunate enough to receive economic wisdom from many talented individuals. One of these individuals is Peter Schiff.
Who?
Almost three years ago, I came across a video of Peter Schiff at Occupy Wall Street. If you don’t remember, Occupy Wall Street was a protest against all the economic bullshit that occurred in the aftermath of 2008.
The bailouts of 08’ and the subsequent passing of blame (taxes) to the public, left alot of people angry. A massive movement started on Wall Street, right underneath the very buildings of companies who had been bailed out.
Morgan Stanley, Goldman Sachs, Credit Suisse, JP Morgan etc.
Peter Schiff was at this protest, not in the form of a protestor, but as someone who was trying to educate the crowd. He was trying to get people to understand where the real blame lies, at the government. His team filmed a video for over two hours of him trying to educate the public and guide their anger in the right direction.
It is titled, “I am the 1%, Let’s Talk” - LINK.
Before I tell the whole story, I want to give some background information on Schiff.
Peter Schiff is one of the few investors who called and profited from the 2008 housing crises. Remember the film The Big Short? Schiff was among those investors. He made a fortune shorting sub-prime mortgages.
Now you might say, who cares about this rich dude. Well, before he actually made his millions, he was a regular guest on CNBC and he was laughed at whenever he tried to explain that the housing market would crash.
No one took him seriously. They laughed at him just like they laughed at everyone who publicly claimed housing was about to crash.
The reason why I wanted to give that little backdrop is because no rich person in their right mind would want to go into an angry crowd that is protesting against “rich-people”. His associate is literally holding a sign that says “I am the 1%”.
If you see the full video (life changing for me), you’ll see countless people argue with Schiff, some even came close to fighting him. He made it clear how financially illiterate a majority of the population is.
When I saw the video, I realized how distorted my understanding of economics was. In the Canadian curriculum I was educated in, I was never taught to think about the consequences of economic policy or the manipulation of money markets. My schooling implied that the government was created to help people.
I’m sure many others like me received the same education in the West and lived their life accordingly.
Then, in the year 2008, September 29th comes along and the world saw the biggest market crash in history. I don’t care about stock-holders losing money, that’s a part of the game, BUT think about how many people lost their homes, their jobs and livelihoods through no fault of their own.
To make matters worse, five days later, on October 3rd, $700B of bailouts were passed into law by the government. The investors who had taken risks were literally given a clean slate and the public was left with a bill in the form of taxes.
Almost 13 years later, bailouts still happen. Hence, why I thought it reasonable to write this letter.
I credit Peter Schiff as being one of the biggest influences in shaping my financial perspective and making me understand the consequences of economic manipulation.
His views are not for the light-hearted. Your first reaction to some of his economic insight may be “wtf” but if you take the time to understand the fundamentals, I’m sure you can find value.
Note: I don’t listen to Peter’s views on Bitcoin. He’s smart but he’s not perfect.
When I learned the true power of free markets from Schiff, it was an eye-opening experience.
For example, let’s analyze some key problems in the West today:
increasing wealth inequality
increasing discrimination in the labour force + general population
increasing trade deficits (China owning us)
increasing business regulation (not in a good way)
increasing money supply + inflation
If I told you that all these problems can be solved with free markets, you would think I’m crazy…
But, let’s take a closer look at how free markets would actually work (paraphrasing Schiff).
We’ll start with the core problem of the West.
Trade Deficits
A trade deficit is the difference in value of how much a country imports (brings in) versus how much it exports (ships out).
The USA currently has a -$80B+ trade deficit. It imports much more than it exports. This means that there are less factories, less production, less value being created in the USA versus other countries that are exporting to them. The chart below shows that this was not always the case.
America was a powerhouse 30 years ago but it is no coincidence that their economic demise has correlated with their increasing trade deficit.
Don’t get me wrong, America is still a powerful nation but anyone holding it to it’s past glory is mistaken. China is now the global powerhouse. While Americans have become more divided and unfocused on the long-term picture, the Chinese have overtaken them with their macro planning (however unethical it may be).
Where do free markets come into this?
The root of the problem is the lack of production in the USA. This applies equally to Canada as-well. We simply aren’t making enough goods in the country, everything is being out-sourced because it’s too expensive make here.
Why aren’t we making more goods in the West?
