Investing for cash flows is better than investing for capital gains.

This may be especially important for the average investor during these difficult financial times. All authorities seem to agree with Robert Kiyosaki’s statement that “we are entering a long and hard financial winter” (Rich Dad’s Conspiracy of the Rich [2009]).

Capital gains investing is gambling. It is possible to win at gambling, but it’s foolish for the average investor to gamble at all in difficult financial times.

Since there are only two kinds of investing and since capital gains investing is unnecessarily risky, investing for cash flow is better because it’s much less risky.

Taxes are another important reason why investing for cash flows is better than investing for capital gains.

Taxes are paid on earned income, portfolio income, and passive income.

It’s good to have any kind of income! However, the problem with earned income, which includes income from a job or a retirement plan, is that it is taxed at the highest rates. If you flip real estate properties or buy and sell stocks and hold those assets for less than a year, the money you make will be taxed as earned income.

Portfolio income most often comes from capital gains. If, for example, you buy stocks or real estate low and sell higher after holding it for over a year, that is capital gains income that is taxed at 28 percent. The danger, of course, is that the stock or real estate that you purchase will not increase in value at all, which is why investing for capital gains is gambling.

Passive income is taxed at the lowest rates. Suppose, for example, that you purchase an apartment building that, after expenses, puts money into your pocket every month. Your income from it won’t only be taxed at the lowest rates, but there are ways to reduce even that tax exposure such as amortization, appreciation, and depreciation.

Assuming that you do your due diligence in advance, you will have an excellent idea before you purchase apartment buildings what their income will be.

Still, since apartment buildings are not liquid and require intensive management, it’s important to understand exactly what you are doing before purchasing them. After all, a single real estate investment can cost you tens of thousands of dollars.

The point is that, from a tax perspective, passive income is the best kind of income to have. If that’s the kind of income you want, then investing for cash flow is your kind of investing.

Another advantage is that you may be able to invest for cash flows using other people’s money! For example, it may prove easier for you to obtain a mortgage on a $1,000,000 dollar apartment building than on a $100,000 single family home. Why? Folks who lend money understand that there’s a huge difference between owning a shelter for you and your family (see Your House and Increase Your Assets) and a cash-flowing asset.

A mortgage on your home is a liability that takes money out of your pocket. Financially, it is bad debt; whether you rent or buy, shelter is an expense. On the other hand, a mortgage on an apartment building may be an asset if it puts money into your pocket. It may be good debt that is not only tax-free but also your tenants may pay it off for you!

I don’t think that any of this is controversial. Why, then, don’t all investors invest for cash flows?

I don’t know. My guess is that it’s because investing successfully for cash flows is more difficult than investing successfully for capital gains.

To continue with the same example, in general, is it easier to sell a single-family home or an apartment building?

A single-family home. Why? There are many, many more people looking to purchase them than there are real estate investors looking to purchase apartment buildings. That higher demand makes it easier to sell.

Real estate is not a liquid asset, and apartments are more illiquid than single-family houses.

Also, more people understand how to buy single-family houses than apartment buildings.

Furthermore, apartment buildings are usually more expensive than single-family houses.

Therefore, it seems that buying apartment buildings is more dangerous than buying single-family houses.

Well, not exactly: they are only more dangerous to buy for the average investor.

What if you learn how to purchase them? What if you specialize and develop an unusually high degree of financial intelligence about investing in apartment buildings, which is an excellent example of investing for cash flows?

If you don’t get distracted, stick to that one kind of investing for cash flows, and avoid all other kinds of investing (including other kinds of real estate investing such as investing in office buildings or shopping centers), you’ll soon be able to develop a plan that will work well for you.

Why re-invent the wheel? Learn how to invest in apartment buildings for cash flows from those who have already done it. It’s foolish not to learn from the mistakes and successes of others.

For example, Kiyosaki sketches his plan in Rich Dad’s Conspiracy of the Rich. He ignores high-end apartment buildings because there is weak demand to live in them as well as low-end apartment buildings because they are too management-intensive.

Where are safe, clean apartments for working-class people located that have a high demand to live in them? Near great sources of working-class jobs!

Everyone understands that location is the most important criterion when selecting real estate. It’s critical when selecting apartment buildings for cash flows.

For reasons that James Howard Kunstler gives in The Long Emergency, I think that the best location to be a real estate investor in the U.S. in the coming years will be in the Northeast.

The reasons for that include global warming as well as oil depletion. Even if you buy real estate with good cash flows now along, say, the Florida coast or in the cities of Nevada, you may not have to live very long to regret your foolishness!

It’s also critical to take into account where in the market cycle real estate is before making any offers. There are very good books and courses that teach how to do that.

Investing well for cash flows is complicated. In fact, it’s too complicated for most people.

