Financial Sense Newshour
The BIG Picture Transcription
January 20, 2007
Part 1
RealPlayer
WinAmp
Windows Media
MP3
- What He Said – What It Means
- FSO Follies: The Bernanke Babble Dictionary
- Retirement Income Planning
- Q-Calls
Part 2
RealPlayer
WinAmp
Windows Media
MP3
- Mexico: Land of Metals Opportunity
- Other Voices: John Berthoud
- Q-Calls
- Curbing Free Speech on the Internet
Part 1
What He Said – What It Means
JOHN: Well, obviously no report of the Big Picture today would be complete without taking a look at what Chairman Bernanke said in his testimony to the Senate this week as far as the economy and monetary policy. I am shocked to learn – to quote something out of Casablanca – I am shocked to learn that we have a debt problem, that we have a deficit problem. Don't mock me, okay.
JIM: Surprise. And I'm also shocked to discover that I may not get my Social Security benefits.
JIM: You know it was absolutely amazing. If you take a look at what he was saying, he was setting the stage, and I want to put this all in perspective. What he was talking about was the increase in entitlement spending both on Social Security and Medicare. Both of them are basically bankrupt. And the problem is that he was basically saying, “Look, congress, if you don't do something we're going to be in trouble because Social Security and Medicare will go bankrupt by 2040.” The first question an intelligent person should ask is when have you ever seen a congressman be concerned about something that happens 35 years from now. That should be your first clue that something is afoot and is not right in D.C.ville. [1:36]
Yeah. That was the same question that was put to Maynard Keynes if you remember. John Maynard Keynes, way back when, during the time of Roosevelt somebody said, “But professor, this just sort of rolls all the problems forward, doesn't it? It doesn't solve anything.” And he said, “yes, well, but in the end we're all dead any way, aren't we?” I mean that was his response, you know. Meaning somebody else will deal with it at some future time.
JIM: Yeah. So the fact that they are talking about something – Social Security – that the latest official figures say doesn't go bankrupt until the year 2040 [shows] that's not what they are talking about here. What they are talking about is remember, we've had two or three fixes to Social Security. The main one came with the Greenspan commission in 1984. They raised the Social Security taxes. And you notice they call them taxes now; they don't call them contributions to pension funds. [2:28]
Contributions, investments or whatever they used to call them.
JIM: Basically they are just taxes. That's what it is. But that came in 1984 and that was supposed to make us secure until the year 2030. And then all of a sudden in the 90s, they are saying: here we are 30 years away from the problem, we need to fix it again. And they put in these fixes. They took off the caps on Medicare taxes. They raised them under Bush I, and then they took the caps off under Clinton; and then they raised and accelerated the amount that's subject to Social Security. So that was the second fix that was hypothetically going to make us secure forever until the year 2040. And I love that any time they are getting ready to pick your pocket, any time the government is going to reform something, that means one word. I want you to put this down on a piece of paper. The word reform means they are going to pick your wallet – higher taxes.
Well, if we look at what is really being said in the Congress, you have to understand that what is really going on, this is a show. That's what it is. It's a dog and pony show. And there is a purpose for it. You have to prepare the public in one way or another for the things that are to come. Basically what we are we are being cushioned like: sit down, don't take this too hard, but we're going to tax you some more. That's the bottom line on it.
JIM: The bottom line is that's what they are getting ready to do. So they've got to go with the scare tactic: “oh my God, if we don't do something now, this is going to be a problem; old folks will be thrown out on the street.” That's going to happen any way, whether we like it or not, as they cut benefits and as they inflate their way out of it. But what they are doing and this goes back to what they were supposed to be doing in 1984 as we were going to raise, double the social security tax rates, raise the wage base and we were going to create these surplus funds like good squirrels, salt them away so that when the baby boomers hit retirement, the money would be there to pay them.
The only problem is we never salted the money away. We spent it. We created the excess tax revenues, the tax revenues came in, the government borrowed the money, spent the money, it's gone and they issued IOUs to the cookie jar. The problem is now we are entering what we call the demographic crossover point where the surplus revenues in Social Security are beginning to decline as less people enter into the work force versus the proportion of people that will now be entering into retirement. We're talking about the 80 million baby boomers who have paid a lot of money into social security taxes that are now coming to the age where they expect to collect on it. And the problem is the money isn't there. It's been spent. And that cross over point is going to take place in the next decade. That's why they are sounding the alarm now because when you think about it, you know, the average congressman that has to run for election every two years, the only thing he's thinking about is: “now that I'm elected, how do I get elected to my next term.”
Long term thinking for a congressman is no more than six months to a year as they think about their next reelection point. So talking about something that happens in the year 2040 is just pure balderdash. They don't care about that. They know these are phony numbers. But that's not the way you present it to the public. I mean, you can't get up there and say: “look, we've passed these bills. I know you've paid a lot of money in Social Security, but we've got this slight problem. We took your money, your surplus, we spent the money and it's not there.” Now we're hitting the cross over point and we're going to start running out of those surplus revenues and we're going to be in trouble here because some of those phony IOU bonds are going to be coming due. And let's face, John, the only thing that's going to happen is we're going to have to inflate our way out of this.
Now, there was a comment – I'm trying to think of which clip it was. Let's play that clip where the one congress man says how does this affect me.
SENATOR: How is that going to really affect my life?
BERNANKE: Senator, first we're going to be seeing this impact on the deficit just a few years from now. It's not that far into the future. And if the deficit begins to widen further, we're going to see more draining of funds away from capital formation. That’s going to mean the economy’s going to grow slower. It's going to mean that wages aren't going to grow as fast because workers don't have as much capital to work with. It’s going to mean we’re going to be borrowing more from foreign lenders and increasing our obligations to them. So even if there is no change in fiscal policy, we'll have soon an effect on the vibrancy, the efficiency, the growth rate of our economy which will be palpable and which Americans will see. And more over to the extent that Americans are counting on, for example, on the current law (social security benefits) and the current payroll taxes, they are going to have a surprise at some point because the two sides are not commensurate in the long run. And they are either going to be finding themselves with lower benefits at retirement than they expected, or higher payroll taxes, or some combination. And that's also going to affect them in a very real pocket book kind of way?
SENATOR: Well, thank you. I think – I hope people are playing close attention. Let me just conclude on this question. About tax cuts, in your judgment and the considered judgment of economists do tax cuts pay for themselves? Dou get more revenue with a tax cut than you would have otherwise have had?
BERNANKE: Well, the effects of a tax cut depend on the nature of the cut, the type of cut it is and so on. I think the general view is that tax cuts don't usually pay for themselves. The fact that tax cuts can increase growth or increase the size of the economy means that they partially offset the revenue of losses as a usual matter. But I think the issue with tax policy is not does the tax cut pay for itself. The question really is what is the balance between taxes and spending that is right for our economy. We don't want to have wasteful spending because that requires higher taxes which are detrimental to economic growth. But important spending – spending we need to do – we're going to have to find a way to finance that and we would just like to find the possible best way to finance that and that has the minimum adverse impact on our economy. [9:20]
JIM: You notice the punch line there is how he brought up tax cuts. And we know after Bush's tax cuts, tax revenue actually have gone up since then and is one of the reasons why the budget deficit has come down to a lower level. But what Bernanke was talking about when he talked about deficits is there's two kinds of deficit that we're now measuring. From an accounting point of view, most businesses are on accrual accounting. So what that means is if they have employees that they must fund or provide some kind of retirement benefit, they have to accrue (put money aside) each year to cover those projected benefits when these employees retire. There is now accrual accounting used with the government budget deficit and those budget deficits are not two hundred something billion. They are over $1 trillion. We have over $50 trillion of unfunded liabilities for Social Security and Medicare. And it's one of the things that Professor Lawrence Kotlikoff, who we had on the program in 2004, wrote a book about called The Coming Generational Storm, in which he talked about this system being simply unsustainable.
So what they are going to do is they are not going to solve this problem. In the end they'll have to inflate their way out of it which will destroy much of what we have in this country. But what they are going to try to do is postpone that day of reckoning and what they are hoping to do is raise tax revenue. So now we are going to begin – this is going to be an issue that's probably going to be solved or they are going to have to address after the 2008 presidential elections because what they are doing now is they are going to be sounding the alarm that's going to be scaring the pajamas off of you – and this is: “oh, my God, this is so scary, we've got to raise taxes.” And this becomes a propaganda process that is now beginning and will be going forward. [11:28]
Well, we need to look at a phenomenon which has occurred in the past and then put our mind in the crystal ball and ask if this is going to happen again. These entitlement programs receive regular what are called COLA judgments, cost of living adjustments – COLAs. And these are indexed to the CPI rate. In other words they are supposed to reflect how much inflation is going up. So the thugs in Washington knew that they could not do that, they had to do something to scale that back, so that's when they began monkeying with the CPI rate. And I would guess – you tell me if I'm right or wrong – they are getting ready to do that again.
JOHN: We got a hint of it. In fact, Bernanke, I think, said that he thinks inflation is under stated by half a percent to a percent. In fact, in print, I think he said anywhere from 1 to 1 ½%. So whenever the Fed – the creator of inflation – is talking about how the CPI is understated, that's the buzz word that we need CPI reform and they are going to be changing that and tinkering with it to bring down the reported level of inflation. This is almost – John, it reminds me out of George Orwell’s 1984 book, but that's what they are hinting at and let's go to that clip where he talks about the CPI is under stated.
SENATOR: Now, our Bureau of Labor Statistics recently introduced a new price index they call the chained CPI. I wonder if you would elaborate on that. They’re claiming that's more accurate than the current CPI that we're looking at. I'd like to hear your feelings on that new measurement.
BERNANKE: Senator, yes, I think it somewhat more accurate. What it does, the existing CPI, the one we're all familiar with, takes a fixed basket of goods and values the change in cost of that basket from month-to-month and year to year. The problem with that it doesn't take into effect as prices change, people change the goods and services that they chose. If carrots become more expensive, I might eat more apples instead. The chain-weighted CPI allows to some extent for the adjustment that people make to go from higher prices goods to lower priced goods, and therefore is probably a better measure of the true cost of living increased than the standard CPI?
SENATOR: Do you think that procedures we're using now with CBO and OMB, that those projections overstate inflation there?
BERNANKE: Well, presumably, the projections they are making are in terms of what they think the standard CPI inflation will be.
SENATOR: Right.
BERNANKE: At the Federal Reserve we've done numerous studies of these indices and we do think for example that the standard CPI does overstate true inflation (if we could measure true inflation) by some amount between ½ and 1 percentage point?
SENATOR: You think with those agencies we need to go to the chained CPI to get a better result?
