Weak Reed: My Response to John T. Reed's Book-Marketing Attack on Me
Remnant Review (Aug. 25, 2012)
I have been asked by a number of subscribers to GaryNorth.com to respond to an attack article written by John T. Reed. I decided to do this as my monthly newsletter, Remnant Review. It is my longest article each month. I have been writing it since 1974.
I am going to take more space than usual for a response to an attack. Every once in a while, I do respond to some article that is critical of something that I have written. On occasion, I have written a book. Westminster's Confession and Salvation Through Inflation are examples. Generally, however, I do not spend a lot of time or space responding to critics.
I have decided to make an exception in the case of Mr. Reed. The reason why I am going to do this is that he has produced an example of a particular form of marketing that has always fascinated me. I regard him as an effective marketer. Given the situation that he finds himself in, I think the marketing strategy that he has adopted makes perfect sense in some situations. Not in this case, however, as you (and he) will soon see.
His strategy is what I call flushing out the quail. Here is the strategy. You go public with an attack on somebody who is far better known than you are. Preferably, this person is widely published, but especially important, his articles and website are more highly ranked than yours.
The goal here is to persuade the victim of the attack to respond in public, which enables you to get a debate going, which gets word-of-mouse going, which may lead to increased sales of whatever it is you are trying to sell.
Mr. Reed is trying to sell a $34.95 book that costs him about $3.50 to print for orders of 3,000. Any time you can get a 10-to-1 markup, I say go for it!
When I am the target of a "flush out the quail" attack, I usually ignore it. I like to disappoint the person who has adopted it. But Mr. Reed has offered a classic case of an ill-conceived attack. I respect marketing, but I like to provide examples of what can go wrong if you fail to execute properly. So, I just cannot resist responding.
Count this quail as flushed. Warning: this quail is armed. Think of me as a quail with an Uzi.
A RE-WRITE OF PUGSLEY'S 1980 ALPHA STRATEGY
I begin by dealing with what a lot of readers on my website and his are unaware of. Mr. Reed has come to an investment strategy similar to mine and the late John Pugsley's. I came to this view at least 45 years ago. Pugsley named it in 1980: the alpha strategy.
I certainly do not resent the fact that a younger man coming from a different background -- a Harvard MBA -- without the same kind of training in Austrian economics that I have had, has come up with pretty much the same recommendations. I regard his recommendations as sound economically, and I also regard them as sensible. I am probably biased, because I have recommended the same strategy for so long.
Let me give an example from an article that Mr. Reed wrote in 2011. It is an article on hyperinflation. But the central fact on which he bases his prediction is this: hyperinflation will not solve the problem of the federal government's inability to pay off on Social Security, Medicare, and other long-term obligations that it has established politically. Because he believes that the U.S. Government will ultimately default on its debts, he recommends a strategy of buying consumer goods that you know you will use in a crisis. In other words, it is a strategy of hoarding. It is Pugsley's alpha strategy.
John Pugsley got started in the newsletter business at about the same time that I did, 1974, and he wrote books rather similar to mine. His most famous book was The Alpha Strategy. It was a very good book, although it was poorly timed. It was published in 1980, just as the Federal Reserve began tightening money. That was the end of the market for price inflation-hedging books. The book was written on the assumption that price inflation would continue. It did continue, but it began to slow its rate of increase. The economy moved to disinflation over the next quarter-century. But the section of the book which listed the goods that it would be wise to buy is a very relevant section. I have reprinted it, with Pugsley's permission, as a free resource for members of my website.
John is dead now, but he was a great defender of the free market. He was a very fine writer. I regard his book's list of products as something that "preppers," who used to be survivalists, would begin to stockpile.
THE GOVERNMENT WILL DEFAULT, HE SAYS
With this as background, I reproduce the final paragraph in Mr. Reed's 2011 article.
You have two choices: you can convert as much of your money into food and other goods before the store shelves are empty or you can wait until after they are empty. And what's the harm if you stock up now on food, household supplies, office supplies, inventory if you have a business, forever stamps, pennies and nickels (see my book for details), and so on? If, somehow, we avoid hyperinflation, you will simply have bought some stuff you later used sooner than usual.