Whether that’s good or bad news for you depends on you. If you are too distracted, ignorant, or unwilling to learn how to do it well, my best suggestion is not even to try.

If you are focused, willing to learn how to overcome your ignorance, and committed to doing it well, my question is, “Why not?” If you have read this far in this post, you probably have what it takes.

Remember, since it’s easier to invest for capital gains than for cash flows, fewer people invest for cash flows. Since fewer people are trying, there’s less competition. Because there’s less competition, the odds of your being successful are automatically increased.

If you are the right kind of person, it’s an excellent way, perhaps even the best way, to become financially successful and independent.

Silver may be the best investment right now (early 2012) for the average investor.

If it’s not, I don’t know what is.

Why?  What’s so good about it?  Why consider buying it now?

The fundamental fact about this world is that nothing abides. Flux is relentless. Always be aware of this when investing.

The way to do that is always to think in terms of wealth waves (cycles, booms and busts). Whether you are thinking about investments in precious metals, real estate, businesses, or paper assets such as stock and bonds, always think long-term, which means having the perspective to consider where the wealth wave for an asset class is at the present moment.

The only time to make an investment is in the present moment. It is always impossible to invest yesterday or tomorrow.

Why might precious metals be a good – or even the best – investment in the present moment [January 2012]?

After all, there has been a bull (rising) market in it for a decade! Perhaps that is a bubble that is about to burst. It will end. Why? All bubbles end. If not, eventually one ounce of it would be sufficient to purchase everything in the world!

So the critical question about buying it in the present moment is: “Is the current bull market about to end?”

Some analysts think it is. Harry S. Dent and Rodney Johnson: “Deflation is the only possible scenario in the decade ahead . . . we are a couple of years into the Winter Season. . . deflation is a monster . . .Gold and silver are inflation hedges, not deflation hedges” (The Great Crash Ahead [N.Y.: Free Press, 2011]). They predice that, like most other commodity prices, precious metals will fall in price.

They are correct that precious metals are inflation hedges. However, gold and silver are not like other commodities in one respect: they are real money. As fiat currencies drop, real money soars.

They are also correct that deflation is ahead of us. In fact, it’s already here.

The critical question is whether or not precious metals are deflation (as well as inflation) hedges.

I don’t know. Most analysis seem to think either that they are or that real money is still worth having in your portfolio anyway.

For example, Michael Maloney thinks that they “have a proven track record of performing well in inflation or deflation” (Guide to Investing in Gold & Silver).

Doug Eberhardt: “Silver is money . . . Historical ratios of gold and silver have fluctuated between 12:1 and 16:1” (Buy Gold and Silver Safely). Buying silver is a good idea when the ratio is below 80:1 and “be cautious” or “possibly take the other side” when the ratio goes higher. (Today it’s about 52:1.)

Howard Ruff: “Silver always rises during gold bull markets, usually twice as far and fast as gold, but the supply/demand situation . . . dwarfs all other reasons why silver will soar in price, perhaps much more than twice as much as gold.” (Huff’s Little Book of Big Fortunes in Gold & Silver)

Thomas Herold: The U.S. economy “must go into either default or into hyperinflation . . . Either option is dire . . . Silver metal is the one that has the lowest quantity of reserves to production, as well as the lowest reserve base to production ratios. . . [Its] uses are only projected to escalate. . . silver has more than a whopping 615 percent in price appreciation potential left to it before it reaches its inflation adjusted high again . . . should silver realign to its traditional average of 1:12 purchasing power of gold to silver . . . silver prices would . . . be far higher . . . count on between five and ten more years of the bull market continuing. . .”(Building Wealth with Silver [2011])

So, as usual, expert opinion is divided.

Five years later, everyone realizes that the economic recession that began in 2007 was not just another recession. It’s actually the beginning of a transition to a new world economy. We’ve never been there before – and this is the fundamental reason why expert opinion is divided about precious metals right now. Nobody knows what will happen.

There is agreement, though, that, minimally, we are in for a very difficult decade ahead. (I’ve been discussing some of the reasons for that in these posts, and I intend to continue to do so.)

Like paper assets and real estate, all fiat currencies are falling in relation to real money [precious metals].

That’s the fundamental reason to have them in your portfolio now.

When currencies, paper assets, and real estate re-value themselves against real money, that will be the time to transfer the wealth you have in precious metals to other assets.

Think in terms of value rather than price. When you do that, as Michael Maloney likes to say, precious metals are cheaper than dirt. “Whether you like it or not, the empire of the United States of America is now in decline . . . There is no possible scenario in which . . . [precious metals] do not rise” in value.

