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Do New Laws Erode Financial Privacy?

AMA2-28-15Where financial privacy is concerned, you can run, but you can’t hide.

There was a time when offshore banking was the smart choice for investors, corporations and just about anybody who wanted to keep assets safe from the prying eyes of authorities. Swiss bank accounts and deposits in places like the Cayman Islands acted as tax havens and preserved the privacy of account holders both legal and not so legal, no questions asked.

But that kind of tax free privacy may be coming to an end, thanks to some wide ranging new laws enacted in the US and abroad. Though the new legislation claims to target tax evasion and return lost revenues to their rightful owner, the government, it’s also raising concerns about the possibility of absolute loss of financial privacy.

At issue are those foreign bank accounts held by US citizens and corporations. They’re widely used to shelter money, stocks and other assets from US taxation – and to launder money from a variety of illicit operations. Whatever the purpose, they’ve historically existed beyond the reach of the IRS.

But that immunity has come to an end, thanks to a new US tax law called the Foreign Account Tax Compliance Act, or FATCA. This law, enacted in 2010, requires US citizens to report all holdings in foreign banks to the IRS.

And if accountholders don’t comply? FATCA also requires foreign banks holding those accounts to report accounts held by US citizens to the IRS, with a variety of penalties for those that don’t report.

The US expects to reap millions in taxes off these assets through FATCA. And while financial experts and investors see the move as stripping away the last vestige of privacy in financial dealings, a long list of countries ratified the law between 2012 and 2014, with more planning to implement it in 2015. Those countries include Switzerland and the Cayman Islands, two nations most favored by foreign account holders.

The scope of FATCA could have far reaching implications. A growing number of Americans are choosing to renounce citizenship and live abroad to avoid harsh US tax laws, and that number could increase. Corporations using foreign accounts, both legitimately and as “shells” for tax evasion, could move their operations and accounts to places that haven’t signed off on FATCA.

Those places may be harder to find, though. While FATCA originated in the US and targets accounts held by American citizens and corporations, it inspired an international variant called the Global Account Tax Compliance Act, or GATCA.

GATCA originated in 2014 with the France-based Organization for Economic Cooperation and Development, a multinational cooperative for promoting economic development and coordinating the domestic and international policies of its member states. This act requires reciprocal sharing of tax and account information among all participating nations.

This means that accounts held by any foreign nationals in any participating country are to be reported to the account holder’s home government. By early 2015, representatives of 51 countries had signed off on GATCA, with more expected.

The passage of both these acts, and the number of countries endorsing them, has critics worried that financial privacy as we know it is effectively eliminated. Though governments have long used means both legal and illegal to get at the assets of various corporations and individuals, some worry that if FATCA doesn’t get you, GATCA will – and the number of places that don’t endorse either one is dwindling.

It’s worth remembering though, that both FATCA and GATCA target only bank held assets such os cash, stocks and other financial instruments. Physical assets, chief among them real estate, aren’t on the radar.

That means it’s possible to secure money by putting it into a solid asset like real estate, which is exempt from reporting – but only as long as it doesn’t generate an income. That income, in the form of rents, leases or other fees collected from use of the asset, does have to be reported – which puts the asset holder right back in the crosshairs of the new reporting laws.

FATCA is widely despised as a blow to financial privacy, and many worry that its global counterpart will deliver that final blow, making it impossible to keep assets and records of financial activity from government intrusion. That’s why for many, foreign real estate investing is becoming the only asset management you can bank on. (Top image: Flickr/cooperweb)

Read more from The American Monetary Association:

The Dollar Becomes a Crowded Trade

Will Deflation Derail World Economies?

The American Monetary Association Team

Final_AMA_Logo-150x150

The Dollar Becomes a Crowded Trade

AMA2-25-15The US dollar continues to trade strong in world markets. But as it continues its climb, some market watchers worry that it might be time to put on the brakes.

According to a recent article from Business Insider, the dollar has become what’s known as a “crowded trade” in the international money markets. What’s more, it may be the world’s most crowded trade, the darling of speculators and eager investors convinced of its long term strength in a world of volatile currency shifts that make the dollar’s stability more appealing than ever.

While the dollar’s surge is a testimony to that very stability and long-term value, it doesn’t always bode well for international commerce and domestic prosperity. And in a crowded trade, there’s always a time when the crowd disperses.

A crowded trade, in the world of international investing, is one that attracts a large number of investors and speculators, all holding to a set of convictions about the market itself an the continued rise of the asset in question.Trades become crowded when that asset gets suddenly hot – the price appreciates fast and quickly attracts a flock of speculators and long-term investors convinced of its money making potential.