BERNANKE: Well, the question – that is really an operational question one might ask – is whether we should use the chained CPI or some other measure to index entitlement benefits and also to index the tax code. As Congress, if your objective is to tie benefits payments and the tax code more directly to what I would call true inflation, you would have a more accurate measure of true inflation by using the chained CPI or some alternative measures. [14:38]
JIM: John, quick, quick, quick, quick get the Bernanke babble dictionary. There was the punch line. He laid it up for you. Okay? They just scared the bejeebers out of you that we've got this huge rush and increase of entitlement spending and it's going to go up and up and it's going to equal 100% of GDP. Notice what they said if we're going to measure true inflation for these entitlements, then we really need to use the chain-weighted CPI which more truly reflects the real inflation rate. What they are trying to do is put a cap and lower what it is that they've been giving people in terms of Social Security benefits and the Medicare type benefits. So this is the lay up right there. They did it so beautifully. He just fed right in to that because they scared you first and said we've got this horrible problem where entitlements are spinning out of control.
What they just told you is one of the steps in which they are going to try to contain that, which is to come up with these false CPI measures which will cut back on the amount of COLAs that they give. This will hopefully, for the government's sake, bring down the amount that they have to spend or slow the rate of growth in entitlement spending. And at the same time, they have got to get you scared and prepared that they've got another solution which is to fleece you again and raise taxes. The program doesn't work. It's a Ponzi scheme and the comeuppance or the day of reckoning is close at hand, which is why they are starting this process right now. [16:24]
SENATOR: How urgent is this situation? How urgent is it that we address these long term balances which, as you describe, could swamp the boat and could have very adverse effect on our economy if we don't take action? How would you rate the urgency of the need for a response by the government?
BERNANKE: Senator, one might look at these projections and say, well, these are about 2030 and 2040 and so we don't have to start worrying about it yet. But, in fact, the longer we wait, the more severe, the more draconian, the more difficult the adjustments are going to be. I think the right time to start was about 10 years ago?
JIM: There you have it, John, what he was really saying. They threw out the number 2030. That was supposed to be when it was made secure in 1984; and then he threw out the year 2040 which is the current fictitious number that they tell people that it doesn't go bankrupt until 2040. The real truth in the matter is the cross over point begins in the next decade. Some point in that next decade, and I'm only talking three-to-five years from now, the amount of surplus that's coming in to Social Security, which they've been siphoning off and spending as part of the general funds, that ends; and then they are going to have to begin paying out more revenues than they have. And that's why they are recommending and raising this issue now because the government is in deep doo-doo. There is no trust fund. They did not save the money and where is it? It's in IOUs. Those IOUs are going to be coming due and what happens is the only way those IOUs will be paid is the Fed will have to monetize those IOUs and print money to pay them. So even if you do get your Social Security benefits, you're going to get inflated benefits that, as Marc Faber has talked about, maybe $100 will buy you a cup of coffee. So that is one reason why we're going to talk about the importance of income planning for retirement in the next segment that's coming up. [18:28]
So one question: at what point does the back get broken?
JIM: I think the unraveling begins after 2008 to 2010 and after 2010. It's going to get quite ugly because all of this stuff is going to come to the fore. I think the dollar is going to be, you know, as good as toilet paper and they are going to have to inflate their way out of it because we are just spending money that we don't have. And the crazy thing about this is they want to expand entitlements, and the next move is universal health care. And the whole purpose of universal health care is going to go to health care rationing. It's just absolutely amazing that this is so clear cut, their game plan, their play book. It's just so easy to spot the lay ups.
So look for more of this and more fire works to come next month when he goes on Capitol Hill for a semi-annual Humphrey Hawkins testimony that's in February and July, so he'll be before the Senate and Congress and the House. And Congressman Barney Frank is already planning to give the Fed Chairman a hard time if ever even refers to rising wages as inflation. So we are going to be entering the age of inflation. It's going to be harder and harder to hide it, but they'll do their best by changing either to chain-weighted CPI and all other measures on it. And right now, the real underlying inflation rate, I would ask many of you listening to this program, do you believe, as the Fed chairman just stated, that your cost of living is grossly understated by at least 1% as the Fed chairman would imply. So any way, it’s time to plan, John, which is the topic of our next segment. [20:27]
FSO Follies: The Bernanke Babble Dictionary
Ben Bernanke: The goal as you know was to help insure…
Yada, Yada, Yada. Blah, blah, blah. There he goes again. Do you have trouble understanding Federal Reserve Chairman Ben Bernanke. Well, we don't blame you. We do too. That's why we created the revolutionary Bernanke on line real time interpreter. Let's hear that again but with the help of the Bernanke on line real time interpreter.
BEN BERNANKE: The clear communication of policy provided notable benefits.
Just push the button and voila.
TRANSLATION: We’ve gotten away with raising interest rates.
Isn't that great? Nothing escapes the Bernanke online real time interpreter during one of the Fed's famous speeches.
BEN BERNANKE: Policy moved gradually: tightening in one quarter point increments over 14 consecutive meetings.
TRANSLATION:If we move slowly enough, you guys are too stupid to notice.
The Bernanke on line real time interpreter is affordable by everyone in the family. It's only 49.95 payable in anything except dollars. And if you act in the next 10 minutes, we'll throw in the Bernanke on line real time fib finder. When the Fed chairman is playing fast and loose with the goose.
BEN BERNANKE: Although macroeconomic forecasts are fraught with hazards…
[squawk, squawk] Liar, liar, liar.
There you have it, pick up your Bernanke on line real time interpreter at any Federal Reserve bank branch. And remember, as the on line interpreter would say: “my job as chairman is to keep economists fooled.”
Retirement Income Planning
Listening to Ben Bernanke's testimony to the Senate this week, I really found it to be quite sobering. Number one, if you understand what he is telling you in as much the Fed chairman ever says anything clearly (I always wondered, Jim, what he would do in a movie theater if there really were a fire, you know) but if you listen real carefully to what he said, there's a very clear warning: the promises that have been made to you as far as Social Security and retirement and Medicare are not going to be there. That's really the bottom line in this whole thing. And you may even be asked to pony up more and more dollars for less and less and less returns. And that came out in an interchange between Senator Jim Bunning who is a Republican of Kentucky and Ben Bernanke.
SENATOR BUNNING: How do we get around the promise that was made when people got into Social Security? How do you suggest that we tell the American people? Or do we set a date certain, say 20 years down the road, all of those who got into Social Security at age 20 who are now 40 when they become 50 will have to get a different rate of return on their Social Security?
They are basically saying that the promise that has been made – it’s in trouble, it's all in trouble. And that future date by the way, we need to talk about the exact date when this thing goes belly up because they are trying to make it sound like it's sometime in the far distant future, but the promises they made are not simply going to be there. I don't know how this is going to fly politically but let's face it that is the cold hard numeric fact.
JIM: You not only have government that’s going to be reneging on these promises, but also the retirement planning through the corporate sector. If you work in the private sector, it has also changed. Let's face it, 30, 40 years ago, let's say our fathers went to work for a company, they spent 30 years with the company, they had a defined benefit pension plan; and when they retired they could basically estimate that they were going to get not only their Social Security, but they were going to get a certain percentage of their salary as a pension. Well, over the past generation, what we've seen is a seismic shift that has occurred in how retirements are funded in this country. And the burden has shifted away from companies and the government onto the shoulders of individuals. And that's really a key thing that you have to understand here regarding your own retirement.
That’s why, as a result of this burden being shifted from government and companies to the individual, you have 401(k) programs today, and you have less and less companies that are keeping their defined benefit plans. And as a result of that, a large majority of boomers who are headed into retirement have been pushed into the marketplace to manage their investments, because basically what they put in their 401(k) plan, what a company may put in, in terms of matching contributions, and what return or what amount that grows to, that’s going to be your retirement. And you're saying: “well, I've got that and I've got Social Security.” Bear in mind some of the other clips we've played in our first segment and we'll play some more clips as we continue into this, but basically for retirement planning, the emphasis and the shift is being transferred from government and companies on to individuals. And you need to understand that because if you're looking and saying, well, the company is going to take care of me or the government is going to take care of me, you're going to end up on poverty street. That's something that is going to become increasingly unreliable because the system is bankrupt and it's going broke as we speak. [26:07]
It's ironic that at the same time that we're hearing that, you're hearing chairman Bernanke say this and we recognize that we have all of the governors of the different states out there telling us we can go for some kind of mandated universal health care program.
Kansas Governor Kathleen Sebelius: But it's time to go further. We must commit ourselves to the goal that all Kansans will have health insurance and we must begin that now.
The previous programs are collapsing out from under them.
JIM: Yes, like Medicare. If you heard Bernanke, he talks about one of the real dangers with Medicare is that you have 35 million Americans, one out of eight, who are now over age 65 right now. By 2040 more than 77 million Americans will be over 65 representing 20% of the entire population in the United States. A major factor that will contribute to this projected spike will be 76 million baby boomers – those born between 1946 and 1964. The largest generation in American history is heading into retirement. [27:20]
JOHN: If we zoom back into the past, if we go into the way back machine, we have been through, since about 1982, a series of increases in FICA and Medicare taxes – always with the promise that they would keep it solvent by increasing these taxes and they were telling us that the date would get pushed back like to 2030, 2040. What happened to all of that chatter? Because all of a sudden, they are saying, well, we are in trouble right now.
JIM: Well, the problem is the increase in Social Security taxation was supposed to increase tax revenues coming into the fund that would be invested for future generations. Just as if you're working at a company today, let's say you're a government employee, you contribute to some kind of pension plan, the money is supposed to be there for you when you retire. The difference is all of these surplus extra revenues that have gone into the social security trust fund have been spent. What happens is the surplus goes into the fund and then what the government does is borrow that money, spends it, and issues an IOU to the fund. The real problem here is not that Social Security, which they are saying is secure until the year 2040. Well, let me just put this in perspective: when have you ever known a politician to care about anything that occurs 35 years from now? The only thing anybody in Congress is concerned about is next year's election. The real problem is the surpluses from Social Security, as we age and as more boomers start drawing on Social Security, the surpluses evaporate in the next decade. So that's why they are talking about it now. Forget the garbage that the system is secure until the year 2040. It's not secure. And these surpluses evaporate here in the next decade. And that's what's scaring the bejeezus out of these guys which is how do we continue this Ponzi scheme and that's why they are talking about this crisis now. [29:41]
Alright, so what will they propose to do about it then?
JIM: One proposal is raising and lifting the caps on Social Security. This year the cap on Social Security is 97,500. One of the things that the Bush administration is thinking of negotiating with the Democrats is they would lift the caps. So therefore, you would pay Social Security taxes on all of your earned income even though you are unlikely to receive any benefits because they'll go to means testing by the time you would have to start receiving benefits – so that's one item. [30:18]
JOHN: That's another fake promise, though, as well, because basically they are going to raise the caps knowing darn well that when these people get there it's even going to be less than what they would have gotten now in effective payment.
