PropertyInvesting.net: Property Investment Special Reports

418: Rich Get Richer, Poor Get Poorer - Winners and Losers

PropertyInvesting.net team  

The objective of  this Special Report is to describe how regardless of which political party is in power, in developed nations, the rich continue to get richer and the poor continue to get poorer. In the next ten years, then middle class will continue to get hammered and reduce in size. There are two key options of investors and the ordinary folk. Either join the rich or descend into the poor. We will explain.

1.  Socialist Policies: In general terms only, socialists or the left wing tend to prefer to tax the wealthy, give this to the poor, increase government and the public sector, print money using Keynesian monetary policies and increase regulation on business. This tends to drive up inflation, temporarily reduce unemployment for it then increases again and reduce private sector cost competitiveness. Many of the rich start investing overseas and some of the wealthiest will move overseas – become tax exiles. Overall the tax take eventually drops and deficits rise. To rob Peter (the rich) to pay Paul (the poor) is doomed to failure as has been demonstrated by the collapse of the Soviet Union, Cuba, North Korea and the like.

2.  Conservative Policies: In general terms only, conservative or the right wing tend to prefer to reduce the tax of the wealthy to stimulate growth and jobs creation in free enterprise. This also increased motivation as it is worthwhile for the poorer people to seek work and add value to society. They prefer more of an Austrian School of economics – namely, no printing of money, currencies backed by gold reserves, a strong currency. They like to reduce the public sector and size of government – and release this talent into the private sector to generate wealth which then generates jobs and economic growth. It will also boost industrial competitiveness. The rich tend to move to such countries and start new business – investing in the country. There is less reason to become a tax exile. Overall the tax take increases as business grows and less tax avoidance takes place because of a fair and equitable tax system. The health and education services improve in efficiency – citizens get more for their money.

Can Make Money With Either:  For investors, it really does not matter that much in western developed nations which type of governments are in power, because serious money can be made in either scenario. So don’t worry too much about the politics – to understand the trends the politics and policies will generate is the key. Then you can position yourself to capture value regardless of who is in power. Unless you prefer to focus on politics - then you might want to be a politician.

US Example - Social Model: Let’s give you an example. Currently in the USA there is a socialist leaning government, intent on big government, huge public sector, with massive $1.5 Trillion/annum deficit ($5 Trillion if you include unfunded liability payments) with a colossal $15.2 Trillion direct debt and $75 Trillion total debt of unfunded liabilities. Taxes are rising. Debts will rise.  Predicting that President Obama will be re-elected seems a reasonable scenario - the most likely outcome - to work with - regardless of economic performance. It's likely dependance on the state is so high now, that the Democrats will be re-elected. So how can an investor make sure of high returns in this scenario – in the USA or UK?

Analysis: Firstly the analysis of what President Obama and his Administration will do:

·        The Fed Chairman Ben Bernacke will be rewarded with another 5 years tenure

·         The Fed will therefore continue to print money at an extraordinary pace because this will be the only way to make debt payments – by buying their own new debt/loans and using the proceeds to pay foreign investors the interest payments

·         The dollar will continue to decline

·         Inflation will rise because of the increasing money supply and declining dollar

·         Bond auctions will fail and interest rates will rise to cater for increased risk of default as foreign governments desert the dollar

·         Oil prices will rise sharply

·         Inflation will rise further – food, import costs, everything

·         Gold and silver prices will sky-rocket

·         Savers will be destroyed as the dollar’s value as a fiat currency is destroyed

Position for Socialist Leaning Government for 5 Years: In such a scenario, one should get well out of US government bonds, treasuries, and cash, and get into gold, silver, oil and any physical asset class. As inflation takes off, real estate values could rise slightly but the value of the debt will quickly decline in real terms. Hence property will be a good inflation hedge – a real physical asset - something that can generates an income that rises with inflation. Artwork, wine, whisky and anything that can be bartered will keep its value, but the currency will be destroyed. Foreign exchange controls would likely be implemented to stop US citizens buying foreign currencies like the Canadian dollar. Hence it’s best to buy Canadian dollars before the implosion and keep them safely in a Canadian bank where they cannot be confiscated by the US government. The same is true for gold. For US citizens, it is best to buy physical gold and store in bullion vaults in London or Zurich – to avoid confiscation, since the US Fed and Government could make it illegal to hold gold. In the 1930s recall they forced people to sell their gold to the government and then fixed the price 40% higher a year later. Hence they firstly seized the gold then grabbed 40% of the value of the gold.

Oil Plays: Because oil prices would likely go ballistic in US dollar terms, then buy oil company stock is a good strategy. It is very unlikely oil company stock would be seized.

