Over the past several weeks, readers have expressed their interest in the upcoming presidential election and its impact on America’s future. More particularly, many readers see this election as a contest between freedom and capitalism and some newfangled version of socialism… and they are worried that if Obama wins, they will become a lot poorer.
Well, here’s what I think. As far as your financial future is concerned, it doesn’t matter who is elected. Despite differences in ideology and rhetoric, our next president will take essentially the same path in terms of “saving” the economy.
I’m not saying that there is no difference between the candidates’ economic views. Obama wants to redistribute wealth. Romney wants to diminish social spending. But neither of them will make much long-term headway at realizing their ambitions. What they will succeed at is what both Republicans and Democrats have been doing nonstop since World War II: expanding the federal government by increasing its debt.
I’m not an economist. In analyzing our country’s economic policies, I take a businessman’s perspective. Businesses have many goals, some altruistic and some selfish, but they are all ruled by the logic of the balance sheet. Without a positive balance sheet, no business can last.
The Economy Is Out of Control
Our economy, I’m sure we can agree, is in ruins, and our federal government has unprecedented levels of debt. On top of our outstanding debts, we keep spending more money than we’re taking in. But only a partisan fool would suggest that this is due to Obama. The national balance sheet was already $9.9 trillion in the red when he took office. He has done a good job of pumping that up to $15.9 trillion. But had McCain been elected in 2008 we would be in roughly the same place.
The reason for that is simple. Every modern-day president knows that his only chance of being elected or re-elected depends on the economy. If the electorate believes that the president is “doing a good job” with the economy, it will re-elect him. If it believes he has made things worse, it will elect his opponent, who will be arguing that he can fix it.
But today there is no way to fix the economy. At the current rate of spending, we’re adding $1.5 trillion per year to the national debt. In 2011, the national debt cost us $454 billion in interest. And over the next decade, that cost is expected to quadruple.
Though there is no way to fix the economy, there is a way to put off the terrible consequences of our debt. That is to increase government spending by printing more dollars. What the president (whoever he may be) wants to spend this funny money on makes no difference in terms of the country’s wealth.
You may prefer to see more spent on our overpriced and ineffective defense system, or you may prefer to see the money going to fatherless families. Your preferences in terms of military and social spending (which comprise two-thirds of our national budget) may favor one candidate over the other. But don’t be fooled; Romney won’t do anything significant to get us out of the jam that we are in.
Remember, it was Bush who introduced the first bailout of the banks. And what did Obama do when he got in? More of the same. In fact, Obama, the “poor man’s president,” hired the very same bankers to run the economy. And with their guidance (their very Republican guidance), big banks and insurance companies received $204 billion in additional “aid.”
What I’m saying, in a nutshell, is that the presidency is insufficiently powered to have any significant effect on the downward trajectory of our economy. Moreover, the little power the president has will not be used to lessen the debt in any serious way. It will be used—as it has been used for decades—to pander to the simple-minded prejudices of the people.
When you run an unprofitable business on debt, you are taking a dangerous risk. Unless you can create and sell an enormously remunerative product, your debt will keep mounting. Until one day, your loans will dry up and your business will fail.
We—the government and most of its population—have been borrowing and spending like shopaholics. Our debt is now crushing us. Sooner or later, we will have to “pay it back.”
Only Two Ways to Pay Back Debt
There are very few ways to pay back debt when you have no money. You can drastically reduce spending and drastically increase production. Or you can put off paying your debt until inflation diminishes it.
American workers, decimated by three financial crashes in the past 20 years, have finally reduced their spending. They have done this despite government efforts to the contrary. Amazingly, their common sense kicked in.
So far, there are no signs that they have increased their productivity. Some economists say that they need government stimulus to make that happen. That is idiotic. The only thing that one needs to become more productive is to work harder and smarter. Even the poorest of the poor can do that.
The American people, by and large, have become fat and lazy. We had the good fortune to live in a country that grew in leaps and bounds for almost 100 years—from 1870-1970, to use rough numbers. Since then, American wage earners, on average, have become poorer in absolute terms. But at the same time, thanks to free trade, consumer goods have become cheaper. So although their earning power diminished, they didn’t realize that they were getting poorer because the toys they were buying (with increasing amounts of debt) were getting cooler.
I’ve been talking about the saving and spending patterns of successful entrepreneurs and workers—the wealth producers. The wealth takers—the millions of Americans and thousands of businesses that are on the dole—will not stand for taking less. And the government—our principal agency of wealth redistribution—will continue to spend to stay in office.
In other words, barring some incredible spurt of individual enterprise all across America, the first way to fix the economy—saving more and spending less—isn’t going to happen.