JIM: They'll not only receive less, and you heard the congressman talking about how they need to reduce benefits. They will go to means testing. So you're going to be asked to pay more money into the system, which is what happens in a Ponzi scheme: you need more new participants or more new revenues to keep the Ponzi scheme from collapsing. And that's what they are going to be talking about. In 1984, when the Greenspan commission raised social security taxes and then also raised the wage base on which it was assessed, I think they said it was going to be secure until the year 2030. And then the Clinton administration came in and raised Social Security taxes and then it was going to be secured until the year 2040. So what they'll probably do is raise Social Security taxes and who knows? Maybe they'll do something, and it will be secure until the year 2090 or something like that. It will be something crazy like that. But believe me, they'll be in trouble and what will happen eventually (as more and more boomers head into retirement in the next decade and it just overwhelms the system), they'll go to means testing and they'll start demonizing the very people that have paid the largest bulk of their revenues into the system as people that have too much money and they shouldn't get it. So basically, the Ponzi scheme will end up being turned into a welfare scheme. [31:55]
But what's the bottom line of all of this, because ultimately they are going to be telling the public, it's 2030, 2040, 2050. And all of a sudden we're all going to wake up in the morning in 2011, 2012 or something like that to find out the whole thing is blown out. And everybody's going to go “whoa! What.” You can see this coming. So what's the bottom line.
JIM: The bottom line – as we started this segment – more of the responsibility for meeting income needs and health care expenses in your retirement is going to be shifted to the individual. Do not depend on the government and do not depend on the company you work for, for this retirement income. In other words, it's going to be what you manage, what you save, and what you were able to grow your assets to which is going to be the greatest security for yourself in retirement planning. [32:51]
Also, Jim, what about minimizing your Social Security contributions. Now, if you are a salaried person you can't do that. But if you work for yourself or in a partnership you can say restructure things so you only say take a certain amount in salary and the rest is dividends and royalties, or, you know. And this is all a legit process.
JIM: Yeah. Which means that you're going to see more people sub-chapter S-corporations; maybe for example, they will take rent from their business and receive income versus rent versus salary. When you're talking about where tax rates are going, remember, in 2010, Bush's tax cuts expire, so you're going to see the tax rates go back up to 39.6 and Democrats have already said they are not going to renew them. So we’re going back up to 40% tax rates. Add to that a 15.3% Medicare and social security tax and you're at 55%. And then on top of that add let's say any estate tax that you would have to pay. So you're already going to be in a 65 to 70% tax bracket. Believe me, you're going to see the 3 F’s – fight, flight or fraud – as the government becomes more rapacious. Just as we found out for example in England during the 1970s when tax rates were running as high as 90%, a lot of the rock stars basically left the country because why produce a record if the government takes 90% of what it is you make. The very same thing happened here in the United States during the Great Depression when the tax rates were raised to 90%, a lot of movie stars in Hollywood didn't make one picture out of the year. After that they wouldn't make any more because why work if you're going to give over 90% to the government. [34:36]
It's very clear that responsibility for retirement, the whole experiment from F.D.R. forward has been a failure from when we started Social Security. The responsibility is rolling back from both corporations and the government onto the individual again, which is tragic because most of the people in the country today still don't recognize that. That's the funny part. And that's what's really tragic. There's a bridge out and they are really not telling them, so people aren't listening. But having said all of that, what does it mean for people who say I recognize this is happening. What do you do now? What are my options?
JIM: You have to recognize there are a number of things going into effect here. And the challenge is from wealth building to life time incomes. And, John, in addition to more of this burden being placed on Americans, people have to start thinking about this differently because of medical changes, people are going to be living longer. And so basically you have to think of when they first put in Social Security, one of the problems was, let's say the average male life expectancy was age 63, 65, so it was expected, when you retired, you collected Social Security for maybe two or three year, but no more than five years and your life expectancy would end. We didn't dream of the medical advances that we would have that would prolong life where the average life expectancy for males today is in the mid-70s; and for women almost close to 80. So the other thing that you have to think about in terms of planning for retirement is the fact that it's your responsibility now; but secondly, you're going to be living longer, so your income and your assets have to support yourself over a longer period of time. [36:24]
JOHN: Well, let's look at the long term implications of that if we're talking about life time income, not only are you going to have to plan for your own retirement, but because of the change in lifestyles that have been going better here in this country (people are living longer), you're going to live longer, so the money is going to have to hold out for longer, and how do you deal with that?
JIM: Well, as I mentioned, there are five risks to life time income. The first risk is longevity risk. You know, maybe you look at your family, you come from a line of very healthy people with long life expectancies. Maybe your parents lived into their eighties or nineties. I have several clients, John, that are in their nineties. One client I can think of is a very active bridge player. Another one, he's had his knees replaced but he still plays golf and he's in his nineties. Maybe he doesn't drive the ball as far as he did when he was in his sixties or seventies, but you know, he's still living and he's very healthy. So longevity risk is one thing you have to take a look at. [37:28]
That's a real way to look at, longevity risk. Be careful, you might live too long.
JIM: Yeah, take care of yourself and you've got a problem. But it's true. People are living longer. Male life expectancies have gone up by almost 10, 15 years. The second risk that goes along with longevity risk is inflation risk. And let me tell you folks, forget about deflation. We're not going to have deflation. Inflation – not deflation – is what you're going to face. And I don't have to tell that to anybody that’s retired today who may have retired five years ago, 10 years ago: just take a look at what you're spending today on doctor visits, prescription drugs, what your utilities are, what the cost of travel is, what the cost of moving into a retirement community, look what you're spending for food.
It was rather hilarious. We're broadcasting today – I'm at the beach – and as we pulled into the city where we have our beach home, we had to stop off at the grocery store. It was rather later Thursday night and I'm going through the produce section and this older woman comes up and starts talking to me. Maybe I have a friendly face, I don't know, and she says, “can you believe what the cost of vegetables have up.” And she says she’s a vegetarian. I kind of joked with her and I said, “well, just ask them to give you the core rate.” And she kind of looked at me like what are you talking about. But here she was, she was just flabbergasted at what she'd seen in the cost of produce.
So inflation risk is a very important element in planning for retirement. And that's why one of the biggest mistakes and we're entering that period now (and we're going to do a show about this: deja vu, stagflation leading to hyperinflation), but people are living longer and you'd better plan and have something in your portfolio that goes up, increases your income. Or maybe you're lucky, you have some sort of pension that's indexed to an artificially low inflation rate, or maybe you develop another skill and you work part-time to supplement your income. But you better have something in your planning to account for inflation because if you don't, you may start out thinking you're living comfortably and then gradually over a three-year period, five-year period, ten-year period, you're going to see inflation come in and erode your standard of living. [40:06]
JOHN: That would also imply as well what I guess we could categorize as asset allocation risk, simply because of the fact that let's face is when you get to the point of retiring, you say well, there's my nest egg, and it's a certain amount, and I have to protect that so people like to put that in secure places. I remember back in the early 80s that was CDs. They were getting a good rate of return and they were secured (guaranteed), but that doesn't work any more and people are going to want to put their money in the banks, but the banks don't grow your money if you look at the current rates that are being returned. [40:40]
JIM: That's a big problem because you talk to retirement planners and they say, “oh, put 60, 70% of your portfolio in fixed income.” And in the eighties that might have been a good plan because the interest rate received in the bond market, the interest rates received on certificates of deposit were far above the inflation rates – so the real rate of return was positive. Today, when you look at CDs and you look at bonds, the real rate of return is negative. In other words, after taxes, after inflation, you were actually losing purchasing power every single year. Your income from those investments is fixed so they are losing their purchasing power and the assets themselves are losing their purchasing power.
And if you were retired, think back of what a $100,000 CD might have brought you in terms of income 10 years ago, and look at that $100,000 dollar CD today. Will that $100,000 produce the same level of income that would have kept you in pace with inflation? And then what is the purchasing power? Look what it costs you to buy a new car today versus 10 years ago. Take a look at what it costs you today to go to Europe versus 10 years ago. All of those costs. So there's a real danger of asset allocation which is people put themselves in such a fixed situation that as their cost of living goes up, they are trapped. And so I think bonds and CDs are going to be what we used to refer to them when I got into this business in the 70s as certificates of confiscation because basically what you're doing is losing purchasing power each year. [42:31]
If I were to comment, Jim, remember how everybody has always been talking about you can have that dream retirement: retire at Happy Acres out in the Mojave desert – or something like that – with stability. That is just not going to happen any more. In other words, people because of the monetary policy of the country and everything are going to have to be constantly monitoring their income and moving things. The whole bit about put your money out here and go play golf, that's probably not going to happen for a lot of people any more, is it?
JIM: No. In fact, I read a number of articles over the Christmas holidays that are talking about this. In fact, the Bush administration in their concept for Social Security planning are talking about removing some of the penalties of people who retire losing some of their Social Security benefits because they go to work. And that is just going to be a viable alternative. So you might want to think of skill sets once you retire that maybe you can work part time and maybe it's something that, you know, it's a hobby or something that you really enjoy that you could do to supplement your income during your retirement years because one of the other risks that we talked about besides investment allocation – the fifth risk in retirement income planning – is health care expense risk. That’s because if you listened to what the Chairman was saying yesterday, you think Social Security is bad, but Medicare is even worse.
What's worse and even insane is trying to go to universal health care – but understand the purpose behind universal health care is to go to healthcare rationing. That's the concept behind it because they know these expenses are going to get bigger. They are going to be a greater drain on government; and the system is bankrupt as it is. So what they want to do is convert the healthcare system to a system of health care rationing. And if you listen to the subtleties of what they are telling you, they are already laying out the blueprint of what is coming. So a fifth risk that you have to plan for (and depending on your income because here's the other irony of this) is: the better and earlier you start planning for yourself, the more secure you will be when you get into retirement, but you will also be penalized for doing so. In other words, because of the amount of assets in your retirement or your income from your investment you may end up losing part of your Medicare benefits, or losing your Social Security benefits as we go to means testing. But nonetheless, we're going back to the way it was before these entitlements came in for a good majority of middle class people, and upper class people. You're going to have to fend for yourself and take care of yourself – and so health care risks are the fifth element of retirement planning. [45:41]
JOHN: You know, Jim, I should point out by the way, it's also something that comes into health care at this stage of the game and that is means testing: meaning, if you're over 50, then they begin to look a little sideways about you, “well, you've really, you know, lived your living you're tailing out there, you don't really need this procedure, somebody younger really needs the procedure.” So it has the illusion when you start out of giving everybody free health care – it sounds good – or some kind of affordable health care, but in reality, because the system can't support it, we go to means testing.
And one of the means, by the way, is age – one of the means tests is age. So whereas now, elderly people such as my mother who is 91 gets a lot of good health care for a very reasonable rate because she invested in the proper areas before she got to this age, that isn't going to be there as well. This is something people need to understand.
JIM: Absolutely.