This is common sense. I heartily endorse the strategy.
In coming to his conclusion, he made an assessment regarding the likelihood of default by the federal government. His scenario assumes that there will first be a time of hyperinflation. But, he said this hyperinflation must eventually end. He then described a scenario that he thinks is plausible, given the assumption of the inability of the government to pay its debts. He said the following.
"How can the hyperinflation and the run on the dollar be stopped?"
End the dollar and replace it with a currency that Americans and the worldwide public trust.
"Like a dollar with gold backing?"
The public would trust that, but only after they demanded gold for the paper and always got it without delay. At present, the U.S. government does not have enough gold to do that. For decades, the U.S. government has refused to let anyone see what it is Fort Knox. I'm guessing the reason is there is very little gold in Fort Knox. Also, a gold standard would probably cause a depression because the money supply has to expand as fast as the economy and the gold supply only expands as fast as gold is discovered which is too slow. The new U.S. currency would probably be backed by a commodity index or some new central bank that was constitutionally independent, run by the nation's most trusted people, and swore on a stack of Bibles that it would not "print" too much money.
"Would that end the run on the dollar?"
Yes, but that would only be the first step. With no ability to "print" money, which is what caused the hyperinflation, and no ability to borrow because the bond buyers no longer trust the U.S. government, the federal government's only choice would be to cut federal spending by about 50% overnight. The money would be good again, but the federal government would not be able to collect enough of it in taxes to pay Social Security, federal pensions, Medicare, and so on.
"Would that mean rioting in the streets like in Europe?"
Probably some, but I expect Americans would figure out faster than the Europeans that rioting only makes things worse, like in the black neighborhoods in the 1960s.
"So what would Americans do?"
Scream and yell and whine for a while, then realize there is no money to continue their benefits and focus on the more urgent task than complaining futilely--finding money to buy food and pay the rent.
"How will they do that?"
Get a job, start their own business, ask friends and relatives and charity organizations for help.
If you are familiar with my comments on the inevitability of a federal default, all of this will seem familiar. The difference between his scenario and mine is that he believes that there must be hyperinflation in between now and the inevitable default. I have argued that, if the Federal Reserve System retains control over monetary policy, there will be not be hyperinflation. I have spelled out my reasons in many places. Here is my argument: the economists at the Federal Reserve know that there must be a government default, with or without hyperinflation. So, to avoid the middle period of chaos, the FED will avoid hyperinflation.
Mr. Reed has made it clear to anybody who reads him carefully that, after the hyperinflationary blowoff, the government will default.
He thinks the economy will recover a lot faster than I do. He wrote the following:
Many, maybe most Americans are out of practice with that because of all the disability and retirement and generous government benefits, but it is essentially just a pre-1970 sort of America. Not a return to the Great Depression. There would probably be a high growth rate in the private sector if the government did not intervene with price controls and all that. They probably will slap price controls and capital controls and tariffs on everything. That will cause a Depression, but it is impossible to maintain those controls. After they are lifted, the private sector will probably boom. Ultimately, all the money the government spends comes from private sector profits. This will force that economic lesson on Americans. The big government people will never go away, but, for a time at least, they will understand that government essentially can never get more than about 18% of the gross domestic product so the only way to grow government is to grow the GDP. That will be a bitter pill for the liberals--they call it "trickle down"--but they had their chance to see if they could defy the laws of economics, and today you can see the disaster it created.
I have repeatedly said that the federal government cannot extract more than about 20% of GDP. This is one reason why governments borrow heavily, and why ultimately they try to persuade the central bank to inflate the currency.
So far, the scenario described by Mr. Reed, as well as the personal investment strategy described by him, sounds suspiciously like my strategy. But Mr. Reed is in marketing. If he goes public with the fact that he is simply copying the strategy outlined over 30 years ago by John Pugsley, and before this by me, he does not make his book sound all that revolutionary. And be sure of this: he is trying to sell his book. He has inserted live links into his articles which take the reader to an order page for his book. On the page where his default scenario appears, we read:
The above is my best guess at the things that will happen the day the world stops trusting the U.S. dollar. It will be a "you ain't seen nothing yet day." Things will get far worse and more complicated in the days after the first day. We're talking suicides, harmful laws, university endowments disappearing, persons who live on income from certificates of deposit, annuities, Social Security, bond interest, bond principal, and more screaming in anguish and anger and begging for food.