Is the U.S. empire in decline? Yes. The beginnings of the decline have been obvious for years. However, that does not mean that it won’t continue to be the most powerful and important nation in the world for quite a few years yet.

Will precious metals rise in value? Nobody knows. For my part, I predict that they will. I’m in!

Even if you agree, however, please don’t become attached to them. When you decide that their bubble is near its top, sell them.

Either way, my most important suggestion is to continue to develop your most precious asset, which is your mind. Keep reading blogs like this as well as books, keep thinking regularly, and every day practice letting go of all thoughts.

The amount of time we waste on trivialities is astounding. If you need to, please break out of your beer-and-sports induced coma or addiction to soap operas and shopping.

Step back. Notice your attachments. Starting with the most important one, begin breaking them all one at a time.

I’ve known bright people who were attached to television news! That news is mostly mass entertainment. “If it bleeds, it leads.” Regularly focusing attention on short-term catastrophes and crimes robs you of paying attention to what is valuable.

Investing in precious metals or anything else is a game. Since all such activities can become addictive, I believe it’s important to remind yourself daily that the purpose of the investing game is to get beyond the need to play it.

What do you want freedom for?  What do you want freedom from?

(My answers: Freedom from Becoming. To live well, which is living a balanced life between Becoming and Being, and to help others do the same.)

Whatever your answers to those important questions, precious metals may be a means to enable you to get there.

Why consider the price-rent ratio?

You need shelter. Either you rent a place to live or buy a place to live.

Let’s suppose that you understand that the real estate bubble for housing in the U.S. burst in 2007 and that prices for single family houses have been falling ever since. Let’s also suppose that you are wondering whether you should rent a house for you and your family or purchase one.

Have prices fallen enough for purchasing a house to be a good deal or not?

There’s no point offering you a straight answer for three reasons. First, with respect to any particular deal many factors are involved. Second, since the market is always changing, there’s no one answer that will work well all the time. Third, I don’t know what you should do because, like everyone else, I don’t know what the future consequences of whatever decision you make will be.

Instead, let’s simplify things by assuming that you are going to investigate this unemotionally as a real estate investor would. My thesis is simple: consider the price-rent ratio before making a decision.

Why? What is the price-rent ratio? Why is it important? What’s a good one?

Whether you are considering purchasing a house to live in or to rent out, the price-rent ratio is the average cost of ownership divided by the rent you would receive from a tenant.

Suppose that you find a house for sale in a good location that you are considering purchasing. It’s easy to find the owner’s asking price. Next, answer two questions:

First: What is the yearly cost (principle, interest, taxes, insurance, and maintenance) of owning that house? Let’s say it is “X” dollars.

Assume you’ll be getting a fixed rate, 30-year mortgage at the going interest rate. Its owner can show you recent tax receipts or you can look them up at the county court house. Any insurance agent can give you quotes on either homeowner’s or landlord’s insurance. A real estate agent can help you estimate yearly maintenance costs, which will vary with the age and condition of the house. So, after you do your due diligence, you determine it is “X” dollars.

Second: What is the average annual rent for a similar house? Let’s say you estimate it to be “Y” dollars.

To determine the price-rent ratio, simply divide X by Y.

If X is $1000 and Y is $1000, the price-rent ratio is 1. Roughly, that is about where it should be – or perhaps slightly higher such as 1.05.

If the ratio is lower, the price of the house is low. For example, if the price-rent ratio were .8, the positive cash flow for an investor owning that rental house would be about 20%, which is very high.

If the ratio is higher, the price of the house is high. For example, if it were 2, an investor owning that rental house would have an “alligator,” which is a property with a very negative cash flow that may eat you alive.

As Michael Maloney argues, it’s important to understand the history of the price-rent ratio for the average single family home in the U.S. if you are thinking of buying one.

For example, in the residential real estate bubble of 1989-1990, the national price-rent ratio was 1.25. Housing prices were too high.

In the recession of 1996-7, the price-rent ratio was .90. That was a great time to purchase a house – if you had the money or could get a loan, which was very difficult.

Then there was the greatest real estate bubble in history that didn’t begin to deflate until 2007, when the ratio was 1.85 or 1.90! That was a crazy time to buy a house!

What about more recently? The great real estate bubble hasn’t yet deflated. It fell and then bounced up to 1.25, which was the same as the ratio during the bubble of 1989-90!

The timing won’t be right until it drops below 1.05.

In fact, usually, when there is a market bubble, it doesn’t just burst down to fair value: the higher the bubble, the farther below fair value it usually goes until another bubble begins. So you might want to hold off buying a house until you see a ratio at .9 or lower.

Either rents must increase or prices must decrease. Since we are in a deflationary period (as I write this post in January 2012) in terms of both the stock market and real estate (when compared to real money, namely, gold or silver), rents are not going to go up. That means that housing prices are going to decline farther.