That’s what seems to be happening with the dollar, whose surge in popularity comes at a time when other major currencies are facing problems at home and abroad. In the face of those currency woes, the dollar becomes a safe alternative. Argentina’s 2014 debt crisis boosted the dollar’s popularity on both the legitimate and black currency markets.

Facing international disapproval and economic troubles at home, Russia has seen a steep decline in the value of the ruble. Worries about its long-term stability, Russians of all income levels began converting their savings and investment into foreign currency – mainly the dollar – whenever possible. Russian banks experienced shortages in foreign currencies, and black market trading surged back.

In Europe, too, the Eurozone is suffering financial setbacks. A majority of the Zone’s member nations dare either headed toward or already in periods of deflation, with flattened prices and slowing economic growth. The euro is trading lower than its leading competitors, causing the European Central Bank to ponder a round of quantitative easing that would put more euros into circulation.

Those moves, along with Switzerland’s decision to let its franc float against the euro and other currencies in world trading, have triggered talk in investing circles of an impending “currency war” of increased volatility in world markets and aggressive maneuvering by central banks.

It’s in that uncertain environment that the dollar sits at the top of the currency trading heap – maybe little too high, in the opinion of some economists and financial experts, who worry that the current “dollar rush” could collapse all too quickly.

That’s why they’re calling for some restraint on the dollar’s strong showing. A strong dollar sounds like a good thing, but may actually not be. The downside of a crowded trade is what happens when the asset takes a tumble – a scenario that’s been likened to a crowded theater with only one exit. What happens when everyone decides to leave at once? In the monetary world, the equivalent is a quick unloading of the underperforming asset.

Against a very strong dollar, other currencies trade weaker. That can affect international commerce and financial transactions of all kinds, including pricing of goods sold internationally and the management of dollar denominated debt held by countries around the world.

Easing off on the dollar’s surge would give world markets a chance to find balance and forestall a rush to abandon the dollar when its trading slows. But the fate of the dollar and its future as a crowded trade depends largely on the decisions of the Federal Reserve, which has observed that a strong dollar could harm US interests abroad and slow the economic recovery at home.

The Fed is in the process of tapering off its own most recent round of quantitative easing, an intervention aimed at keeping interest rates low in order to stimulate the economy’s recovery, and under new leadership is taking a cautious approach to major shifts in monetary policy.

As Business Insider points out, the landscape of international finance is constantly changing. World events and domestic upheaval make long-term predictions a risky business. But for now, as the dollar flexes its muscles on the world stage investors with an eye to future returns are happy to join the crowd.  (Top image: Flickr/SqueakyMarmot)

Read more from The American Monetary Association:

AMA111: Six Steps To Wealth With Linda P. Jones

Will Deflation Derail World Economies?

The American Monetary Association Team

Final_AMA_Logo-150x1502

AMA 111 – Six Steps to Wealth with Linda P. Jones

 

Jason welcomes Linda P. Jones to the show. Linda is a podcaster and financial expert who teaches others how to have a wealthy mindset and how to build wealth the right way. She became a multimillionaire by the age of 39 and talks to Jason about her stock market background, six steps to building wealth, and where the US dollar is going.

 

Key Takeaways:

2:30 – Linda realized early on that mutual funds weren’t going to make her rich.

4:30 – People who are overly cheap or frugal do not have a wealthy mindset.

9:30 – Linda shares her story on how she made money in stocks.

14:20 – Even if you have a full-time job, having a side hustle is a great way to begin creating wealth.

16:45 – About every 8.5 years the US sees a financial cycle.

20:50 – Linda is a big fan of gold and silver and she explains why they’re a great investment.

25:10 – The only reason the US has so much power is because they have a monopoly on money.

 

Tweetables:

Nobody ever got rich saving money. They got rich by creating money, by creating opportunities. That’s how wealth is created.

If people just save money and put it in the bank at 1%, it’s going to take 72 years for it to double.

The price of gold is going to have to re-adjust to its true price of what it should be trading at.

 

Mentioned In This Episode:

Money Love by Jerry Gillies

http://www.lindapjones.com/

 

Transcript

Jason Hartman:

It’s my pleasure to welcome Linda P. Jones to the show. She is America’s Wealth Mentor and she is the only financial expert who teaches the important of having a wealthy mindset before and during your wealth building. Linda teaches the savvy wealth-building knowledge that Wall Street didn’t teach her that made her a multimillionaire at the age of 39. She’s a contributing author to three number one bestselling books on Amazon, host of the Be Wealthy and Smart podcast and winning of the bronze Stevie award for Maverick of the Year for her revolutionary approach to  financial education. So, I’m looking forward to having her on today and discussing some of these ideas with her. Linda, welcome, how are you?