Okay, now, given all of these five problems with retirement planning let's work out some solutions because it doesn't do any good to scare the bejeebers out of everybody. You're making me sick, Jim. [46:42]
JIM: Okay. Just remember this acronym: SPDs.
SPDs?
JIM: SPDs. It's save, plan and diversify. And one of the first things you might want to consider is start to visualize your retirement, the age in which you plan. And you may want to think of either working longer or for example, if you don't have enough assets saved maybe working part-time. The other thing that you want to do is think about converting some assets for life time income. So you might want to have a systematic withdrawal plan on a certain amount of assets that cover the gap between what you're paying out in expenses and what you need in terms of total income. Right now, what are the things that you can look at? Well, so far we can still look at Social Security, but I'm hesitant about saying you can count on that.
Number two, take a look at your pension plans, if you don't have a defined benefit plan.
Three, look at systematic withdrawal plans where basically, you're going to be looking at some principal that you're going to be pulling down.
Four, start taking a look at real estate. For example, if you live in California, your house is worth 750,000, you may want to think, hey, I sell my house, I move to some area where I can buy a house for a couple of hundred thousand, and convert your existing real estate into income producing assets. The last thing you want to do is retire if you have the bulk I of it in real estate because besides giving you shelter, it's not going to be producing income. So take a look at were you live in terms of expenses.
You might want to look at smaller communities in states where they don't have large welfare systems so the cost of living is a lot cheaper. Generally, on the West Coast and the East Coast in large populous centers the tax rates, the welfare systems, the government is bigger and it's more expensive to live. So think in areas that are maybe more remote. And that is one of the clear trends that we've been following is new retirement communities that are springing up in areas where it’s less expensive because what people are doing is cashing in on their major asset: real estate.
Another issue, take a look at, for example, we've always talked about dividend investing here. Something in your portfolio, maybe something that's a blue chip company, a mature company, in a business that is not impacted by the economy. In other words their dividend is $1000 from your stocks this year, next year it will be $1,050, so you have something in your portfolio that is keeping pace with inflation that will allow you to live.
The bottom line is you've got to start doing some planning because if you listen, and bear in mind what you heard on Thursday on Capitol Hill is just a forewarning, and you're going to hear more and more on this as we get into the next decade, the surplus revenues of Social Security dry up and the government is in a problem because all those trillions of dollars of surplus that's were supposed to go into the trust fund and be invested there to provide the payments to the boomers when they retire, all of that money has been spent. And it's nothing but a cookie jar full of IOUs. [50:22]
JOHN: You know, I guess what always disappoints me really because it's been my career for all my life in the media is that a lot of the media people know this but they are not reporting on it, which is what media are supposed to do. And imagine for example, if you were to do the very same thing for your employees with their pension plans, we would have you doing this from San Quentin. As I recall, we'd have a little thing in the cell there to do the show from. It's the very same plan, it's a Ponzi scheme. It's the very same fraud. This is fraud, but nobody seems to comment on it.
JIM: Well, you'll never hear anybody comment on it unless it slips out, like Brit Hume on election night last November slipped out. Somebody was commenting about Bush and Social Security and Brit Hume said, “well, everybody knows there's no trust fund.” So the media knows this. It is disappointing and you're absolutely right, John. We have a 401(k) program where our employees put 10% of their pay into a 401(k) plan and then we match it by 150%, so our employees are saving. But imagine instead of doing that, I took our employees income and I decided I'm going to invest it in real estate for myself or maybe buy a place on the beach or a boat or something. I’ll call it an investment and then I’ll issue an IOU. You know, you're right, I'd change my pin stripes for orange stripes, and we'd be doing this from San Quentin. So it's absolutely amazing, which is one of the reasons why we need alternative media because these stories aren't being told to the public. [52:09]
Let's walk this segment down if we could, Jim. Why don't you give us a one, two, three checklist for retirement planning, so we have it firm in people's minds.
JIM: Alright. I hate to tell people this, but step one is expense inventory – and that's a budget. You need to estimate what your budget is going to be in retirement dividing it into essentials such as food, housing, clothing, health care costs, and insurance. And then what we call discretionary which is travel and entertainment – that's step one.
Step two: income inventory. Draw up an inventory of all of the sources of income you expect to receive whether it's Social Security, a traditional pension, life time annuities, or any kind of long term income flows, rental property investments.
Step three: compare your expenses with your income sources and then you need to also add an inflation factor to that.
Step four: allocate assets to cover the essentials and to fund discretionary expenses. Should there be a gap in income coverage between essential expenses close this gap by either segregating a specific pool of assets to draw on systematically – a systematic withdrawal program. And once essentials are funded, the assets remaining may be used for discretionary expenses.
Step five: protect and update the plan you put in order. Decide whether you're going to protect your life time income plan with major medical life or long term care insurance for example to handle that fifth risk that we talked about, medical expenses. Review your plan at least once a year. Adjust all of the elements including your expenses, your asset allocation and withdrawal rates to meet changing personal circumstances. [54:06]
Q-Calls
Time to go to the Q-line here at Financial Sense Newshour which you're listening to on www.financialsense.com. The Q-line is open 24 hours a day to record your questions for the program at toll-free US and Canada 1(800)794-6480. It is toll-free from the US and Canada. It does work from the entirety of the world – it gives us a feeling of power – but you have to pay for it outside of the US and Canada. Here we go:
Hello, Jim and John. This is Walt from again from Wisconsin on the issue of taxing the oil companies. I think this is an issue a major issue and that we should not be encouraging the use of oil but trying to deter it as the benefits from eliminating our dependence on oil by converting to the abundant renewable and clean energies would be so huge – even world changing. I wonder if people realize how meaningful and big these benefits would be which would include creating more jobs here and put us on the road to saving the environment and probably reducing the effects of global warming. Cleaner air and water would improve the health of society which would also reduce health care costs, as well as increase productivity. Becoming energy independent could turn the trade deficit around: buying and importing less oil as well as exporting our technology and energy. And probably the biggest benefit would be eliminating or reducing our dependence on oil would reduce our reasons to be meddling in the affairs of the Middle East and other countries. If we didn't need the oil, would we be over there? I'm really astounded as it seems to become more evident that our main reason for invading Iraq was to control the oil; and it seems to be what most of the world presumes after the President's speech Wednesday. I caught the tail end of the statement he made by I believe it was a senator who said 65% of the world's oil is in that region and we have to win this war. I'm totally blown away that they seem to have this extremely arrogant selfish attitude that we should go and take what we need if need to by force. And it's no wonder that so much of the world now mistrusts, fears and hates us. The benefits of converting to the abundant renewal energies from the fossil fuels would be so extensive that we should be doing everything possible to get there as fast as possible, which is a far cry from what we're doing subsidizing the oil companies. [56:27]
JIM: Walt, let me just say this: we agree on alternative energy. If you listen to Other Voices, alternative energy investments by the private sector have quadrupled since 1998 to 63 billion last year. We agree on alternatives. Here's what you don't get, Walt. Look around you. Look at the cars, look at our transportation system. We are not going to go from oil to alternatives in the next couple of years. It is decades away before alternatives or new technology comes in on the transportation system. Our rail system has diminished over the last 50 years. There's no way that alternatives are going to solve this problem right now. So until we have a solution and alternatives become a stronger and stronger part of our economy which are decades away, what are you going to do? The fact is 85% of the world's oil is controlled by Russia and OPEC. And so, you have to have something to get you there in transition. I agree with you on alternatives. We need to be doing all that we can, but we still have a fossil fuel burning society.
And a third factor until we come up with a new source of fuel, whatever that's going to be, from technology that finds it, the fact of the matter remains is America will not be energy independent. In 1972, we were producing 9 ½ million barrels of oil today and we imported 12.6% of the petroleum that we produced. Today the United States produces only 5.1 million barrels a day and imports 60% of the petroleum that we consume; and by the end of the next five 10 years, that figure is going to be over 70%. The important point you are missing out on is alternatives cannot solve this in the next 10 years. You're still going to need natural gas and oil. We are taking it off limits. We are penalizing the companies that provide us, which is making us ever and ever more dependent on what goes on over says. You really need to look at the alternative idea. I agree with you alternatives is where we need to go, but we're two decades away from that. And the problem that you have is from now to the year 2030 what do you do. [59:26]
Yes. Hello, Jim, my name is George from Minneapolis, Minnesota. Thanks a lot for the wonderful show you guys are putting on. I listened to this show on Saturday and yourself and a couple of the other panel members Frank Barbera and one other gentlemen, you were talking about an invasion of Iran as being a possibility. And I was very surprised by that to be honest with you because with the low political capital that President Bush has at this point and the great reluctance of the American people about the whole concept of the Iraq war, I think that would start an impeachment proceeding in the Senate the day after he announced such a war. So could you explain a little more why you think that's a legitimate political possibility given the situation in Iraq. Thanks a lot.
JIM: George, a couple of things, you've got to think unconventionally here because this is something a lot of people think for that very reason. The Prime Minister of Israel and the president of the United States have low political standing right now then something like this wouldn't happen. But when you take the President of Iran talking about basically as soon as they get the weapons Israel's days are numbered, Israel has to take that seriously. So what you might see is not an invasion of Iran but a military strike through planes, bombers and cruise missiles. And simply the United States, which is moving military hardware into the region very heavily would be there as a back up in case Iran decided to retaliate with either chemical weapons. So we would be there to give them a moment of pause. So all of this is possible.
And remember, also look for provocation. If something was to happen here against the United States on our soil, against US assets overseas, anything may happen. You can see that escalation in violence which Iran is funding has stepped up this week. So there are a number of issues that can happen, but the most likely scenario as many are thinking is that Israel takes out the nuclear facilities with an air strike and then we're simply there as back up. [1:01:36]
Jim, Dominic calling from London. Great show as always. Last year, I remember in the Fall, you said that you were close to being fully invested now in the mining sector; and once you were fully invested you were just going to enjoy the ride. And with this period of disinflation that you foresee coming, have you been selling your junior miners, or are you holding on to your position? And if you're holding on but you see this period of disinflation, why are you holding on to them?
JIM: Okay. Dominic, number one, we’re fully invested and we're holding our position. And even though we're going to go through a short period of disinflation here, remember, underneath the surface the disinflation theme comes from dropping manufacturing prices, dropping real estate prices as increased capacities is with us – especially with real estate inventories here in the US, and also manufacturing inventories globally.
But remember, underneath the surface, the Federal Reserve, the central banks of the world are expanding credit, so monetary inflation is going to accompany or will be the response to this disinflation. And so given that we know this, that's why we're just going to hold on. Yeah, it will be a bumpy ride, but nonetheless, take a look at a chart, a chart of gold over the last five or six years: yes, you've had the pull backs, but then we've always had that upper chart. And I think, you know, eventually gold we're going to see gold in the four figure range. So knowing that, and knowing its scarcity, how its getting harder and harder to find (gold production was down last year and there are very few countries where it's safe to mine) – that's why I prefer holding them because we want late stage development juniors that are not only going to increase the size of the deposit, but as prices go up, we'll be close to prefease or we'll be close enough where they can take it into production. That’s because once gold crosses $1000 (and you're seeing silver in the 30 to $50 range per ounce), you're going to want to be in producers, which is why I want to hold.