Why buy a house at a higher price now when you can purchase a similar house later at a lower price?

So, there is a conclusion from our looking at the price-rent ratio: it’s a good time to be a renter.

That, though, will change. Right now, rent a house and invest in gold and silver.

All bubbles burst! The gold and silver bubble will eventually burst. If it didn’t, you’d eventually be able to purchase a house for an ounce of gold or, even more absurdly, all the real estate in the world for an ounce of gold!

If so, as real estate decreases in value while gold and silver increase in value, investing in gold and silver now will enable you to use them to purchase more real estate later.

All that being said, though, this does not mean that you should not purchase a house right now.

That may seem to contradict everything else in this post, but it doesn’t. The point: the price-rent ratio is just one factor to consider. If it were the only factor to consider, it would follow that this is a poor time to purchase a house.

Again, this discussion has been over-simplified. My thesis is only that it’s a good idea to consider that ratio before purchasing a house.

If you agree with that now and didn’t before, excellent! You’ve absorbed some information that may be important to you.

Income from rents is similar to personal incomes and corporate incomes that are closely tied to price and supply fundamentals.

What are the most important fundamentals regarding real estate? Everyone knows the answer: location, location, location.

There are always good real estate deals available. Just please don’t be in such a hurry to purchase real estate that you forget the price-rent ratio.

(Have you read the related post about Your House?)

Is the U.S. dollar sound money or not?

If it is, what makes it sound? Will it continue to be sound?

If it isn’t, what should we as individuals do?

Ultimately, money is an idea. That being said, my purpose here is practical rather than theoretical.

Is money important? King Solomon: “The table has its pleasures, and wine makes a cheerful life; and money is behind it all” [Ecclesiastes 10:19]. It’s especially important if you don’t have any!

[Is money ultimately  important? No. In my judgment, that is reserved for spiritual awakening. I mention this because not having money is not an excuse for living poorly.]

Where does money come from?

Our species has existed for about one-quarter of a million years. For nearly all that time our ancestors were foragers, hunter-gatherers. Presumably, there was at least occasional bartering or trading, but there was no need for money.

The First Agricultural Revolution occurred about ten or twelve thousand years ago. Once our ancestors figured out how to grow crops and domesticate animals, the advantages of doing so made the foraging way of life obsolete. Those who came to control land became wealthy; everyone else paid their taxes, which were typically in the form of crops or animals, to them.

Because of specialization (the division of labor), the First Agricultural Revolution enabled our ancestors to organize themselves for the first time into sizable communities. Towns and cities must circulate goods and services to survive. There are only three options for doing so [cf. Heilbroner’s The Worldly Philosophers].

The first is tradition. In ancient India, for example, successful economic patterns were preserved from one generation to the next by handing down specialized tasks from father to son. If you were a farmer or a brick maker or a carpenter, your son would become a farmer or a brick maker or a carpenter.

The second is dictatorship (kingship, authoritarian rule, command economy). The pyramids of ancient Egypt were built because various pharaohs commanded that they be built. If a king wants a larger army, he simply decrees that peasants from various other occupations become soldiers.

The third is the market system. Its rule is deceptively simple: each may do what is to his own economic advantage. If everyone does this, all the necessary tasks will actually get done because of the rules of the market game. The market system is the basis for modern society.

So where does sound money fit in? Although there is a helpful distinction to be drawn between money (monetary wealth) and currency, let’s here – following common usage – consider them to be the same thing. Minimally, it is essential that currency or money is a medium of exchange as well as a unit of account.

A problem with bartering is setting exchange rates. How many bushels of corn trade for one shirt? The answer becomes easy once the value of each is given a monetary price, which is a unit of account.

Money also facilitates transferring value between assets. It makes doing deals less cumbersome and more efficient, which is what a medium of exchange does.

Incidentally, there’s nothing new about this. Aristotle: “money was intended to be used in exchange” [1259b4] (as opposed to using interest to get money from money, which he considered to be “the most unnatural” way to become wealthy).

Money may also have nonessential uses as well, such as being valuable for wealth storage or for deferred payments. Lest this discussion become too complicated, let’s just set those aside.

Some physical objects used as currency or money work better than others. What criteria separate less useful from more useful?

The best money must be: portable, divisible, durable, and readily recognized as being valuable.

Land is not portable. As private property, it can be an excellent means of storing wealth, but it cannot be money. It’s divisible, durable, and (usually) valuable, but it’s not portable.

Cattle and slaves are not divisible; it’s difficult or impossible to make change using them (even setting aside questions of morality). They are, though, valuable, relatively durable, and somewhat portable.

Seashells don’t make sound money because they are too fragile and are not usually recognized as valuable.