 

Linda P. Jones:

Thank you, Jason. It’s great to be here. I’m great.

 

Jason:

It’s good to have you. Where are you located? Give our listeners a sense of geography.

 

Linda:

I’m in the Palm Desert area. It’s called Rancho Mirage. It’s between Palm Springs and Palm Desert.

 

Jason:

Been there many time. Good, good stuff. So, you have six major areas that you focus on, is that correct?

 

Linda:

I do. I really learned that our six steps to wealth and from my childhood I always want to be wealthy, I grew up among people that were very wealthy, but we were middle class and I wanted to know how do people do that and sort of became my life’s mission to discover how that happens. I tried different things. I went into the investment industry. Listened to what they said to do and realized that if I buy mutual funds and wait my entire life, I’m never going to be reach.

 

Jason:

Yeah, mutual funds, I mean, they’re just a scam, aren’t there?

 

Linda:

Well, they are not always a scam, but they definitely are not going to get somebody to a super wealthy level. They might be able to give you some growth above and beyond what you can get certainly at a bank and other places, but they definitely are not the end-all, be-all  for wealth building.

 

Jason:

Tell us what you’ve learned and let’s dive into these 6 steps.

 

Linda:

Okay, well the first step I learned was that millionaires were always feeding their mind with positive things about how they could really think bigger, how they could put positivity in their mind, and realize that they could achieve a lot more than they thought was possible. So, step number one is to create a wealthy mindset. So, it’s really about being grateful for what you have, but also just deciding what’s going to be in your mind. Instead of letting the TV and negative media feed your mind, it’s about you putting in there what you want to be in there through different statements that you want to put in there that you create and write down and commit to memory. You know, allow that to really be your belief system.

 

Jason:

Yeah, I think that’s very true. I remember many years ago we hired a speaker of a great old book by the way, I wonder if the guy is still around, he’s name was Jerry Gillies and he wrote a book called Money Love. It’s definitely an old book, it was quite a while ago, and I remember a group of people from my real estate brokerage hired him to come in to speak to us and he had us do the wealthy mindset activity of imagine you’re at the wealth level that you desire and imagine we’re at a cocktail party and talk, act, be that person. The funny paradox about this is that certainly we all need to be prudent and wise with our money, right Linda, but being cheap and being overly frugal is definitely not a wealthy mindset, is it?

 

Linda:

It’s not and, you know, there’s a big trend right now toward frugality and what I call frugalism, which is living in a 200 sq ft home and not having a drink with your friends, but camping in the woods for your fun activity. I mean, that’s all well and good, but you know if you’re focusing on becoming frugal, there’s only so much you can cut out before you’re actually living in the woods, right? So, I’m not a big fan about being frugal. I am a fan of being careful and smart with your money and smart with how you spend it and invest it, but I think that this frugalism, this whole sort of trend is really getting out of hand.

 

Jason:

Frugalism is getting out of hand, I love it. So, yeah, because it makes you focus on the wrong thing, doesn’t it? I mean, I like to say to people, nobody ever got rich saving money.  They got rich by creating money, by creating businesses, by creating opportunities, by creating rental housing for people. That’s how wealth is created. It’s not created by saving money. I mean, certainly you need capital to do a lot of these things and you need to save to get to that point, but what’s the distinction there. Maybe help our listeners understand the fine line.

 

Linda:

That’s the prefect segue into the second step, because actually my second step is save an nest egg, but I agree with you, it’s saving an nest egg for the purpose of capital. It’s not saving for the purpose of saving. You know, if people just save money and put it in the bank at 1%, it’s going to take 72 years for it to double. So, just saving alone, you’re exactly right, it’s not going to work, but when you realize that you have to have some sort of side invested or what I call a side hustle where you have to have something on the side where it’s going to grow your money faster, that’s really what the saving is all about; is to get it in the investment.

 

Jason:

Yeah, to develop capital to do the investment, okay. So, is there is more to step two then?

 

Linda:

No, that’s pretty much it.

 

Jason:

Okay, how about number three?

 

Linda:

Step three is to find a mentor and that’s something that you’re great at and it’s something that I started became good at as well, just really directing people, what are the steps, what are the things you need to do, because, sadly, a lot of people that are writing books are actually journalists and have never created wealth and I think that there’s a huge distinction there, because I will read people and I’m sure you’ve done the same thing, Jason, where you read these financial books and you go, “Where is this person coming from?”

 

Jason:

Oh, they’re so basic and just dumb.