My book How to Protect Your Life Savings from Hyperinflation & Depression needs 320 pages to explain all this. The chapter on "Government and institutional reaction"--which forecasts the long-term responses of government, banks, stock exchanges, and so on covers 22 pages what you can expect to happen--based on what happened in the many countries that have had hyperinflation in the past.
Really, his book does not need 320 pages. It just needs extracts from Pugsley's book, from my 1977 book, How to Profit from the Coming Price Controls, and from Mark Skousen's 1977 book, Playing the Price Controls Game. I would have been happy to coorperate. I am sure Skousen would have. But that might have made it appear that little or nothing in his book is original. When you charge $34.95 for a book, it had better appear to be original.
Far be it from me to criticize somebody who tries to sell a book. I began selling self-published books in 1977. I am a great believer in self-published books, and I am a great believer in generating as much interest as I can for those books. But you have to understand what Mr. Reed is facing. He has no reputation in the hard money camp. He is a specialist in real estate speculation. He has not published on any of the major hard money sites, nor was he around when the hard money movement was getting started back in 1967. I was. I began writing for that movement over 45 years ago. My first published booklet was Inflation: The Economics of Addiction. That was in 1964.
So, when you are a newcomer in an old, well-established market, and you have written a book obviously targeting that market, you have to develop a marketing strategy to try to generate some interest in your book. Mr. Reed has done this, rather effectively I think. He is basically saying this: "I'm calling you out North. I dare you to come down and shoot it out with me. I double-dog dare you."
So, because I respect anybody who is struggling to sell a "me, too" book to an audience that is not aware of 35 years of prior books on his topic, I am responding to his call.
AGREEMENT: THE GOVERNMENT WILL DEFAULT
He begins his book marketing sales pitch with praises of Lew Rockwell's site, for which he has never written. (I have written almost 1,200 articles for it.)
I get the daily free Von Mises Institute newsletter. You should, too. I have singled out some of their articles here as especially good.
Then he adds "however."
Today, however, I got one titled "Hyperinflation Is Not Inevitable (Default Is)" by Gary North.
North says two years of hyperinflation is not enough to solve the government's problem therefore they will not hyperinflate
North says we who think hyperinflation is inevitable (theoretically, it can still be headed off) are overlooking two facts:
1. The biggest debt is the unfunded liabilities for entitlements like Medicare, Social Security and because hyperinflation usually does not last more than about two years, and the unfunded liabilities for entitlements are based on a 75 year projection, three years of hyperinflation will not solve the government's inability to pay entitlements.
2. North says the average term of U.S. debt is 8 years so most U.S. debt won't be affected by two years of hyperinflation.
With regard to unfunded entitlement liabilities, North says hyperinflation predictors like me overlooked that. No, I didn't. I said in my book How to Protect Your Life Savings from Hyperinflation & Depression that the public's rights to medicare and Medicaid and federal retiree health care are not dollar-denominated assets. Therefore they are unaffected by hyperinflation. I called them blank checks, not dollar-denominated assets.
He is correct. He did say this. Good for him. Therefore, the key question for him to answer is this: What good will hyperinflation do the Federal Reserve, which sets monetary policy? As he wrote in 2011, the government will default after the hyperinflation. Why, then, will the Federal Open Market Committee (FOMC), which is made up of the presidents of the 12 regional, privately owned FED banks, adopt monetary hyperinflation? Surely not to avoid a government default, which Mr. Reed and I both think is inevitable.
THE DEAD ENCYCLOPEDIA SOCIETY
Next, he did something very weird. He cited Encarta, a defunct CD-ROM encyclopedia that Microsoft abandoned back in 2009, because Wikipedia killed its sales. Ironically, we can read all about it on Wikipedia: http://en.wikipedia.org/wiki/Encarta
Here is what Mr. Reed wrote:
With regard to the average term of U.S. debt, here is a quote from Encarta:
Maturity of U.S. debt ranges from less than a year to over 20 years, with the average maturity about 3 years. More than half of the debt, however, is short term, maturing in less than a year.