Pieces of printed paper and coins made from nonprecious metals don’t make sound money because they may not be recognized as being valuable. However, they are portable and relatively durable. Coins are divisible. Both can be sound money when they are, and are recognized to be, receipt money, in other words, IOU’s for real money.

Here’s the point: Human beings have tried many different kinds of physical objects as money (media of exchange and units of value), but most don’t work well.

I’m reminded at this point of a lovely passage in Aristotle where he is talking about utopian philosophers (like his teacher Plato) who dream up new living arrangements:

“Let us remember that we should not disregard the experience of ages; in the multitude of years these things, if they were good, would certainly not have been unknown . . . “ [1264a1-3]

Let’s use the test this suggests: What has human experience down through the ages shown to be sound money?

Gold and silver.

That’s it. Nothing else. They are recognized today as real or sound money in all cultures around the world; they are valuable.

You may object that they are just metals, that there is nothing inherently precious about them.

Actually, silver is the second most useful natural substance that comes out of the earth (after oil). Gold, too, has industrial uses. However, set their usefulness aside.

Gold and silver are sound money because human beings take them to be precious or valuable. Who cares that, if there are any, denizens outside our solar system might not value them?

To fail to understand their value is to “disregard the experience of ages.” If you have a lot of gold or silver, you are wealthy. Period.

Notice that both metals satisfy all four of the sound money criteria mentioned above.

The only one where they don’t do very well is portability. It’s dangerous and uncomfortable, for example, walking around with pockets full of silver coins.

However, that is easily remedied by printing paper receipts that are backed by quantities of gold or silver that is safely stored. That paper may function well as sound money.

Can paper that is not backed by gold or silver be sound money?

Well, as long as there is consensus that it is money it can work as a medium of exchange. However, once skeptics question it, if confidence in it erodes, then it will cease to function as sound money.

By these criteria, no fiat currencies are sound money. Since the U.S. dollar is a fiat currency, it is not sound money – and neither are all the other dozens of fiat currencies around the world that are pegged to it.

It’s astounding to realize that the official reserve currency in the world today is not sound money!

What should you do with it?  I don’t know.

Prudence, though, suggests getting rid of it, and certainly not trying to store wealth in either it or paper assets (see Inflation and Stealth Tax).

Are you prepared to survive a global economic collapse?

For various reasons that I have begun to articulate in some posts in the “financial well-being” category of this site, I predict there will be a worldwide financial crisis soon, perhaps within the next year or two and almost certainly before the end of this decade.

I hope that I’m wrong! On the other hand, what if that prediction is correct?

Let’s assume that it is and that you genuinely enjoy living. How should you prepare to survive a global economic collapse?

The problem is that there is no way to determine exactly what it will be like. Globalization is a recent phenomenon. There has never been a global financial collapse.

Perhaps, though, by examining recent national economic collapses such as the one that occurred in Argentina in December 2001 we can make some educated guesses that won’t be too far off the mark.

A global economic collapse will occur when economic activity abruptly and temporarily stops and only very slowly recovers.

It will, sooner or later, recover.

Please don’t let your imagination run wild. You might fear that a global economic collapse will look like nuclear winter or something out of the “Mad Max” movie.

Not at all. In fact, outwardly, everything will look very normal. There will still be houses and farms, oil wells and cities, automobiles and forests, stores and factories, sporting events and holidays.

A global economic collapse means a temporarily broken economy. In asking the question about surviving a global economic collapse, I’m inviting you to think realistically about how you would manage for the years it would take for the economy to recover fully.

For example, even if a global economic collapse were due to the financial implosion of all fiat currencies, for a while cash would likely still work, so you might want to keep some on hand for such an emergency.

Because it’s decentralized, the worldwide web would still function. However, banks would temporarily close — and don’t count on being able to use credit or debit cards.

Expect 25 to 50% unemployment. How will you obtain money?

Even if you could purchase food, store shelves would be quickly emptied. The practice of just-in-time delivery means that grocery stores simply don’t store much food. Might you not want to have some months of (canned, dehydrated, or freeze-dried) food on hand for such an emergency?

After all, government services will soon deteriorate. As citizens demand more and more services from the government, expect rationing.

Don’t be surprised if there’s more corruption of governmental authorities.

How do you expect government leaders to react to a global economic collapse? I expect them to become more authoritarian, more dictatorial.

A currency crisis might soon lead to the government trying to confiscate precious metals (gold and silver) as well as firearms.

Surely it would lead to increased censorship. What government leader wouldn’t want to control the information available to citizens with the rationale that it is for their own good? Might there not also be increased phone tapping and eavesdropping on private e-mail communications?

Do you think that the legal system works efficiently now? It would quickly become more and more inefficient.