 

Linda:

And they are not going to get people to their goal, they’re not going to, like you said, they just tell you to save money, you’re not going to become wealthy.

 

Jason:
It’s amazing how we could even pick on without even naming names, I think our listeners know who they are, a lot of the gurus that you see on television, really, their place just doesn’t work. I mean, it’s amazing how they became so popular. I almost think that that might be a conspiracy, you know, to provide misinformation to the masses so that the powers that be can stay in power.

 

Linda:
Well, you know, it’s an interesting point and that would be a very fun topic to talk about on another show, but I think that, you know, I never heard about FICO scores until, and I was in the investment industry a long time, I never heard FICO scores discussed and all of the sudden it just became the focus on television, you know, and all these topics that, yes, it’s important if you want to buy a home and a good credit, but it’s not the end-all, be-all of wealth building. There was very little time actually spent talking about what you’re going to invest in that’s going to grow your money and create wealth for you and that’s what I love about what you do is, you know, talking about real estate and getting people to understand that’s an important vehicle for them.

 

I don’t have any one particular vehicle that I am a fan of. There’s many that I am a fan of, of course, I made my money in stocks originally, then when on to make some very nice money in real estate and, you know, there’s other things as well. I’m a big believer  in gold and silver even though right now we’re having a little bit of difficult. I think that’s more a currency war than it is an investment issue, but I really think that once you understand what’s going on with the currency people can invest like billionaires who are buying up a lot of gold and silver right now.

 

Jason:

When you talk about stocks, I mean, that just amazes me because literally in all my years, as I mentioned off tape before, I have never met anybody who wasn’t an insider who created any real and significant wealth on Wall Street, investing in stocks, bonds, and mutual funds. What did you do? Tell us what happened and how you did it?

 

Linda:

Well, I was looking at how to invest and, you know, it was really interesting because Wall Street would always say don’t buy individual stocks, they’re too risky, and I was actually in the mutual fund industry, so I was actually talking about diversified portfolios all the time and really believed in that, but I also saw that wasn’t going to get to the higher compounding levels that were going to build true wealth and I really understood that you needed to invest in a money engine, which is actually step four of the six steps to wealth.

 

So, I looked around at what are the different money engines that I could invest in and I tried some real estate, I tried some foreclosures, they actually went well, but my returns weren’t quite what I was hoping for. At that time, I noticed the stock market had been going up 30% for a couple of years, this was the early 90s, and I’m like wow, what’s up with that? Because there’s all this really hard work I was doing in real estate and I’m like, you mean this is a paper asset that I could invest in and if I knew what I was doing and picked the right companies this might even work? I started to, I read how to make money in stocks and I would buy Investor’s Business Daily and follow that religiously and..

 

Jason:

Were you a dividend stock investor or either one?

 

Linda:

No, at that time the tech stocks were doing very well.

 

Jason:

So, we’re talking what, the dotcom bubble? Is that the era?

 

Linda:

The dotcom bubble, tech stocks, and internet stocks and basically concentrated in that area, and yeah. There were several companies that did extremely well.

 

Jason:

Okay, so that’s interesting. So, you really pretty tolerant of investing in speculative stuff, you know, where you’re just buying simple for capital appreciation. You know, you say you like gold and probably silver too, I don’t know if you said silver, but those assets don’t produce any cash flow at all, they’re purely one dimensional. You’re just buying them, you know, buy low, sell high is the business plan. That’s it, there’s nothing else to it, wait for the dollar to collapse. It kind of surprises me that you’re tolerant of that. I don’t know, as I’ve aged I’ve become such a cash flow investor.

 

Linda:

Well, I think that’s a good thing and I think that’s also a result of interest rates being so low and I think that interest rates were not quite so low at the time I was investing so it wasn’t so critical to be getting those higher rates by looking at dividends and other things, but I think since interest rates have come down so low, it’s become a critical part of investing and a critical, you know, part of the compounding equation.

 

Jason:

So, you had some good timing on some tech stocks or dotcom stocks in the early, like, 2000 era, right?

 

Linda:

Yeah. (#12:07?) one million and then it doubled in the next year. So, made a million dollars in one year the next year, so…

 

Jason:

Did you do private placement or simply trading stocks online type stuff?

 

Linda:

Just trading stocks.

 

Jason:

So, no private placement memorandums, right? Any IPOs?

 

Linda:

Nope, no IPOs.

 

Jason:

That’s great to hear. You’re the first person that I know of who has done that, so that’s awesome. Okay, next step?