The other thing is because [we’re] a fund it takes a while to accumulate juniors. I mean, it’s probably easier for an individual but somebody like us that manages quite a bit of money trying to trade in and out of juniors just doesn't make a lot of economic sense because you'd be working against yourself. That's why I'd prefer to hold on to them. And patience is required and the other thing is you never know when one of these juniors is going to make a new gold discovery. We've got a couple right now that are looking on some very, very promising prospects. And you never know when that drill hole is going to be announced and people are going to say, “holy cow, would you look at those drill holes.” And that's just something that's unpredictable. So you've got to hold onto these, you've got to be in them for the long term because that's how you're going to make money. As I mentioned last week, my 3 P’s are patience, people and property. And patience is a very important aspect when you're investing in juniors. [1:04:49]
Part 2
Mexico: Land of Metals Opportunity
As most investors know, if you're involved in mining or oil exploration, the minerals (or the oil) is where you find it – including precious metals. And sometimes where you find it is not in a very desirable place of the world, simply because of the fact the governments are hostile to you. It used to be the natives were hostile. Now, it's the governments become hostile. Or, the governments allow you to come in and develop your mine and they treat you very nicely until you get everything up and running and they go, “oh, Senor, we are sorry, we think this will be better as an XYZ mine.” So there aren't very many safe areas of the world that are left out there, but looking south of the border, since we do a lot of that now days, that would seem to be one place which seems to be relatively safe for metals exploration.
JIM: John, you're absolutely right. We talk about the three-legged stool of investing here. We talk about fundamentals, technicals, and we also talk about politics or geopolitics because it does affect investing. And as many major oil companies have found out where they spend literally tens of billions of dollars in Russia and the Russian government just changed a whole deal on them. And as many oil companies have found over the years in Venezuela. And now Hugo Chavez plans on nationalizing the entire country. Originally, what he did is change the taxation rate and the percentage rate in terms of what the state owned. And so you've got to be very careful today.
And most of these governments are very clever. They wait for you to come in, discover the stuff, spend the money, put in the money for capital structure, and then they confiscate it when you're done. Well, the same thing is happening in the mining area, and that's why I think that the number of areas that are safe politically today from government confiscation, or contract changes where they don't honor law, is Mexico. It's one of my favorite areas.
And the thing about Mexico is a number of years ago, Mexico changed their mining legislation. And the basic reason was they wanted to bring investment into the country. So basically between 1990 and 1992, Mexico radically overhauled a nationalistic mining law structure that had been in place, for the express purpose of really attracting foreign mining investment. And it has been very successful in doing this. This overhaul was accompanied by, for example, privatization of virtually all of the Mexican government’s mining holdings. And as a result, John, it brought in a lot of exploration and development money into the country. Now, it started out slow because, let's face it, in 1992 or the mid-90s, people weren't thinking about the gold bull market or the metals market that we've seen in this new decade. And so it really began to accelerate in 2001 where a lot of money was raised in the junior sector for exploration. And now, as a result of the change in those laws, there are 80 foreign companies that are exploring for gold, silver, copper in Mexico. And there are currently 160 projects throughout the country. So my estimation, it's probably one of the safest and most mineral rich deposits in the world today. [3:32]
Well, something that the Spanish discovered very early on, shortly after the conquest of Cortez in Mexico, Cortez versus the Aztecs, is that Mexico was very rich in metals – especially notably silver. I mean this was a source of wealth for the Spanish Empire at the time. They kept sending ship loads of it back to Spain. And of course, that issue came all of the way up through the Mexican revolution because the Mexicans felt at that time American companies had exploited them. And that's why we began to see this nationalization tendency. But it's as soon as they do that, then they run into trouble because they never seem to manage it well themselves.
JIM: And that's exactly why they redid this. They have a rich mining culture in Mexico, as you said, John, it goes back, you know, hundreds and hundreds of years. They've been mining for 500 or 600 years out of that region. And as a result of that, they've got exactly what they wanted. Change the laws, respect property rights and now there's an influx of companies coming into the country because Mexico is very rich in natural resources. It’s not only rich in metals but also it's been rich in oil. And so a lot of people don't realize, for example in the year 2005, which is the latest figure that we have statistics, Mexico was the world's largest producer of silver with an output of almost 103 million ounces. And John, that had increased almost 4% from 2004. And it is the 17th largest gold producer with mine production up almost 1 million ounces. That’s up a massive 40% from the previous year. So this upward trend we think is going to continue, stimulated by not only higher prices for gold and silver but also encouraged, as you look around the world, by political stability and a very mining friendly environment - and more importantly, proven geological prospects in the country. [5:34]
JOHN: Well, I'm curious, though, because there is mineral wealth all of the way throughout Latin America. As a matter of fact, the tragedy of Latin America – I read a number of books on this in the course of my studies – was that it hasn't been for a lack of intelligent people or resources. It's been from corrupt governments, to a large degree, that have prevented this, but why in particular Mexico versus some other Hispanic countries in Latin America?
JIM: I guess if you take a look at it overall it is their mining heritage. And as I just mentioned it is the world's largest producer of silver. It historically has represented probably the world's number one silver producer with historical production records, 10 billion ounces of sliver have been produced out of Mexico and a current annual production of well over 100 million ounces with now, you know, there's been almost a Canadian invasion. Most of the Canadian exploration companies are very heavily involved in Mexico. That’s not only exploration companies, but some of the intermediate companies and even the larger companies. So it's, number one, very opportunistic for producing silver as a precious metal. And most of the deposits of silver are high grade, and more importantly they are amenable to low cost underground and surface mining.
Secondly, I think Mexico is basically a textbook example of sustainable development. And as we’ve mentioned over 500 years of mining has been the foundation, and it's an ongoing and integral part of the nation's national and local economies. And this takes on increasing importance as migration from the rural areas to the cities increases due to lack of rural employment. So the Mexican government is saying, “Look, let's develop our mining industry because this creates jobs in rural areas where a lot of the metals are located.”
Politically, Mexico is probably the most stable country in Latin America. They have very favorable tax structures and a strong government commitment to natural resource development. I mentioned earlier that they had radically overhauled their nationalistic mining laws going back to 1992, as well as privatization.
The other thing too is, and this is important, the government has demonstrated a very strong commitment to an increasing transparency in all aspects of dealing with government in terms of regulation of the mining industry and is probably the most successful of this. Foreign companies now can compete in Mexico with not only the local companies. Also, I think culturally, Mexicans are friendly towards mining at all levels. This means mining explorationists and developers can expect to be welcomed when they enter an area – in stark contrast to their reception in many other parts of the world. The Mexican mining community (and this is very important because it's one of the problems that we have is finding qualified personnel) is very well trained at the professional and at the skilled-labor level.
And more importantly, and here's a greater risk, Mexico has very strong environmental laws and a commitment to uphold them. But you don't see the obstructionist environmental organizations. They are very few. And they have very [little] leeway. In other words, the greenies can't come in and stop development because the government wants development as this employs local populations. This is very much similar to what's going on in China today where the Chinese government is looking for ways to develop the rural communities rather than have all of the rural population keep moving into the city, and creating all kinds of problems. So this means that mining companies who follow Mexican laws and internationally accepted environmental practices can expect to advance their projects without undue interference.
And besides that, during this period of time when they had nationalized the mining industry, Mexico remains underexplored. So you have major discoveries that are being made now and especially in the years going forward as we apply modern geological and geophysical concepts and methods that were not used in the country for 30 or 40 years. And so you have a number of projects down there from polymetallic multiple metals type project to a lot of gold and silver properties. And to me, it just spells out a lot of opportunities. I mean this is one area that we are going into very heavily in terms of the companies that we're choosing for our funds. Not only intermediate producers who are going in and expanding their presence in Mexico, but also late stage development plays. There's a polymetallic mine that's coming on that's going to be extremely profitable. We're involved with a lot of silver and gold. And that's one thing that you see a lot of in Mexico, especially in the Sierra Madre gold belt, both the northern, the central and the occidental part of the Sierra Madres reminds me – what is it, John – the old Humphrey Bogart movie The Treasure of the Sierra Madres. [10:46]
We don't need no steenkin’ badges
JIM: But you know the Discovery Channel, I think it was last year, they did a special on the Sierra Madre gold belt, which is my favorite area for mining in the world today (other than, let's say, the yellow knife area up in Canada and some of the other areas). It is probably one of the most prolific gold and silver belts in the world. And just turn on the television, for example, on Friday. CNBC's been doing this whole special on Hugo Chavez as the next great Fidel Castro. Well, think if you were going to spend a lot of money. And mining is a time consuming business. It's a capital intensive business. It requires highly skilled people. You go in and you discover, you stake, you spend years of development, you raise capital in the markets to put in a mine and a mill. And then all of a sudden you get that ready. Can you be assured once you do all of that that you will have a mine and the government doesn't change things? So that's one of the advantages that Mexico has today. And it's right at the top of the list of my three favorite areas of looking for places today which would be Canada, Nevada and Mexico. [12:07]
And if we were going to invest in this area, Jim, what would you be buying right now as far as investments in Mexico?
JIM: Boy, I tell you, John, if I was looking at Mexico, there's two things that we think are very attractive. As I pointed out on this program – the majors aren't the place to be. These are the companies that are not going to grow their production. Late stage development plays, I'm talking about companies that are close to prefeasibility, they are proving out a property. I love – especially in the Sierra Madre belt – the combination of gold and silver companies because I think silver is going over $100, maybe $150 an ounce. And God knows how high the price of gold will be. So the combination of gold and silver late stage development properties is great. Also, consider some of the intermediate developers who are moving in that area. You take a look at what happened when Glamis bought Francisco Gold, and they developed El Sauzal and basically saved Glamis. Now that mine is producing 200,000 ounces a year at a cash cost of less than $100 an ounce.
So that whole area, I think, if you look at Sierra Madre gold and silver belt, any one of those companies in that area are grossly and I mean grossly undervalued in terms of the potential; and also in terms of what they can produce or explore for. A lot of these companies some of them are going into production this year, some will be going into production next year. And in addition to what they are bringing on line in production, they are also still doing some development drilling and exploring to enhance their deposits and make them even bigger. So anything in the Sierra Madre belt.
And also, we own a large position in a polymetallic company that will be big in some of the other base metals, in addition to having gold and silver. And of course that's going to be on the eastern end of the country. But some of those projects in the Oriental belt of the Sierra Madres are also very attractive to us. So Mexico is one of our favorite places; and also Canada and especially certain regions like the Yellow Knife area and a couple of other areas – because I just think they are the most stable.