When confidence in the the fiat currency collapses, how is the government going to continue to fund, wholly or in part, public institutions such as schools, hospitals, and public transportation systems? Expect more rapidly crumbling infrastructure like roads and bridges, the electrical grid, and sewer and water systems.

Is there a way to ameliorate such effects on you? For example, if you don’t already have one, how could you obtain clean water from an alternative source?

Expect more obvious poverty such as shanty towns and skinny children begging on the streets for food.

Might it not be wise, also, to expect a negative cultural change? What about moral deterioration? Hard times bring out both the worst as well as the best in human nature.

Expect a smaller and less efficient police force to battle increased crime.

These ideas are not fantasies. I just happened to read Fernando Aguirre’s Surviving the Economic Collapse, which is based on his own experience of the economic collapse that occurred in Argentina. I simply extrapolated the scenarios mentioned above from his book.

The survivalist community is filled with religious fanatics and other wackos ranting about surviving in the wilderness with groups of like-minded brethren and other goofy ideas.

I’m talking about surviving a global economic collapse living right where you are, which may be in a city surrounded by strangers.

There are some possible scenarios such as the earth’s being hit again by a huge meteor or a massive eruption in Yellowstone that are not worth worrying about for the simple reason that there’s nothing to be done. Survival is unlikely. (My suggestion: go meditate until you let those ideas go.)

That’s not the case with a global economic collapse. It’s both predictable and survivable.

Yes, some weak and meek will perish, but most of us will survive. The real question is: what quality of life do you want during and after the transition?

Like my father, I achieved the rank of Life Scout in the Boy Scouts. (I quit at sixteen — when I thought myself too old — as an explorer 5 merit badges short of Eagle.) Everyone knows the scout motto: “Be Prepared.”

Why not be better prepared for a global economic collapse?

If you don’t think one will come soon, my view is that you simply haven’t been paying attention. Again, I hope that I am pleasantly shocked that one doesn’t occur.

Everything in Becoming comes in waves or cycles. Good times are followed by bad times, which are followed by good times and so on.

The downward economic spiral became obvious in 2007 and the crisis, the global economic collapse, has been slowing unfolding ever since. There will soon be a tipping point [see my 5 Ways to Diminish Failure Almost Instantly, pp. 21-25].

I’ve personally never lived through a depression, but I soon expect to and hope at least to survive it, if not to emerge stronger from having been tested.

Aguirre: “Real survival is about being extremely positive and resourceful.”

If there is a global economic collapse, it will restructure the world’s economy. The people and organizations that survive the economic winter will emerge stronger than they were before the collapse.

Why not make the decision to prepare yourself? Why not plan to emerge stronger?

There’s no major downside to being better prepared.  Even if it doesn’t occur, there’s an important upside, namely, greater peace of mind.

If you don’t do it for yourself, why not do it for your loved ones?

Consider, too, the help you might be able to provide for the weak and the meek then if you prepare yourself now for the global economic collapse.

With good reason, many people fear a global economic collapse. The economic condition of humankind today is, in my judgment, in poor shape in most of the world. While many are simply ignorant, even many of those who today understand what might happen are unable or unwilling to prepare themselves.

If you are able and willing to prepare yourself, won’t you then be in an enormously strengthened position to help others?

Shouldn’t a well-lived life ultimately be about serving others?

Inflation functions as a stealth tax.

This does not necessarily mean that it is part of a conspiracy of the rich to rob the poor. Some authorities believe that, but it’s not necessary to believe it.

What’s important is noticing and understanding it, which will enable you to make better financial decisions.

Since 1971 when President Nixon felt forced to sever the connection between gold and dollars, U.S. dollars have been fiat currency. (By government edict, we must pay taxes and we must pay those taxes in dollars.)

Inflation is caused when the currency supply expands. When there are more dollars available to purchase the same amount of goods, the prices of goods rises. This is price inflation.

Deflation is the opposite. It’s caused when the currency supply contracts. When there are fewer dollars available to purchase the same amount of goods, the prices of goods falls. This is price deflation.

Why is inflation a stealth tax?

It’s because, when inflated, all fiat currencies like the U. S. dollar lose value in a way that’s difficult to detect and this benefits the government.

It’s the government that creates currency. What happens each time a new dollar is created? When it begins circulating, the purchasing power of all other dollars slightly declines. This is a stealth tax because it’s hidden and that benefits the government.

You and I may notice rising prices, but prices don’t matter. Value matters. The value of, say, a sports jacket, a barrel of oil, or a piece of real estate may remain unchanged, but, because of the stealth tax, their prices rise. We tend to think that they cost more, but, really, all that has happened is that the purchasing power of our fiat currency has declined.