 

Linda:

Next step is to compound it at a high rate. So, couple of things here. One thing is that you need to get to some higher double digit returns in order to really build wealth for yourself and that’s what you do and what you teach and also incorporating the smart use of leverage. So, a lot of people are saying don’t have any debt, debt is bad. I really found that debt is a tool and leverage is a tool and leverage is something that gets you a higher rate of return.

 

So, as you know, but let me go through for the listeners just a simple example, if someone paid $100,000 for a home and that home went up 10%, it’s worth 110,000, they made 10% on their money. If, however, let’s say another person just put down 10% on a $100,000 home, that home went up 10%, now they’ve made a 100% on their money just by having that leverage they actually dramatically their rate of return and that’s the power that leverage has. That’s why real estate over the years has been such a great investment. One of the reasons..

 

Jason:

Oh, leverage just rules. I mean, the old Archimedes’s quote, he said, “Give me a lever long enough and I’ll move the entire world.” Leverage is a very, very powerful tool and real estate really is the most leverage friendly asset class, so that’s a great thing, yeah. Okay, good.

 

Linda:

Absolutely. So, I think compounding, you know, if people are smart with their leverage and if people are smart with their use of debt, you know, debt can be used to get into a business as well, which businesses compound at a high rate and 77% of the wealthy have actually made their millions through owning a business.

 

So, I’m really a proponent of having a business and even if you work in a corporate situation having a side hustler, because that’s how I started, you know, I was full time working, traveling at a very business job and family life and started all this stock investing on the side. That’s why I recommend that people start their business is just with a little side hustler or their real estate with a side hustler.

 

Jason:

Side hustler, most people would say moon lighting. I love how you say side hustler. It’s great. It’s awesome. Good, good stuff. Okay, great, what else? We’ve got two more steps maybe?

 

Linda:

One more.

 

Jason:

One more, okay.

 

Linda:

the 6th step is to protect your wealth. So, the great thing about leverage is that it can get you higher compounding rates, but as you know, the downside of that is if you’re in the wrong place at the wrong place, it can work against you. So, a lot of people, you know, in the 2008 crisis were leveraged to the hilt and were, you know, just playing the same game and not seeing that money actually moves in cycles and that cycles actually come and repeat and, so, many people were caught looking the other way were highly leveraged and when values dropped, you know, had some really significant financial issues. So, I want people to really be aware of protecting their wealth and realizing that you don’t wanna have that leverage, you don’t want to have your foot on the accelerator floored on the leverage the whole time. You want to back off of that as you have some success.

 

Jason:

Absolutely. Great points. Linda, tell people where they can find you and learn more?

 

Linda:

They can find me at LindaP.Jones.com or on my Be Wealthy and Smart podcast on iTunes.

 

Jason:

Fantastic. Where do you think the economy is going? There’s been a lot of talk about deflation recently. I have been on the side of inflation for many years just with all the money creation. I just got to think we’re going to have some inflation, but it’s kind of a mixed bag. Lately, you look at oil prices, it’s really pretty amazing how cheap oil has become.

 

Linda:

I agree. Well, I we’re definitely having a bout of deflation here and where we are in the cycle would say that we’re probably do at the end of this year for some interest rate hikes, which will get us another kind of situation like we had in 2008 again and I’m not trying to be a huge predictor, but I’m just saying that about every 8.5 years we do have cycles that tend to repeat and so, I think that we could see some inflation come back in later on this year. We could see things to pick up and heat him and the fed raise interest rates, which can be a real problem.

 

Jason:

So, we’ve got a bout of deflation, but ultimately you think it will become inflationary, then?

 

Linda:

I do. I think it’s going to balance itself up the other way where we’re going to have some interesting rate issues.

 

Jason:

It seems like most of the economists out there think we’re going to have low interest rates for awhile and you seem to disagree with that and the reason the rates would go up is because of inflationary pressure, most likely, but one of the problems seems to be that a lot of this money that’s been created, I should say currency, it’s not really money; money is something real like gold, but a lot of the currency that’s been created out of thin air over the past several years, it hasn’t really hit the streets and it’s just in the hands of the banks and this is why we’re not seeing much inflation. What are your thoughts about that?

 

Linda:

Yeah. I think it’s surprising that we haven’t seen that because there’s just be so much money printing. I mean, the quantitative easing has been astounding. I think we’re going to see another round of that and that’s probably going to lead into the higher interest where they eventually do see it start to show up in the economy and start to heat up the economy too much.

 

Jason:

So, any thoughts on timing for this?

 

Linda:

Toward the end of this year, around October of 2015 into 2016.

 

Jason:

So, we’ll have sort of a deflationary bout in until then and then we will start to see inflation raise at that point?