He adds this: "So the term may not be what North says."
What term? Maturity? I am not sure. Anyway, here is what I wrote:
The on-budget debt of the United States which is owed to the general public has an average maturity of approximately eight years. The Federal Reserve System is using "operation twist" to buy larger quantities of 30-year Treasury bonds.
This sentence was in blue, meaning that it was a live link: "The average maturity of the federal debt now is about eight years." Try it. Click this link. You can read an article on the FED's Operation Twist. On page 24, we read: "On 21 September 2011, the Federal Open Market Committee (FOMC) announced the new MEP, which seeks to increase the average maturity of the Federal Reserve portfolio of Treasury securities by 25 months to about 100 months by the end of 2012." Let's see: if I divide 100 by 12 (the number of months in a year), I get approximately 8, meaning 8 years.
All he had to do was click the link and read the article. But, instead, he got out an old CD-ROM disk of an encyclopedia that went bust in 2009 and quoted it. This is not what I would call original research.
Generally, it is a good idea for critics not to treat me as though I recently fell off the turnip truck. Mr. Reed is about to discover why not.
Mr. Reed continues:
However, I agree with North that much U.S. debt does not mature until after the projected hyperinflation which most observers expect to start around 2014 to 2017, which would mean it would end, if it had a two-year duration, around 2016 to 2019.
UNFUNDED LIABILITIES: 75 YEARS
He is avoiding the key issue of my article: Prof. Kotlikoff's figures. Prof. Kotlikoff says that the present value of the 75 years worth of unfunded liabilities of the U.S. government totals $222 trillion. So, why does Mr. Reed focus on 2019? What is so special about 2019? Nothing.
Furthermore, where is evidence of this statement? ". . . the projected hyperinflation which most observers expect to start around 2014 to 2017." What observers? Where have they said this? He cites no one. Are these people with a good track record of forecasting prices? They are predicting an event which has happened to no Western industrial nation since Germany and Austria, 1921-23, other than Israel, 1983-85.
Then he says that my historical examples are "too crude."
North's statement of how long hyperinflations almost always last is too crude. The actual durations of many historic hyperinflations are listed on page 118 of my book How to Protect Your Life Savings from Hyperinflation & Depression.
I do not own a copy of his book. He is clearly trying to sell it. It is a blue hyperlink that takes the reader to an order page.
In a public debate, it is best to cite the evidence for your crucial arguments. It is not good to try to prove your case by citing secret evidence that costs the reader $34.95 to discover. I am very big on selling books, but when you are trying to refute someone who has devoted almost 50 years to a topic, it is best not to rely on your $34.95 secret evidence in your attack essay.
In any case, my original article was clear regarding what my criteria are: hyperinflations in peacetime by Western industrial nations. I wrote:
There have been cases of hyperinflation in the past which have become legendary. The most famous of all of these hyperinflations is Germany from 1921 through 1923. Simultaneously with that hyperinflation was the hyperinflation in Austria. These were not the worst cases of hyperinflation in history, but they were the worst cases in industrial societies.
Mr. Reed goes on.
Whether dollar-denominated bonds mature before the hyperinflation ends matters not.
However, the big problem is that North is assuming that when hyperinflation ends, the purchasing power of the dollar reverts to pre-hyperinflation levels. The hell it does!
Two years of U.S. dollar hyperinflation would wipe out the purchasing power of all dollar-denominated assets world wide.
When the hyperinflation ends, the U.S. dollar will be replaced by a new currency. An old-U.S-dollar-to-new-currency conversion rate will be established by the government at that time. I am not theorizing this. It is the way it has always gone in past hyperinflations except where the country in question simply ended the old currency and just let the pubic use foreign currencies forever after.
I do indeed think that the new replacement currency will be of greater value than the hyperinflated dollar, i.e., zero. I have never said that this new currency will be the same value as pre-inflation purchasing power. He does not offer a citation, because the statement does not exist. But his statement will no doubt impress his disciples.
Here is my position: the purchasing power of the replacement currency will be established by future conditions, meaning supply and demand for currency. Simple. Nothing revolutionary here. The free market will decide what it is worth in relation to the now-defunct currency.