Eventually, fiat currencies always rebalance their purchasing power in terms of real money (gold and silver). Governments can suppress market forces for only so long; eventually, markets cause a revaluation of currencies.

If so, sooner or later markets set both the monetary value of goods as well as the monetary value of currencies.

When the classic gold standard was used, there was no inflation, no hidden or stealth tax. The business cycle still functioned; there were booms and busts. However, on average, for centuries, there was zero inflation.

You may wonder how currency gets created in the first place. The answer is that the Federal Reserve writes a check as a loan to the government, without having a bank deposit on which that check was drawn, and, when those checks are deposited in banks, banks use fractional reserve banking to create currency. Banks charge us interest to use the currency. Flowing currency sustains the economy.

Since the currency is no longer pegged to gold or silver, there’s no real restriction on how much currency can be created. As long as people are confident that the currency has value, a credit-based economy still functions. This keeps governments and banks happy while preserving inflation.

They are happy because they are unrestrained, undisciplined. By way of contrast, if the economy were based on gold and silver, banks and governments have to be restrained, disciplined. It used to be that way. However, governments and banks resented it and found a way to cheat gold and silver.

Cheating may work for a while. It doesn’t work in the long run.

The U.S. was the strongest country to come out of World War II. Delegates from 44 countries decided at Bretton Woods in July, 1944, that they would peg their currencies to the U.S. dollar and that the U. S. would enable their central banks to redeem dollars in gold at a specific rate ($35 per ounce).

As Michael Maloney argues in Guide to Investing in Gold & Silver, the Bretton Woods agreement had two problems.

First, the question “How many dollars can be created for each unit of gold?” wasn’t answered.

Second, there was still an open, worldwide gold market (even though U.S. citizens couldn’t own it) that operated in addition to the Bretton Woods gold market.

So, until the market eventually caught up with it, the U. S. was given a license to use the stealth tax by creating currency.

Demand is the critical factor in economic life. Higher prices due to inflation are only the result of an artificial demand; they don’t reflect an increase in value.

Still, why is inflation a stealth tax? How does it benefit the government?

Remember that the leaders of the U.S. government have to be voted into office. So ask: how does inflation help them gain votes?

It involves both appearance and reality (cf. Schniff & Downes’s Crash Proof 2.0).

It appears that assets owned by citizens are increasing in value even though they are only increasing in price. So citizens mistakenly think, for example, that the stocks and real estate that they own are becoming more valuable, which tends to make them pleased with whatever it is the government leaders are doing.

It also appears to citizens that the economy is growing and healthy because they believe government propaganda concerning inflationary spending. It is really difficult to measure what is happening in such a huge economy, and the government’s own measurements (such as the Consumer Price Index [CPI]) as well as the disappearance of M3 [the most informative measure of the currency supply] in 2006 are to the government’s advantage. For example, cost of living adjustments to Social Security and other government benefit programs are determined by the understated CPI and, so, cost less.

While actually catering to special interests, the stealth tax enables the government to pursue fiscal policies that benefit heavily-indebted citizens (such as the mortgage interest deduction). Lower inflation premiums keep interest rates down enabling citizens to carry more debt. Similarly, the stealth tax enables the government to keep interest rates on national borrowings lower.

The stealth tax makes it easier for government leaders to repay the national debt because they are able to make payments in dollars that are worth less.

The stealth tax makes it easier for government leaders to enact popular social programs (especially the so-called entitlement programs) without paying for them honestly by raising tax rates.

So, mild inflation (as opposed either to rampant inflation or deflation) really is a stealth tax that benefits the government (and banks).

This is why researchers like Michael Maloney write things like: “the dollar is simply a smoke screen that obscures true value.”

After Bretton Woods, the U.S. was free to create as many dollars as it wanted. No other country had this advantage.

Not only could the government use the stealth tax against its own citizens, by running budget and trade deficits the U. S. government actually had the ability to use the stealth tax against citizens of all other countries as well! After all, diluted dollars are still the reserve currency worldwide.

However, that situation was temporary. Why?

Yes, in 1971 Nixon freed the dollar from the constraint of being pegged to gold.

Simultaneously, though, gold became free-floating, international money. (In 1974 U.S. citizens were once again permitted to own gold.)

What does all this mean for you and me?

(I have related posts such as inflation, gold, and buying gold. I intend soon to add additional posts on similar topics including silver.)

A tax may either be an obvious tax or a hidden stealth tax. Inflation is a stealth tax.

Is that good or bad? It’s neither: it’s just a fact. Most people don’t understand inflation as a stealth tax.

If you didn’t before, you, too, now do. That kind of information is power.

(If you click here, you can find a chart that calculates inflation from 1774 to the present day.)