 

Linda:

I think we could see interest rates start to go up, yeah, in October.

 

Jason:

So, if you want to secure long term three-decade-long fixed-rate debt, do it sooner rather than later, it sounds like. What other thoughts or advice would you have, Linda or just where things are going, anything, I thought I’d just leave it open for you.

 

Linda:

Well, it sounds like you’ve been educating your listeners about gold and silver and what real money is, which is fabulous thing because not many financial experts are doing that and I really believe that we’re in a different game than we’ve ever been in before. With this quantitative easing, we’ve had the government printing money unlike ever before and when you have an oversupply of anything, it’ll eventually will cause the price to drop.

 

So, I do think that while right now the dollar is very strong, we’re also seeing all the bricks, countries find alternate funding, they’re funding ways to trade with each other without using the dollar. They’re getting their own Swift system. I mean, all of this interbank trading with these other countries is now going online, which we never had that before. They were forced to use the dollar before as the petrol dollar as the world’s reserve, but as we get farther down the road here, I think we’re going to see that these other countries are not using the dollar. Eventually that will catch up with the dollar and, as you said, real money is gold and silver and what a better time than right now to pick up as much as you can.

 

Jason:

I have to say though, Linda, I’m not much of a gold bug. I mean, I do own some. I think I’ve got all of the four major metals now. You know, I have invested in it over the years, but I think it’s too speculative. Again, I just go to that cash flow point and the fact that I don’t get any income from gold, I don’t get any tax benefits, you know, it’s just like this very simple buy low, sell high speculative strategy and I’m afraid of the way the central banks and governments around the world manipulate gold prices. It seems like they’re winning. They’re really the most powerful entities on earth. It shouldn’t be this way. Like philosophically, I agree with you, completely, but I’m just looking at the way the world is even though it’s not right that it is that way.

 

Linda:

There’s only so much supply and demand. Unlike the dollar, you can print paper money till the cows come home, there’s no limit to how much paper money you can print, but gold and silver don’t have that ability and so, what’s happening is as people are taking possession of gold and not just allowing paper contracts and gold to be sold, but they’re actually wanting the physical gold, if you’ve followed the news this week, they were four countries that just asked for their gold back. So, we’re starting to see countries wanna have it in their possession. They’re starting to lose faith in paper money. It’s just starting to crack and so what people need to realize is right now the price of gold and silver is below what it actually costs to take out of the mine.

 

So, this is a manipulated price. This is a manipulation of the central bank to make the dollar strong right now, which because gold and silver move inversely to the dollar that’s made them go down, not because they’re not in demand, not because they’re not rare, but because it’s a manipulation, but that can only continue for so long. As soon as their is no more supply to deliver, those prices will change and they will reflect the accurateness of supply and demand, which right now is completely artificial.

 

Jason:

Okay, so, that’s a really good point that you bring up. So, why can’t that manipulation go on forever? I mean, it’s been happening for decades. It sort of brings me to that saying that, you know, having a stock background when you were in the financial services business, the investor complaining that, you know, the market is irrational, I’m right, the market is wrong. Well, you know, the answer is, well, the market can remain irrational a lot longer than you can remain solvent. I’m just afraid that they can just manipulate for a long, long time.

 

Linda:

Well, the reason they can’t, Jason, is because of the supply. So, what’s happening is every single futures contract that is coming due for gold right now is being request in physical. So, before they used to just roll over paper contracts of gold and silver.

 

Jason:

I think that’s a Ponzi scheme. I really believe and, you know, tell me I’m crazy, but I think COMEX is, you know, it’s just my opinion, I have no proof, but I would just venture to guess that could well be a Ponzi scheme that could crack at some point.

 

Linda:

Yeah, wouldn’t surprise me either. I mean, basically they were trading paper for something they didn’t have, they didn’t have enough to actually be able to deliver it, so as this is starting to heat up and as more people are demanding the physical gold and silver, eventually we’re going to not be able to deliver and there’s going to be default on the delivery of those future’s contracts and when that happens, the price of gold is going to have to re-adjust to its true price of what it should be trading at, not this suppressed, artificial price.

 

Jason:

Yeah, very interesting. It’s going to be very interesting to see how this plays out, but right now, you know, amazingly America still seems to be in the position of being the brink’s truck of the world. The Russian economy is falling apart rapidly, Greece is falling apart again, Europe is socialist disaster. We can grouse all day about how the US is so poorly managed and so in debt and everything is wrong, but look around, who’s any better off? You know, any major country, I mean. There’s not much out there.

 

Linda:

There’s not much out there and..

 

Jason:

Russians are just getting a hold of every dollar they possibly can, you know, they look at that as better than gold, interestingly.