As we talked about on the program with some of our experts in the first hour, it is much easier to get something done in Canada than it is in the United States. About the only place you can get anything done in the United States is Texas and Nevada, which tend to be pro industry. But if you're talking about Glamis I think it has had a mine prospect here in California they've been trying to bring on line for 10 years. So once again, that's where I'd put it.
I love the late stage development play because you're either a prospect to be picked up by somebody else, or if nobody picks you up like take a look at what's happened to Alamos. Take a look at what's happened at Gammon Lake. Now, let's take a look at what's happened to Mine Finders. Nobody bought them. So what they did, they decided to go it on their own and they are going into production. So that's why I like that combination possibility where I think a company has to pursue a dual strategy because you can't just sit back and say, “look, our objective is to be acquired.” Well, you may not be acquired. Why? Some of these companies are now coming on stream that weren't acquired – the majors are asleep. So that's what I'd do. [15:39]
Well let's summarize this as we always do at the end of these segments. It seems like you have a lot going for this area and there's a lot of favorable geology, there's favorable political stability, et cetera.
JIM: First of all, you have a favorable political background. And as I mentioned, the laws are favorable. You don't have to run into obstructionist greenies that are going to come in and shut down your project, because you have a government that is intent on developing its rural population, and providing a means for them to support themselves. And a lot of these mining jobs are very well paid. So you've got a favorable legislative and political background.
Secondly, you've got a very strong geological background. It's a country that is very, very rich in not only multiple polymetallic deposits, but also in silver and gold deposits.
And as the price of metals move up, with this strong geological background, the third strength is you have: infrastructure, and you have trained personnel; you have laws in mining that help support, and that make what it is you're going to do highly economic. I mean if you take a look at El Sauzal, which was a junior (it was Francisco Gold) basically taken over by Glamis, which is now producing over 200,000 ounces a year, extremely profitable at a cash cost below $100. So think of gold today at $635 and you're producing gold at 100 bucks. Think of the cash flow and economics. So that's another aspect, I think, that's very favorable about the country is the economics of mining in the region. You may find gold in Mongolia or other places, but because of infrastructure, because of the weather, because of all of the legislative hassles, it becomes almost uneconomic where you need higher and higher prices of gold and silver to make a profit. That's not the case in Mexico. It has some of the most profitable silver mines, and is one of the few areas in the world where you can mine silver profitably. And also if you're mining other minerals such as zinc, lead, copper, you can also make a lot of money because your cost structure is so low down in Mexico. So to me and to sum it up: Mexico, land of opportunity. [18:03]
Other Voices: John Berthoud
JIM: Well, this week energy was at the top of the list in Congress as a new energy independence bill is being proposed. Well, we're going to take a look at that bill and it's not energy independence as you and I would think.
Joining me on the program is John Berthoud from the National Tax Payers Union. John, let's begin with your editorial in the Wall Street Journal. What's wrong with this bill? And why is it not going to help consumers?
JOHN BERTHOUD: Well, first and foremost, what people have to remember when we tax a company in any sector – while Nancy Pelosi or moveon.org might be able to demagogue it and say, “Oh, we're, quote, unquote, getting big oil or getting the fat cats,” or whatever – . when you tax a company or an industry, economists have a word called "incidence." And the question is where is the incidence of that tax? When you tax a Kellogg’s Corporation, they are going to pass through to their workers, their shareholders and the people who eat cornflakes. And so too with the energy sector – when you go after the energy sector to pass make-feel-good legislation like this, the bottom line is that workers are going to be hurt, shareholders are going to be hurt. Millions and millions of Americans have shares of their 401(k) or other investments in the energy sector. They all will pay a price on this. And then ultimately, we consumers are going to pay a price for this. Energy products will have to go up in price. So Nancy Pelosi and her left-wing friends and moveon.org may all be exulting over this and pretending that a lot of rich oil executives are going to be punished by their actions. The bottom line is shareholders and average Americans are going to be footing this bill. [20:19]
JIM: Well, let's take a look at the supposed benefits. One is energy independence. Most of what I've seen is the biggest winner may be OPEC. This is not only a lengthy and complicated bill, but the central idea seems to be simple. Raise taxes on domestic oil producers and then spend the money to subsidize ethanol, solar energy and windmills – as long as you don't put them up on Malibu and Cape Cod.
JOHN BERTHOUD: That's exactly right. The problem with – I think as you and your listeners know – some day this planet is going to run out of oil. Let me rephrase that. We will never be able to get every drop of oil out of the earth, but at some point, it's going to get deeper and deeper and further and further in nooks and crannies that it's just going to become economically unviable for us to get it out, and at which point well in advance of that point the market will kick in, and companies and inventors will bring to market ideas that will provide alternative sources of energy. When a bunch of bloviated politicians in Washington, who take campaign contributions from lots of these, quote-unquote, alternate energy sources start directing your and my tax dollars to this company or that company or this industry or that industry, first, it's not being done based on good public policy. A lot of times it's based on, you know, who is the campaign contributor. Think Duke Cunningham, for instance, diverting defense dollars. The same thing happens with energy policy. But even if these guys could set aside their parochial political interests, I have zero faith that even a benign public sector official could do a better job of picking what are going to be the alternate sources of energy that our economy will naturally move into. I am not that much of an expert. I don't know whether that process needs to really begin in 40 years or 60 years. Again, it will happen at some point. The question is are we going to do it based on markets, or are we going to do it based on politicians? I think this is a bad mistake. It's a wrong mistake. And it's, it's going to lead to the wasting of billions and billions of dollars. [22:54]
JIM: Well, you know, they tried this in the Carter administration with a windfall profits tax. They set up the Carter Era Synthetic Fuel Corporation, which turned out to be one of the biggest Washington boondoggles. They spent $2.1 billion on alternative fuels before complaining bankruptcy. The other thing, John, there is no under investment by the private sector in alternative energy. Investment in alternative energy has more than doubled to 63 billion, and quadrupled from 1998. So the private sector is doing this.
But here's one of the problems I have on it – these leases. Another provision of the bills is they are strong-arming these oil companies to renegotiate their contracts and pay a $9 per barrel royalty fee from these leases. If the companies refuse, they are going to punish them and they'll lose their right to bid for future leases on federal property. The hypocrisy of this is we are now telling people in Africa and Russia and Venezuela, trying to persuade them and other nations to honor their property rights while Congress turns around and does its own version of a Hugo Chavez imitation. [24:04]
JOHN BERTHOUD: That's well stated. And the Carter years, that's absolutely right. There was a study by the Congressional Research Service (a nonpartisan study organization, that’s an adjunct to Congress) looked at the experience of windfall profits tax from 1980 to 1988. And as was predicted, when it went into place, the windfall profits tax drove down (and this is the findings of the Congressional research service) domestic production and led to an increase in imports. And one might have thought that we would have learned from the unhappy experiences of the 70s and early 80s of what happens when the Federal government gets into the business of punishing domestic energy producers. These politicians, these 264 members of the House (mostly Democrats but also some Republicans – I think 36 Republicans voted for this) see polls, and I remember last year when there were spikes in oil prices and a lot of the drive to do this started last year when prices spiked and this was a way with quote-unquote inordinate profits for folks to get the energy sector. And of course prices have dropped from their peaks of last year, but that hasn't abated the interest of these members of Congress. So, politically, the good news is this does not have enough votes to override a presidential veto. If this dog does get through the Senate, one would hope George Bush, who has been loathe to use his veto panel and only done it once, will veto this thing and it will die the sorry death it well deserves. [26:02]
JIM: You know what this strikes me, is this is similar to a bill that we tried to pass last year in California. In fact, it's probably just the resurrection of California Proposition 87, which was funded into political campaigns by a bunch of venture capitalists that were starting alternative energy companies here in California. And thank goodness, California voters voted it down because they realized it would damage the state's home oil and gas industry, increase foreign oil consumption and raise energy bills here in the state. And most people don't realize this is a campaign reward for those same group of people that have supported this – in having this billions of dollars of funds which they would funnel to those companies that supported the campaign – because this is not energy independence.
And by the way, I know because people listening will get upset when they go, well, the oil companies ought to pay more. The leases for drilling rights in the Gulf of Mexico were signed between the oil companies and the Clinton administration's Interior Department back in '98 and '99. Now at that time, oil was at $10 a barrel. They signed it without a requirement for royalty payments. And here is what you do not hear from the media. And this is not a conspiracy by Big Oil. In fact, it was a bungling of the Clinton administration. And you had oil companies such as Chevron who alerted the Interior Department of the absence of these royalty payments or royalty fees, and the Interior Department replied: “no, we want the contracts to go forward. We need you to go out there and drill because production is declining in the United States.” And that's something you don't hear in this whole story. It's “let's get the oil companies.” And really what this is, is campaign largesse that's going to be fed into those companies that were feeding into these campaigns much in the way that happened here in California. I just hope the president is smart as the California voters were to basically reject this whole concept.
JOHN BERTHOUD: Amen to that. Our website by the way is www.NTU.org (NTU – National Tax Payers Union). NTU published a ballot guide last year and certainly recommended to our members that they vote no on that. And, you know, I've been disappointed. A lot of the media here in Washington, because there is this absolutely naked self interest between some really wealthy people as was the case in California with the venture capitalists, who stand to make a lot of money and get a lot of federal largesse by virtue of this bill.
You know, there were all kinds of and for the most part well deserved criticism with Republicans with the bills that they passed and the connections to contributors and well-healed friends. The reporting on this that I've seen here in Washington has unfortunately not focused on the financial connections of those who stand to benefit from this. It's the same thing with the minimum wage increase. I am kind of surprised – well, not surprised but I'll say disappointed – that the Washington Post said the Republicans are passing a tax cut. A couple of years ago there was all kinds of reporting by the Washington Post about who would benefit and the connections to the Republican party. I see much less reporting on that in terms of the beneficiaries of this bill or the beneficiaries – you know, Big Labor – that are benefiting from the minimum wage increase. And one would hope for more but maybe not expect it. [29:47]
JIM: Well, they hear about it from programs like ours or organizations like yours, which is probably one of the reasons they are trying to shut that down with the provisions that they added to SP1220, which would go against grassroots organizations because they don't want people to understand that the venture capitalists and the Wall Street guys that are behind these alternative companies that would benefit immensely from this bill. So they are basically taking money from oil companies and giving it to campaign contributors. And that's something you never, ever hear in this whole debate.
Well, John, if our listeners would like to find out more about National Tax Payers Union because it looks like they are trying to hike Social Security taxes again, and I guess your organization and others have met with Hank Paulson and said, you know, if you're thinking of raising taxes, look out.