Mr. Reed continues.
You will gain no purchasing power when the dollar is replaced by a new U.S. currency
The conversion rate will be based on the purchasing power of the U.S. dollar on the day the hyperinflation was ended!
I do not know how many zeroes will be knocked off the hypothetical hyperinflationary dollar. I do know what such a hyperinflationary dollar will be worth at the end: nothing. Ludwig von Mises called this the crack-up boom. Will knocking off five zeroes do it? Ten zeroes? Twelve? I have no idea. I know only this: the new currency will be worth more than the hyperinflationary currency on the day of the replacement.
Will you gain purchasing power by holding the new currency? Maybe. Maybe not. If you hold one trillion inflationary dollars in a bank, if there is still a bank to hold them in, and the government knocks off 12 zeroes, then you will have $1. So what?
Mr. Reed then launches into a discussion of the Canadian dollar. Why, I do not know. He never mentioned foreign currencies before in his essay.
Here's an example. Today the U.S. dollar is about equal to the Canadian dollar. $1 USD = $1 CAD. I expect we will have hyperinflation and that Canada will not. See my other headlines news articles for the reasons.
So after hyperinflation, $10,000,000 USD = $1 CAD. The U.S. ends the hyperinflation by creating a new currency called the star dollar. The conversion rate to the Canadian dollar is again 1 US star dollar = $1 CAD. So what is the conversion rate for old U.S. dollars into new U.S. star dollars? $10,000,000 old USD = $1 star.
Why does he think Canada will not inflate? It exports to the USA. If the Canadians cannot export to the USA, there will be pressure politically to inflate. I hold Canadian dollars in a Canadian bank, so I agree with his main point. I don't think Canada will inflate as fast.
But, just for the record, the fact that Canada's economy and ours are so closely intertwined is another reason why the two central banks will cooperate with each other. This will act as a brake on the Federal Reserve and as an engine of inflation on the Bank of Canada.
Mr. Reed continues.
U.S. bonds and all other dollar denominated debts that have not yet matured will still be denominated in old U.S. dollars when they do mature and they can be paid off in worthless old U.S. dollars.
This is true of corporate bonds during the time of hyperinflation. Companies will "call" the bonds, and pay them off with worthless dollars. The suckers who invested and held onto corporate bonds will be wiped out. This is why corporate bonds are a bad investment in times of price inflation and rising long-term interest rates. But U.S. government bonds are not subject to "calls," meaning mandatory pre-maturity redemption. If Congress changes this, then that is a major act of default.
However -- and Mr. Reed refuses to respond -- this does not solve the government's 75-year debt problem. The liabilities for Medicare and Social Security will remain on the books. So, I reassert my original point. The Federal Reserve will not adopt hyperinflation, because this will not solve the government's ultimate debt problem.
Mr. Reed continues.
Our government wouldn't do that to us
You may think the U.S. government would not dare do that because it would piss people off. Rather, they would convert the old hyperinflated U.S. dollars into the new non-inflating star dollars one for one. No freaking way!
"Star" dollars? What are "star" dollars? I shall return to this later.
Mr. Reed adopts a familiar debater's technique here. He uses strong language to conceal his lack of a cogent argument.
Remember, he is trying to sell his book, not refute me in a boring, point-by-point manner.
The reason the old U.S. dollar is hyperinflated is they "printed" too many of them. If they allowed a one-for-one conversion into the new star dollar, there would instantly be too many star dollars, too, and the hyperinflation situation would continue unabated.
This is obvious. A replacement currency is supposed to replace a dead currency. Of course they will knock off zeroes. What is his point?
Does he have a point?
True, Germany did pass some post hyperinflation laws giving a limited number of creditors who got wiped out by hyperinflation partial clawbacks in the range of 15% to 29% of the purchasing power lost. They also levied small taxes on the windfall profits made by borrowers who got to pay debts off with worthless, hyperinflated German marks.
What Germany did in 1924 after having lost World War I in 1918 has precisely nothing to do with what a U.S. hyperinflation will or will not look like. Why mention it? What is his point?
Does he have a point?
But fundamentally, there will be no restoration of the purchasing power of old U.S. dollar-denominated loans and bank accounts after hyperinflation ends.