 

Linda:

Well, I think that this, you know, these sanctions that happened against Russia and then Russia struck back and then the United States, you know, made the dollar very strong, which just tanked oil prices, which made Russia’s oil and currency drop. So, they’re, you know, in between a rock and a hard place. I mean, they are a real mess, but understand that the only reason that the United States had this power is because they had a monopoly on money, so now..

 

Jason:

Well, it also had the monopoly on being the biggest military the human race has ever known and that’s how it keeps that and enforces that monopoly.

 

Linda:

That’s right, but as these other countries, as China and Russia and Brazil and all the bricks decide to trade amongst each other without the dollar; for the first time ever in history, this is taking away the dominancy of the dollar. It’s just happening right now, so it’s too early to see it, but to my view that’s what’s going on right now and that’s why the dollar is so strong is that, I think, the federal reserve is doing it can to prop up the price of the dollar, because it knows that it can’t do it for every much longer. So, it’s going to do it as long as it can, because its days are really numbered.

 

Jason:

It’s an interesting debate. I’m just concerned that they can kick that can down the road for the next three decades, but maybe they can only do it for another three years. Who knows. We will see, we will see. It’s really, Linda, when you really look at it, it’s really illogical and that’s why it’s just darn hard to predict this stuff, because they’re all sorts of other forces outside of it beside math. If it were just about math, the dollar should have collapsed by now. Very, very interesting discussion with you today. Give out your website one more time.

 

Linda:

It’s LindaPJones.com.

Jason:

Linda Jones, thank you so much for joining us today.

 

Linda:

Thank you, Jason, my pleasure.

 

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Will Deflation Derail World Economies?

AMA2-23-15Low prices delight consumers. But those falling prices may signal darker days ahead in the form of deflation, which flattens economies and leads to long-term recession. As prices drop and sales flatten in many of the world’s leading economies, experts fear a global epidemic of deflation that could have long-term effects on local and international commerce.

Consumers don’t like inflation, but central banks do. Inflation means higher prices and a sense that money doesn’t “go as far as it used to.” But a little inflation keeps commerce humming and debts being paid. It helps a country’s economy avoid deflation, which has a less obvious but more detrimental effect on local development and international trade. For government run central banks, the magic number for inflation rates that keep economies afloat is about 3 percent.

Deflation accompanies falling prices. Unchecked, it can create the dreaded “deflationary spiral” in which prices drop, but consumers don’t buy. That creates a surplus of goods and supplies that aren’t being used. To move them along, prices drop even further. But if people still don’t buy, the cycle continues, spiraling down into a hole of stagnation and recession.

When that happens, less money circulates in the economy. Consumers buy less and have more trouble paying down debt. That happens on a national level, too, as counties going through a round of severe deflation struggle to manage their own indebtedness. Let unchecked, long periods of deflation can plunge a country into economic chaos for years.

The current epidemic of deflation is hitting well-off countries in North America, Asia and the Eurozone. According to a recent article from The Economist, inflation rates in many of those countries is running well below the sweet spot of 2 percent – or is likely to do so in the near future.

In North America, Canada and the US are still seeing significant economic growth, but their inflation rates are still low – and falling oil prices are threatening to push them even lower. But the economic giants of Asia are seeing more trouble ahead.

In china, the inflation rate is below 1 percent. Japan’s rate is significantly higher, but a variety of factors affecting Japan’s national and international financial health threaten to push it down. In other Asian countries such as Thailand and Vietnam, deflation has already settled in.

The situation in the Eurozone is worse. As the Economist reports, 15 of the Eurozzone’s 19 member states are already in deflation. The most public face of the Eurozone’s economic troubles is Greece, but prices are flat for major categories of goods in more prosperous members such as Spain and Britain as well.

What’s behind the worldwide wave of deflation? One easy target is falling oil prices, which have dropped at times to prices under $100 per barrel in world markets. But the drop in oil prices actually has an upside – and oil price shifts are only one of many factors contributing to the threat of a round of deflation.

Lower oil prices mean savings for consumers in the form of lower gas and heating prices. The cheaper packaging of goods like cleaning products and soft drinks also passes on savings o buyers. That means consumers have a title more money available to buy other things, or to pay down debt. Governments benefit in the short run, too, from collecting more taxes and tariffs on energy consumption and usage fees from corporations.

In the long term, though, continued low prices overall keep the economy stagnant. If prices stay low, so do wages, and the job market suffers. Debt, both personal and national, gets harder to pay. People buy less, and the economy falls into s pattern of stagnation and paralysis that’s difficult to turn around without artificial intervention.