JOHN BERTHOUD: Yes. We had a forum just this week on Capital Hill, and it's been on C-Span, if any of your listeners are flipping around the dials, hopefully they'll find us at least once or twice more on C-Span. They rerun these things. And our message on Social Security was pretty clear that Washington may have – for any of these problems and issues – may have many problems in the federal government [but] lack of money is not one of them. We have with Social Security taxes we have raised and reraised and then reraised some more our taxes on Social Security. We as a tax payer group just think it's unconscionable to say one more time in the name of fixing Social Security that we've got to go back and hit up tax payers. It's sort of Charley Brown kicking the football and we are going to try and – and some members of Congress are already out there doing this talking about the need for raising Social Security taxes once again. But it just seems to us that we've raised and raised and raised the Social Security tax over the proceeding decades – and enough is enough. It's time to slow the growth of benefits and it's time to enact fundamental reform such as creating private accounts to make this a pre funded system, rather than this insane pay as you go structure that we've been working under ever since today's program started. [32:04]
JIM: John, just a final question , why do you think the media has never covered this? The only time I've seen this covered and it slipped out last November on Fox news with Brit Hume that there is no trust fund. They take the excesses, they spend the money and then they issue an IOU. If you and I did that running a company, we would be behind bars. But last November on election night, they were talking about Bush’s Social Security reforms and it slipped out of Brit Hume and he said well everybody knows there is no trust fund. I about dropped because that was the first time I've seen anybody in the major network reveal what they all know that there is no trust fund.
JOHN BERTHOUD: Well, I'm not sure they all know it. I think there's an enormous amount of misinformation. And I think a lot of the blame goes to politicians who talk about this, and Republicans and Democrats who talk about lock boxes and all of this kind of stuff. The reality of Social Security is it's a pay as you go system. It's not like a 401(k) or some type of pre funded retirement accounts such as you might have or your listeners might have or I have. The benefits that my mom is collecting today up in Connecticut are being paid out of the payroll tax dollars that you and I are paying into today.
And what happens is we've set up the system so there's more dollars coming in than beneficiaries taking dollars out right now. Those assets don't go away into any type of real asset that can be called upon later. And there really is no trust fund in the sense of the word that a lot of folks understand it to be. But your trust fund and in the context of the federal budget just means a segregated fund where dollars come in and dollars go out. The real problem with Social Security is that it's a pay as you go system and when you have dramatic changes in demographics (such as are happening right now with a growing number of seniors, and a falling ratio of workers to retirees) a pay-as-you-go system is ultimately going to go onto the rocks because of those changes. So you're absolutely right: there's a lot of bad reporting. But I think maybe it's less that these guys don't want to talk about it, than I think there's just unfortunately a grave deficit of understanding among a lot of the nation. [34:40]
JIM: Alright, John, well, listen, I want to thank you for joining us on Other Voices this week. Why don't you give out your website if our listeners would like to follow when they are planning to pick their pocket.
JOHN BERTHOUD: Sure. We'd love to have you folks come to our website which is www.ntu.org and find lots of educational and research materials there. Folks can also sign up to our free e-mail list. We don't bombard people but periodically give them information about what's going on in Washington. And we also give folks an opportunity when Congress is considering an important measure to easily contact their legislature and express their views. So I encourage your listeners to check out our website at www.ntu.org. [35:29]
JIM: Alright, John. Well, thanks so much and listen, have a great weekend.
JOHN BERTHOUD: You too. [35:52]
Q-Calls
And time to go back to the Q-line for another question from one of our callers.
Hi. I'm Tom in Winterdale [ph.] Washington, and I'm calling concerning today's activity in the grains and the forecast for the corn market. And what it might do the plans or the forecast that, Jim, you had last week concerning “first the pain, and then the gain;” and then your indication that you thought the figures would look good on the inflation factor; or make them look good for this first half of the year. If this grain keeps going, do you think they'd still make it look good on inflation factors and fool the people and kind of twist the numbers around as they usually do? Or do you think that we might – you may want to change your forecast. You did talk about the rogue wave and it looks like we're going to get one. What do you think?
JIM: Well, Tom, I think we are going to get a rogue wave here in the first six months of the year, but I haven't changed my forecast. Will they make the inflation numbers and fiddle around with them? I think we got a clue this week when Ben Bernanke said he thought headline inflation was over stated by 1 to 1 ½%. Listen to the first segment of the Big Picture. Whenever the Fed starts talking about inflation being over stated, believe me they are going to tinker with the numbers. So I haven't changed my forecast at all. I do think we're likely to get hit by a rogue wave, but remember, central banks are inflating around the globe and the first sign of trouble the markets will be screaming for central bankers to reinflate. [37:15]
Hi, Jim and John, my name is Chris. I'm calling from Calgary, Alberta, Canada. I thought I would mention something here actually with regard to those burn rates of the largest oil fields. What would be interesting I think would be if people look at the rule of 72. That’s basically dividing the percent by 72 and you get the time that an investment will double. You could also look at that too and you'd see probably like Cantarell in five years it will be half, and I guess in Ghawar in seven years it will be half – I think if my math is right. But I just thought I'd mention those things and that’s kind of alarming in the next five to seven years those really large oil fields that we’re dependent on, there’s only going to be half the amount of oil there – assuming those burn rates stay static. So just thought that was really insightful. And again, keep up the great work, you're really providing a tremendous public service to people around the world who are able to listen and learn. So keep up the good work.
JIM: Yeah. Chris, the point about the decline rates of these major oil fields. That's one thing that really strikes me because when you have something like Cantarell, Burgan, and Ghawar decline at much more rapid rates than we've seen…you know, we are not discovering anything that's going to be done to replace those. We're not moving aggressively enough on alternative energies. I mean, you're in Canada. The Northeast of the United States does not want any windmills, they do not want any refineries, they do not want power plants. We're hoping to talk you guys into building the refinery and also to build the LNG terminals. I mean it's just absolutely nuts. I mean, take a look at our energy bills.
I look at this and we're taking steps: we've got everything, so I can literally walk to work. I can walk to the grocery store, get all of the things that I can and I'm looking at getting a car that has total mileage per tank of about 750 to 800 miles per gallon. So it's just absolutely nuts and you would think there would be more people that would be talking about this, but we're still stuck on stupid focusing on the wrong things. And you're right –it's alarming. [39:27]
My name is Jason. I'm from Southern California. I have a question about when Phillip Colmar was talking about liquidity. And I am new to investing and I’m not really sure I understand the difference between liquidity and inflation because he said there’s going to be low inflation but liquidity, which sounds to me (given looking it up and stuff) like that's just money sloshing around when therefore you’re able to sell stuff. I'm not sure I see the difference. What's the difference between liquidity and inflation given that inflation is caused mainly by money printing. That's my question.
JIM: Jason, when he refers to liquidity, he's talking exactly about that – about money and credit floating around, which is really monetary inflation. But he did say they break it up into two things when they look at inflation. Goods prices – so if you see, for example, a plasma screen drop in price, they would count that as deflationary or disinflationary; whereas if asset bubbles go up, they say that's asset inflation. So they try to break inflation up into components parts, which I think is misleading, but whenever you hear the world liquidity, think of money printing. You've got it, buddy. [40:46]
Hello Jim and John. This is John. I'm in the Philadelphia area and I want to say I really enjoy your show and I've been basically eating out every chance I can get. Question for you, my understanding is oil is only transacted in US dollars and therefore as oil prices rise the demand for dollars rises as well. My understanding also is that the dollars is only used as a transaction. So, overall, I'm a little confused as to what effect will the rising price of oil have on the demand for dollars. Is there not much since it’s a transaction, or would it increase? That's about it. Thanks a lot and keep up the great work.
JIM: John, in fact, it's not just oil, but most commodities internationally are transacted in dollars, and so as demand for commodities increases whether it's copper, lead, difference, steel, iron or oil, the demand for dollars also increases. And one of the reasons that we don't see the imminent dollar collapse is we have nothing to go replace it right now and so therefore we are beginning what I call a transitional period right now where we're going to be moving to some of the alternative centers – whether it's the Euro, the Yen or it's the Chinese yuan. But eventually, the ultimate currency is going to be gold and that's the reason gold is going up because the smart money realizes that all the currencies depreciating against each other. But getting back to your question – as oil prices go up, the demand for dollars has to increase with it because you've got to have the dollars to pay for it. [42:27]
Curbing Free Speech on the Internet
JIM: Well, John, in this segment we're going to talk about what we think are going to be some interesting challenges coming forward here in freedom of speech and especially as it applies to the internet.
JOHN: There was a major challenge that emerged this week, and part of a bill in Congress that has got the attention of both Focus on the Family and the ACLU simultaneously. You know this is a bad bill when people on the left and the right are agreeing that this is terrible. Let’s do some background behind this whole thing. The advent of alternative media has had a major impact on US politics for probably about the last 20 years. Political people, especially the right, because they believe that for the large part the left was represented in the mainline media, but the right began to gain control of talk radio in the 80s. Notably there was the rise of Rush Limbaugh and others. And then other talk show hosts began taking to the air. So that was the first role of the alternate radio and they were finding alternate ways of getting their news.
For example, I remember when I was talking in Denver in the early 1990s the way we found out what was going on in Washington is we had our friends in London read the Daily Telegraph because it had the most accurate reporting about all of these little scuttlebutt stories going on that the Washington Post was actually spiking – the Monica Lewinsky stories, and other things related to that. So we would have fans over there fax us stories from the Daily Telegraph preferably, so we could go on the air in the afternoon and talk about it. This actually turned out to be a profound embarrassment for the Washington Post and they actually attacked the Daily Telegraph in an op-ed piece which is almost unheard of – one major newspaper attacking another. So that was that.
Then starting about the mid-90s we began to see the first internet newspapers and internet radio – some of the first licenses granted for real media streaming came out about then. And all of a sudden, the small choke hold that the three major networks plus public television (and some of the wire services and the limited writers groups) held over the control of what everybody saw or heard in news was broken. Now, the first time politicians began to realize that something was wrong – in their minds – was in the election of 1994, when it just didn't go the way they thought it would. And you could almost hear the obituaries on the mainline media the following night as they bemoaned what happened – “we don't understand.” And they began looking at what ultimately President Clinton came to call hate radio because it was largely conservative at the time. So there it is we have a vibrant, abundant talk radio medium and also blogs and websites. So we come to a situation now where sites such as ours here at Financial Sense are pouring out a huge amount of information on the air that Congress people don't want. I mean literally, there are people out there who have lots of time on their hands, they have blogs, they read parts of bills, they read everything and man, it hits the blogs within hours of when it's posted on the Congressional website. So Congress doesn't like this any more. [45:43]
JIM: No. And one of the reasons, John, they don't like this (and this applies to both Democrats and Republicans) is a lot of people in order to get elected will move to the center and they’ll say if you're more conservative you might move to the center to appeal to a broader audience; or if you're far to the left you’ll move to the center to get elected. The problem people elect people on campaign promises or things that they go on. And then they get to Congress and it's just like Pelosi and Reid handed out pork in some of their first billions. They are no different than what Republicans do and that was a big disagreement with Republicans. Republicans ran on fiscal responsibility. And of course obviously we saw what happened when they took over Congress and they got to spend pork.