My point exactly. This is the heart, mind, and soul of my original argument. This is my point. The Federal Reserve System is not going to adopt a policy which wipes out the largest U.S. banks, which are creditors. Otherwise, the borrowers will stiff the banks with worthless digital money. Here is what I wrote.
No other nations in Western Europe have ever experienced anything like the hyperinflations of Germany and Austria in the early 1920s. Their currency systems were completely destroyed. Farmers were able to pay off debts that had been accumulated prior to World War I by selling one egg and handing the money over to the creditor. This of course destroyed the creditors. It is generally believed that the middle class in both Germany and Austria suffered enormous losses. They had been creditors. . . .
If this form of hyperinflation ever comes to the United States or any other Western industrial nation, it will lead to the complete destruction of creditors. It will mean the complete destruction of long-term creditors. Anyone who bought long-term bonds of any kind, anyone who invested in mortgages of any kind, anyone who is the recipient of a government pension, or anybody who is dependent upon Social Security and Medicare could not survive this kind of hyperinflation. It would always be paid off in money that is worth far less than when the debt was contracted. When we think of the delay in payments that already exists with respect to Medicare reimbursements to physicians, we get some idea of what it would do to the healthcare industry. The delay of 90 days would basically eliminate the debt.
Congress may be willing to do this. The FED will not.
Mr. Reed continues.
The end of hyperinflation means the new money is real, like the Canadian dollar which I assume will remain real throughout the hyperinflation in the U.S. Essentially, reinstating the purchasing power of U.S. bonds denominated in old worthless dollars would mean changing the wording of those contracts to say they were denominated in Canadian dollars or star dollars.
You do not understand this, do you? This is because it makes no sense. He is not providing any kind of logical argument. He is just filling space on a screen.
An author has the responsibility of connecting one idea with another. He speaks of "star" dollars. What is a "star" dollar? He has not defined it. What have Canadian dollars got to do with the decision of the Federal Reserve's or Congress's definition of a "star" dollar, whatever a "star" dollar is?
Canada has 30 million people. The USA has 310 million. They vote here. Canadians do not vote here. Does Mr. Reed think Congress cares about the Canadian dollar or the Canadian economy? Does he think a Congressional committee will structure American contracts in terms of the Canadian dollar?
Apparently, he does. He does not explain why.
But A, that would be unfair because the lenders tried to anticipate the inflation rates in the interest rates on the original bonds or loans and it is not the borrowers' fault they anticipated low. It would be double counting to let them put an inflation premium into the interest rate when they made the loans then also get paid back in an uninflated currency like the star or Canadian dollar. And B, where in the hell would the bankrupt U.S. government get the real money to, in effect, buy trillions of Canadian dollars with which to pay off the not-yet-matured U.S. bonds?
Does any of this make sense to you? It makes no sense to me. But it is not designed to make sense. It is designed to sell a $34.95 book.
HYPERINFLATION AND/OR DEFAULT?
Congress cannot "print" its way out, he insists. On this, we agree.
Don't tell me they can just "print" the star dollars to pay them off. That is what created the hyperinflation. The new star dollars will not be trusted unless there is some totally independent--probably by constitutional amendment--entity in charge of printing star dollars and they will be ultra transparent, watched like hawks, and maybe required to only "print" as many star dollars as the growth in the GDP warrants. They most certainly will NOT be allowed to print extra star dollars because the federal government is trying to spend more than it takes in.
First the hyperinflation then the default.
He calls for an independent agency to control American money. But there is already such an independent agency. It's called the Federal Reserve System. It is not in the interest of the employees of the Federal Reserve to inflate away their pension program, which is funded. They will get blamed -- correctly -- for hyperinflation. Bureaucrats will do what they can to avoid blame.
The FED will not adopt hyperinflation. It is a short-term disaster that does not produce an escape from the #1 problem: the unfunded liabilities of Medicare and Social Security. Congress has created this nightmare. The FED cannot evade it with hyperinflation -- only postpone it a few years. Why would the FED destroy its credibility and also its pension program in order to bail out Congress for a couple of years? This makes no sense.
I think you can safely ignore Mr. Reed.