That’s when the central banks step in with quantitative easing – a plan to stimulate growth by pumping money into the economy, manipulating interest rtes, or both. The US Federal Reserve is in the closing stages of its latest round of Quantitative Easing since the massive housing collapse of 2008 plunged the country into recession. That stimulus involved the buyup of billions of dollars worth of mortgage backed securities and bonds in an effort to push interest rates low and keep money moving.

Now, the European Central Bank is rolling out a similar plan to buy treasury bonds and other kinds of securities in an effort to get more euros into circulation, The Bank of Japan is planning its own initiative to keep inflation at a comfortable rate and forestall deflation. Other countries are mulling similar interventions to stop the slide,

It’s too early to claim that deflation will dominate the world’s economies. The US dollar is trading strong in world markets against other currencies, which also affects international commerce and pricing, and other factors – including oil production – are constantly in flux. But for consumers in general and investors in particular, it’s worth remembering that falling prices may have rising costs.  (Top image: Flickr/PhilipTaylor)

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Deflation and Oil Prices: Should Investors Worry?

AMA2-18-15Oil prices are falling, dropping below $200 USD for a barrel of crude. And while that makes US consumers happy, the tumble in prices is fueling worries of a looming round of deflation that could ripple throughout the economy and trigger another round of intervention by the Federal Reserve.

Because petroleum products play an enormous part in the economy as a whole, the ups and downs of the oil industry affects just about all major sectors. In areas where Big Oil has a high profile, jobs, housing and local retail and manufacturing are buoyed – or potentially sunk – by the boom and bust cycle of worldwide oil supply and demand. That’s why the recent fall in oil prices has economists and financial experts concerned about the possibility of a “deflationary spiral” that could eventually require another round of government intervention.

For consumers, the major concern is inflation – higher prices, and a dollar that doesn’t go as far as it used to. But the consequences of deflation may actually be greater. The “deflationary spiral” that financial experts fear begins with a drop in prices, as we now see with oil.

But although that drop should mean that people buy more, they may not, choosing to wait instead for even lower prices to come along. If that happens, there’s an excess in the production of various commodities. To move that inventory along, prices drop even more. But if consumers still aren’t buying, the cycle continues to perpetuate itself, spiraling down and down.

A healthy consumer economy is driven by the willingness of people to buy things. And if that doesn’t happen, the whole structure is weakened. Consumers delay spending, and debtors have a harder time securing debt. And because energy is a linchpin of that structure, the drop in oil prices could signal the beginning of a deflationary spiral and threaten another recession.

When a sluggish economy threatens recession, it may be time for government intervention in the form of quantitative easing, as the Central Bank artificially manipulates interest rates and the flow of money to keep major sectors moving. That’s what happened during the troubled years following the housing collapse of 2008 when the Federal Reserve instituted not one, but three rounds of easing. The last of these, dubbed QE3, involved the buying up of $85 billion in mortgage-backed securities every month to keep interest rates low and encourage buying.

As the economy began to stabilize after the housing crash, the Feds began a gradual taper off of the stimulus in 2014. But now, some economists worry that deflation triggered by the drop in oil prices could mean another round of easing to prop things up. But according to a recent report from Business Insider, the current drop in oil prices may actually make that kind of intervention less likely – and it may not even lead to the usual consequences of deflation. In fact, the opposite may be true.

As Business Insider points out, lower oil prices benefit consumers, who will pay less for gas and heat. Lower gas costs free up household income for buying things or paying down debt. As people buy more gas, the government is able to collect more in taxes and tariffs on those transactions. While the “deflationary spiral” paradigm depends on consumers’ reluctance to buy, even when faced with dropping prices, in reality, spending less for gas probably means people will be spending what they’ve saved in other ways.

Lower oil price alone aren’t likely to cause problems for central banks, unless prices in other major sectors also start to drop. Low oil prices help to keep inflation down, and because consumers can buy more and pay down debt, the two major consequences of inflation – a slowdown in buying and problems with covering debt – probably won’t happen, except in certain areas of the country where the drop affects the performance of local oil producers.

In those areas where oil production is a major contributor to the local economy, a slowdown could mean a drop in housing prices and loss of unemployment as well as the decline of local businesses. But in those areas where oil is sonly one of many enterprises in a diverse economic picture, those effects are likely to have little impact. (Top image:Flickr/cliftonsteed)

Source:

Udland, Myles. “Three Reasons Why Lower Oil Prices Won’t Lead to a ‘Deflationary Spiral,.” Business Insider. businesinsider.com 1 Feb 2014.Insider. businesinsider.com 1 Feb 2014

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