It’s too expensive. We’ve literally priced ourselves out of business in our own country. The weakening of our economic policies and constant short-term turmoil has been capitalized upon by other countries.
When governments place increasing restrictions on businesses a.k.a make it harder for them to conduct business, the business owner simply takes his business someplace else (or is forced to shut-down).
This is also known as the “Principle of Substitution” in economics.
That is the crux of what has happened in the last 20 years. It’s become more expensive to conduct business in the West. The government has gotten bigger, they can’t balance their budget and thus have increased taxes for the general public.
Along with increased regulation and taxes, we’ve had a surge in social correctness.
Businesses are now trying to be politically correct. This notion has caused the skill level of our work force to dwindle. Being caught up in political correctness is costly for business and lets other businesses (abroad + monopolies) capitalize.
Detour: Free Market Example
I want to show you a simple example of free markets and how they automatically detract participants from discrimination.
We have two business owners named A and B.
We have two applicants, one is a white man, the other is a black man.
Let’s say owner A is racist towards black people. In the interview process, he rejects the black man for no other reason besides his skin color. Therefore, he hires the white man.
The black man then has an interview with owner B and gets hired.
Both the business owners, A and B, compete in the same industry. They are competitors.
What happens if the black man is more talented than the white man?
Business B overtakes Business A. The workforce of B is more skilled/efficient than the workforce of A, hence they have better output and perform better than their competition.
The owner of A is punished by the free market for his racism.
If he does not change his interview process (discriminating based on skin color), he will lose talented individuals to rival companies. Eventually, he will go out of business.
This example is not to say that a black man is more talented than a white man. It is to highlight the effect of discrimination in business. Free markets will weed out this discrimination. This applies to any human being, hiring women, sexual-orientation, previous history, education etc. Anything at all that can be discriminated against is detracted with free markets.
This argument also has a slippery slope fallacy that applies to present day hiring processes.
Consider the same scenario but this time, Owner A rejects the white man.
Current times dictate that he has to show his company promotes “diversity in the workforce”. He cannot reject the black man because he can get sued for discrimination (even though he is not racist). This rejection could also lead to social pressure and therefore damage his business.
Owner B now hires the white man.
In this case, the white man is more talented than the black man.
Now business B will overtake business A because it’s workforce is more talented/skilled/efficient etc.
In the long run, if business A continues to hire people solely based on diversity, it will go out of business. The employees who are a diverse group based on skin color, will also lose their jobs when the company closes or has to downsize.
This is simply how economics and equilibrium work.
In a true free market, discrimination is discouraged (and rightly punished). The skillset of market participants determines the course of their trajectory. Talented people advance and the not-so-talented people are forced to acquire more skill.
No handouts are given, no bailouts and no forceful equality.
Instead of equality, we get equity. The act of being fair.
Here is a picture that describes the difference.
End of Detour
This picture brings us back to trade deficits. The West is stuck trying to make business opportunities equal. Free markets simply don’t work that way.
Note: The equality I’m talking about here has nothing to do with human rights or any non-financial setting. If you think otherwise, you’ve missed the whole point.
We need to allow businesses to conduct business freely. They should not fear repercussions based on who they hire or fire. The regulatory structure of business also needs revamping. 40 years ago, it was easier to do business in the West than it is today. Think about that. I’m not talking about digital business, I’m talking about backbone productional businesses. Auto-makers, food-plants, energy sectors, technology, infrastructure and much more.
You might think, “Wait, companies like Apple are based in the West?”.
That’s true but where are their products manufactured? China.
Look at everything you own. Electronics, clothes, furniture etc. I bet over 95% of it is made in China or a 3rd world country.
We have smart people in the West (Silicon Valley & Tech) but the inventions are all being outsourced abroad.
Solution: Less government intervention and more free market participants.
This is looking like a long letter so I’ll probably split it into a few parts. Before I end this, I want to leave a few cookie crumbs.
Think about the following
minimum wage
universal health care (for my fellow Canadians)
decentralized systems (no central figure of control, like Bitcoin)
Which of these hinder the economy and its people?
Hint: Only one of those options allow for free markets.
I’ll leave you with that.
Thank You
Disclaimer: The views expressed by the author are not intended to serve as any form of financial advice. This letter is for entertainment purposes only. Please do your own due diligence and research.
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