And that's really what happens in Congress today. Either party gets elected, their chief job is to reward those that contributed to their campaign and penalize those that didn't. The problem with all of this that's going on is if you're a large lobbying organization, a political action committee, no problem. You're the kind of people Congress will like because you get access to politicians because you give them money. The problem they don't like about the bloggers and these grassroots operations is they don't give any money. And what they are always doing is reporting on what it is that you're doing. So a lot of things that they are getting ready to do that they don't want people to know that they are voting. It’s one of the reasons how you know they are going to shaft you is when they conduct a vote and what's that procedure, John, where none of the votes are registered.
JOHN: It's just a voice vote is all it is.
JIM: Yeah. It's a voice vote and they do that many times when it's not recorded so therefore if you voted for something that you promised people that you wouldn't do or support, through a voice vote, you can always say, well, I support this and you can lie and not get caught. The problem with these grassroots organizations is this stuff gets reported to the public. It happens instantaneously and the problem these politicians don't like is their actions are being held accountable. In other words, they are being revealed.
And another problem that they have is you can do something that irritates people or the voters. You went back, you reneged on a promise, everybody has a short attention span, so six months later when the election comes up, people forgot about something you voted sixty months ago or last year. The problem with grassroots organizations for congressmen is voters can be reminded by these bloggers and grassroots organizations or talk radio or internet sites that are saying, “hey, remember this Congressman, he said he wouldn't do this, well, guess what, I don't know if you remember this, but he did exactly that one year ago.” So that's another reason that they don't like them. [48:48]
JOHN: Well, this week the fertilizer sort of hit the air conditioner because the Senate and the House have been working on ethics bills and, you know, bad things often come in good packages. You can have a wonderful cup of coffee with just a trace of cyanide in there and I wouldn't recommend drinking the coffee. And buried in Senate Bill One (it was Senate Bill One and HR Bill 4682) was section 220. And what this did basically (to summarize it all up), if your newsletter or website or radio show reaches more than 500 people at a grassroots level with information about which they might want to contact Congress, you know, to obtain changes in bills, and if you spend or receive more than about 25 to 50,000 (depending on which bill you read), then you are a lobbying organization and you have to register with both houses of Congress, and you have to inform Congress every time you inform your constituents about any kind of an issue. And if you don't, the penalty would be 50 to $100,000 in fines plus six years in jail for willful failure to comply. This is impossibility, Jim. We’d be filling out forms every two minutes here on the program. [49:57]
JIM: Yeah. I mean we couldn't tell you that for example contact your congressman because they are getting ready to do something that would be harmful to you. We couldn't do programs and talk about how jiggered the CPI is with hedonic adjustments. We couldn't write articles. And one of the things we've always tried to do on Financial Sense is we allow alternative views. One of the reasons we do not accept advertising on Financial Sense (and Mary and I fund this out of own pocket) is I was in television news for two years and advertisers have control on content in terms of how news is displayed, and stories that you cover. And I was censored over the years to the point where I just got fed up and I left doing television because I didn't like that. I didn't like doing a story that I thought was important and my news producer coming in and saying, “you can't do that, these people advertise on our program.” [50:58]
JOHN: Right. We're not going to antagonize them even if it's a news story.
JIM: Yeah, even if it's a news story. So that's one reason we do not allow advertisers on our program. And we also allow alternative views on Financial Sense: people that submit articles to us. As long as you don't use four letter words, body parts and family members in what you talk about, we'll put the stories on our program. We don't censor our authors unless they get foul; and it's understandable because there's a certain standard we want to maintain here. But a lot of the stories that we do, one of the reasons we call it the Financial Sense Newshour is because of my radio talk radio career which goes back to 1987 and my radio program became the Financial Sense Newshour – after I left television because of all of the slanting in the way we would do and the way we would report a story; the way we would take and edit sound bites.
And more importantly, John, all of the stories we were spiking (by spiking – meaning we weren't telling people) and that's what gave rise to the Financial Sense Newshour; and that's what I started to do locally here in San Diego to the point we created a controversy and I was thrown off a radio station because they didn't like the stuff that we were saying because we were reporting this.
And I remembered this was late 90s, and I'm just not going to mention who this was, but we had a gentleman that did one of these real estate no money down. No. This was early nineties, like '92, '93, I forget. It was when I came back to radio after leaving television. And the real estate market was going through a downturn and this guy was one of the real estate hucksters and he'd go around and he'd have these seminars. And he would buy a lot of radio advertising getting people to come to the seminar. And it was kind of like buy a home with no money down, you remember those kind of scams. And so he did a lot of advertising and my producer came in and said you're going to interview this guy on your show. I don't want to interview this guy. This guy is – I don't believe in what he's doing. I think this is bad advice. And they said: “you will interview him.”
He was basically talking about how what you would do is you would buy a house and two weeks later you would turn around and sell it for a profit because you could find these houses and you'd make, you know, 20, 30 grand and then you'd just keep doing this. You'd buy a house every two weeks and at the end of the year, you'd make a quarter million dollars. So what I did, and of course everybody remembers in California in the early nineties we were going through a real estate downturn, so I got the head of the California Association of Realtors on to the program as a guest, and so I didn't get to be the bad guy because I would have gotten in trouble with my producer. But I had this guy, and we got them on the show and I said, “also joining me on the program is the head of the California National Association of Realtors.” And so as he went into his little spiel, the guy from the National Association of Realtors basically starts calling him on it, and going: “What do you mean you're finding homes like that. You know the foreclosures and the way property rates are dropping and you're not going to buy a house in two weeks and turn around and sell it a month.” He was so ticked off. Well, you know, I did enough of that that finally they threw me off the station because that's just what happens in news. And the reason that we're bringing this up is, John, why don't you think the major networks cover these kind of stories?
The reason you don't hear about this in the mainstream media, the media is ticked off. The major networks have lost market share, newspaper readership is down. If they can close down the Internet it would be great for their business. [54:50]
JOHN: Remember when the first internet news sites came out and you began hearing things out of the Washington Post and other media: “Well, you know, those are internet sites and they are just little rumor mills. They are not professionals like we are. And then it turned out the non-professionals began breaking all of the stories that they were then forced to deal with. So they themselves would like it, I think, a lot if they were able to go back to sort of the good old days.
There's been an effort on the part of – well, it’s usually on the part of Democrats because Democrats recognize that Republicans had gained control of the talk show air waves and Republicans felt good about it because they felt for years that the mainline media were overwhelmingly liberal in their output. So what they tried to do, this is the next step by the way that we're going to talk about here is you're hearing the rumblings about bringing the fairness doctrine back. Now the fairness doctorate on its surface says that any issue that's covered, the broadcaster has to provide some kind of fair and balanced view. Boy, it sounds like fox news, doesn't it. At least they claimed to be fair and balanced. They have to provide that.
Now, If you remember the old days when the general manager of a station used to get on, this is Earl C. general manager of KRUD television or something and do an editorial. And they had to provide equal time for somebody of a different viewpoint. That was easy to do, alright, because he did specific items at a specific place. But now with talk radio like this program or any other program, the talk show host changes topics how many times in an hour and talks about how many different things. It is an impossible nightmare to keep track of this and they face the same problems that people would face under Senate Bill One, which is that you can't keep track of it. There are large fines and prosecutions, including your license, if you're an on air license. And so finally it’s much easier for them to just go away and say we'll run country and Western music, it's a lot safer. So those are the two main assaults we see right now. Congress doesn't want you to know what they are doing. That's the bottom line on that. [56:59]
JIM: And the way they plan to stop it is they know that the internet, this broad medium, where all of these stories, the minute something happens and as you mentioned, John, there are housewives, there are people that are taking these bills and going through them line item by line item, something that probably a lot of Congressional staffers aren't doing, and they are discovering this stuff. How did somebody pick up this 220 provision in SB 1? because that's exactly what's happened, you've got independent people that are reviewing this and saying: “Wait a minute. This is a control of the internet and it's limiting free speech.” And how often would you find Christian talk shows with the ACLU teaming up with somebody like James Dobson, or the National Association of Manufacturers and the Independent Business Council getting behind this because they know that a lot of small businesses don't have the big lobbying power that large oil companies have or what trial lawyers have, or what drug companies have or what Hollywood has. They just don't have that money.
So the internet is an inexpensive and actually more effective way to do that. And that's why they are trying to shut it down. And even I'm hoping that this will be defeated. Even if this is don't be surprised, John, if they try to sneak it in some other bill. And thank goodness, we do have the internet where people can bring this information out to the public. But if something like this would be past, we would eventually have to shut down this radio program because I don't want to spend the time in hiring a person filing every time that somebody submits an editorial for our site, somebody writes something, or we say something on the air or one of my guests says something on the air that is controversial. You know, like this week we interviewed Dr. Marc Faber. He said some things that I'm sure the government wouldn’t appreciate hearing. [58:58]
As of Thursday night, very late Thursday night, they voted out section 220. It was the Bennett amendment which was approved which eliminated section 220. But the house bill is still up and running and then there will be a joint bill, a reconciliation bill. After they get through, the Senate Bill One is going to pass. It's actually needed. There's a lot of provisions in it for some ethics reforms but this was one that was really bad. But you're right, they are going to be back trying to do this again and again and again. We're not done with this battle.
It's amazing how some of these actual websites work. They have retired police men, retired house. People at home, they are reading through the bills, they funnel that through a central editor or information. There are a number of sites that have op-ed pieces being written by people and these sites just like your site are getting millions of hits. These are a real threat to any politician who wants to engage in shenanigans. So they go they will be back.
Well, Jim, that is it - having done our shtick. I'm a passionate advocate of freedom of speech. We've both been in broadcasting a long time and if there’s one thing I believe we can get out there and everybody can hash out the ideas and like you say, leave out the body parts and the names. We can grind up ideas, we can’t grind up people. But that's that. Any way, coming up, let's see, next week on the program, what is it week going to be doing?
voiceover: the same thing we do every night, pinkie, try to take over the world.]
There you go, Jim, you're plotting to take over the world.
JIM: Coming up next week, my guest will be Lowell Miller, he's the author of the new book called The Single Best Investment. You’ll want to stay tuned for what that is. Also coming up the first week of February, Roger Blanchard will be joining us. He's talking about the future of global oil production. February 10th Aaron Chaze has written a new book called India. And February 17th, Ike Iossif will joining me here on the program for Ahead of the Trend. Ike is now broadcasting out of Greece. All of that and more coming up on the program in the weeks ahead.
In the meantime, on behalf of John Loeffler and myself, we'd like to thank you for joining us here on the Financial Sense Newshour. Until you and I talk again, we hope you have a pleasant weekend. [1:01:20]