Inflation Destroys The Middle Class: The other thing to remember is, despite an incompetent Fed and a US government that has little knowledge or regard for business, they will still want to keep their elite friends in Wall Street happy. So the printed money is given at zero rate to the banks, who then hoard this cash and give a little to the most robust but hard pressed businesses and individuals at rates 5% higher than what the Fed gifts it to the banks for - at tax payers cost. The cash hoards are then used to speculate on oil, gold and silver – plus other risk tools – by the elite - to line the pockets of the investment bankers. The middle tier of Wall Street meanwhile give out positive messages about bonds, stocks and financial services so they can take high fees – but many of the wealthiest financiers – who have little regard for their client’s interests – know the whole economy will go pear shaped shortly. But just like they did in early 2008, they will say everything is fine and improving – but know a crash is close on the horizon. They will be the first to get their money off the table as the bubble goes pop.  The same is true of the politicians – they want to get re-elected. So the crony elite stick together – and the feeding frenzy of printed money for good old fashioned speculation just before the election is maintained. But many of these financiers will be buying gold, silver and oil whilst they advise everyone to buy US bonds and stocks – and take fees on these - thereby propping things up before the election. Can you see how the rich get richer, the middle class get destroyed and the poor get poorer – even with a socialist government. Anyone with any savings – let’s say you are retired and have $100,000 cash saving – after a few years of receiving 0.5% saving rate, but having official inflation of 3% but real inflation of around 8-10% - when inflation drifts up to say 14% your savings will be destroyed – that $100,000 will decline to more like $30,000 in real value in about 5-7 years. So the bankers take the 4.5% over base rate at no risk, speculate and drive up commodities prices that then increase inflation for the poor and make savers get even more destroyed. When was the last time a country had negative real savings rates for years on end - crazy and danagerous. No wander oil prices are rising fast.  Can you see that the inflation is destroying savings and asset values whilst destroying the government debts generated up to and then after the 2008 financial crash.

Bail Out Of Bad Banks: When the government stepped in to bail the banks out with tax-payers money and nationalised them, this was a hugely negative and socialist strategy – they saved all the failed banks and made them zombie banks. Then they increase regulation on the banking sector – further driving up borrowing costs. They printed money that then created inflation. But they kept bank rates at zero % to try and flush out money from savers and destroy savers value. This cheap money has now created a further bubble in the stock market as they rise to new highs and the bankers make record bonuses again or at least try and make these if they can get away with it. All the time it is the socialist government feeding money into the mix for the rich upper elite to make serious returns as normal hard working middle class people have to pay higher taxes and the poor continue to get poorer. Moving forwards, when the next recession begins soon, unemployment will rise and inflation will get out of control. At this time gold and silver will develop into a bubble as panic sets in and every man and his dog starts being gold and silver. There will be a run on currencies and this money will be spent investing in real money – gold and silver.

You Have Options: The point of the analysis is to highlight that every individual in the UK, US or mainland Europe – in developed western nations - has an option. They can either sit and watch this happen. Or position for this outcome. In blunt terms – do you want to be a winner or a loser. We are pretty sure that anyone having read this article to this point is in the “winner” category because they are motivated and want to improve their lot in life and that of their families. We thought it might help to describe the attributes of “winners” and “losers” – just to highlight how different these types of people actually are.    

In summary, if you follow the “winners” behaviours, you will maximise the chance of having a successful, fulfilling and long life. You will be far more likely to become rich – even beyond your wildest dreams.

Government Mis-Management: If you can then see what the government is doing around you and what is happening in the global economic environment – you will be able to position to maximise your returns and make sure you head towards the rich bracket, avoid getting snuffed out in the middle class bracket and stay well away from the poor bracket.  On the whole, rich private sector individuals and investors show winning behaviours describe above. They may not have all of them – but practice the vast majority of them.

Your Behaviour Is Key: Beyond any doubt, it’s these behaviours that drive success rather than background, religion, gender, race, colour, creed, nationality or class. Just remember all US citizens (except Red Indians) are immigrants. They started out with nothing. Same in Australia. Many of the richest people in London are immigrants that started out with nothing in their native countries. Many of the most successful private sector investors were from humble backgrounds – examples: Steve Jobs, Alan Sugar, Bono, Paul McCartney, Richard Branson, Robert Kiyosaki, Warren Buffett.

Dollar Inflation Bubble: Just to put come prospective on how the US dollar money printing has destroyed purchasing power and created bubbles, consider this. The Dow in 1980 was 1000 - it is now 13000 - a thirteen fold increase. However, the US GDP has only reason 35% since then. In 1973, oil prices were $7/bbl. They are now $110/bbl. That's about the thirteen fold increase.  The money supply since 1973 has risen 13 fold. The rise in the oil price can be entirely accounted for by the increase in the money supply and indirectly debt. So when you fill up your tank, think about the Fed's printed money and debt as the cause rather than OPEC, the Middle East or oil companies. In "real money" gold terms, oil has not really risen significantly since 1980. It is still 16 barrels of oil for one ounce of gold. Coincidently, that's the average oil usage per person per annum in developed nations. Hence your total individual oil bill per year is more or less constant at one ounce of gold, that's ~$1700.