Accept the Inevitable
The second option, as I said, is inflation. Inflation “fixes” debt by making the amount of money owed cheaper relative to the value of the dollar. If you owed someone $100,000 and you sat through a period of 100% inflation, your effective debt would be only $50,000. This is true for both personal and government debt.
Now the government can delay the inflationary solution by printing and spending dollars in the trillions—and that is just what it’s been doing. Every administration in the foreseeable future will persist in this ruinous practice, because it is the only way they can prevent a collapse during their tenure.
But sooner or later the bubble will burst, and there will be inflation. It is inevitable. And when it comes, it will make everyone poorer. (Or almost everyone, as I’ll explain in a moment.)
Inflation will make wealth producers poorer because, although their incomes might inflate a little, the goods and services they buy will inflate a lot. And the greatest losses will be borne by those who have the greatest wealth.
What about the wealth takers? They, too, will become poorer, because the funds they get from the government will increase very little, while the cost of the meager goods and services they buy will skyrocket.
Meanwhile, there are two groups that will benefit from inflation: institutions that are deeply in debt (including the government) and the banking industry, if it is considered “too big to fail.”
Everyone else will share the pain. And eventually, probably after decades of suffering, the economy will start to grow again.
As I said, I am not an economist. But as an entrepreneur and investor for more than 30 years, I have been guided by a little voice inside my head. It has always whispered the same message: “Don’t fret about what you can’t control. Focus on building your wealth and protecting it. There is nothing else you can do.”
By listening to that little voice, I have been able to increase my wealth, year after year without exception, for 30 years—including all sorts of economic and stock market crashes. I have succeeded, I think, precisely because I refused to invest my money and time in worry. I invested it in wealth-producing ventures instead.
And that’s what I’m telling you today. However much and for whatever reasons you might prefer one presidential candidate over the other, don’t be so foolish as to think that the solution to your financial future will depend on him.
The only thing you can do that makes any sense is to take action immediately to increase your individual wealth.
Self-Reliance—Your Path to Financial Freedom
This may sound selfish but, in my mind, it is the only way out of this mess. Ultimately, wealth is the product of profitable work and diligent saving. You, and only you, can do this. The government can’t and won’t.
In reality, the most unselfish thing you can do about the economy is to work harder and save more. This will increase your wealth, the wealth of your employees, and the wealth of your family and any others you wish to help.
So that is my recommendation. Vote for whom you like, but don’t believe for a second that either candidate is going to help you get richer or even prevent you from getting poorer.
Take arms against this sea of troubles and oppose them with the following survival plan.
My Financial Survival Plan for the Next Term of Office
Don’t retire—however much you want to. Keep your job, because you’ll need your income as some of your assets become worth less. If you are an employee and can persuade your boss to let you work part-time, do so. But only if you will be providing a service that he/she can’t get as cheaply from someone else.
If you are retired (or even if you are still working), establish a second income. There are a hundred ways to bring in more money. The best income comes from entrepreneurship, and the easiest businesses to start these days sell their products online.
Evaluate and reallocate your assets to generate more income and hedge against inflation. Building wealth, I’ve told you many times, is much more about the kinds of investments you make (asset allocation) than it is about the particular stocks or bonds you buy.
Examine and revise the way you use your income. Understand the difference between saving and investing. Learn the best practices for maximizing every dollar you earn.
If you possibly can, get a second residence in another country where you can live well on a fraction of the income you have right now. I know it’s a cliché, but there are literally dozens of tropical paradises outside of the U.S. where you can live like a king on an income of just $2,000 per month.
Keep a stash of gold coins. The more you have, the safer you will be.
Put a portion of your investment money into solid blue-chip stocks. I’m talking about big U.S. and international companies that have an enduring, competitive advantage. These are the kinds of companies that Warren Buffett would buy today if he were starting out again.
Buy rental real estate—as much as you can, as soon as you can. I’ve been investing in real estate for 40 years, and I’m quite sure that there has never been a better time to buy than right now.
Learn how to live better by spending less. Most people never give much thought to the value they get for the goods and services they buy. And because of that, they tend to spend huge chunks of money on junk. I believe you can live a genuinely rich and rewarding life on a modest income—if you are smart about what you buy and how much you pay for it. I’m writing a book on this subject now, tentatively titled Living Rich. And I’ve written about the other aspects of my financial survival plan through The Palm Beach Letter.
If you have the energy and conviction to take all of these measures, you will not have to worry about what is going on in Washington. The big trends—toward more government, more debt, less freedom, and never-ending war—will continue. And if you have money, you will be paying for it. But your wealth will outpace the taxation and inflation that will be imposed—regardless of which banner they stand behind.