Once you understand inflation as a stealth tax, you will be empowered to understand how, for example, general equities or stock markets have been falling for a decade.

What? How can that be? Isn’t the Dow going up in price?

Yes, it has been going up in price. However, its real value has been falling.

It’s an invisible crash. In relative terms, since everything else has been increasing in price faster than the Dow, the Dow has been falling even though its price has been increasing.

Lesson: stop using dollars to measure value.

When you begin to “see” the world as it is instead of as how you would like it to be, won’t the quality of your financial decision naturally improve?

Of course they will.

Inflation is a derivative of currency that is declining in monetary value (cf. Robert T Kiyosaki, Rich Dad’s Conspiracy of the Rich, p. 88). It’s a product of fiat currencies such as the U.S. dollar.

What’s causing it? Is it getting worse?

Government leaders fear deflation, which is its opposite. Since the way to dilute the value of the currency is debt, government leaders use debt to create inflation to forestall deflation.

Baby boomers like me have become so used to the incessant dilution of the dollar that it seems normal. In 2011 the dollar declined 10% in value measured against gold. That’s neither good nor normal. Let’s begin by understanding why.

Let’s suppose that both you and your neighbor are business owners. (Actually, since your household is a business, that’s probably true.)

Let’s also suppose that your neighbor has a very profitable business and that your own business is ailing. Might you not be attracted to begin doing whatever it is your neighbor is doing? Of course. Why not emulate those who are making a greater profit than you?

In simple terms, this explains why profits always tend to fall in capitalist (market) economies. Marx pointed this out a century and a half ago: it’s impossible in the long run for a business to perpetuate its profits much above its costs. This is why good business owners are relentlessly focused on growing their businesses.

Here’s an important analogy: a country’s economy is like a business in this respect. If it isn’t growing, it isn’t healthy.

It’s puzzled me for half a century why government leaders are not much more concerned about population growth. We’re at 7 billion and human population growth is expected to continue until at least 2065. I find this alarming! Why don’t they? The answer is that they have a fundamentally different perspective than I have. For example, I’ve already read economic thinkers who see the predicted population plateau later this century as a “monumental” problem because the number of potential consumers won’t always keep increasing! That’s how relentlessly (and absurdly!) focused on growth they are.

The problems with capitalist economies that Marx diagnosed remain with us today. The most important of those problems is how economic values pervert all other values. The relentless focus on growing (gaining, expanding) is a premier value of Becoming that obstructs Being.

Let’s, though, stay focused here on inflation.

Since inflation is incessantly eroding the value of our currency, either we must content ourselves with growing poorer or keep focusing on gaining more cash. If, like me, you don’t really like either option, you might want to eliminate inflation.

However, if you ran the U.S. government, you, too, might not want to eliminate (a modest level of) inflation because it fosters (a modest level of) economic growth.

It does foster economic growth, but there are a number of reasons why economic growth won’t continue.

Here’s a sufficient one. The economy is fueled by demand. (If you are not sure that’s true, I recommend Braudel’s great Civilization and Capitalism, 15th – 18th Century.) Why has the overall economy been booming for the past quarter century?

Two facts explain it. First, 70% of the demand in the U.S. economy comes from consumers. Second, that demand has been unusually high recently. Specifically, it’s come from us baby boomers, the 75+ million who make up the “generation” born between 1946 and about 1961, who were in their peak spending years.

However, not only are baby boomers beginning to retire, which would naturally create less economic demand, but also “homeowner equity values have dropped dramatically in the last 10 years” and, having been under pressure for over thirty years, “[a]djusted for inflation, income has been flat for over a decade” [Dent & Johnson, The Great Crash Ahead, pp. 187-190].

Wanting to sustain our styles of living despite unpleasant economic realities like these, we baby boomers have been taking on massive amounts of debt to support our consumption habits. Uh oh!

Now what?

Now we boomers are, finally, reducing our rate of consumption. In fact, we are frantically trying to downsize and pay off debt in order to prepare for retirement. It’s good for us as individuals to decrease debt and to increase investments, but it’s not good for the economy because it diminishes growth.

That lowered demand means less spending, which means a slow but long-lived crisis for the economy as, year after year, more and more boomers cut back. All things being equal, if the largest group of citizens is paying off debt instead of consuming, the money supply will shrink. Less money in circulation means less growth. The next generation (GenX) isn’t large enough or affluent enough to make up the lost demand.

The addict, the economy, has gone into debt withdrawal. Deflation has begun. For example, home prices have recently declined by about one-third.

However, all things are not equal. Government leaders (especially the Fed) have been very busy pumping massive amounts of currency into the economy by printing more fiat currency and buying bonds. Why? They have been trying to create inflation.

Again, government leaders fear deflation. Since it will mean a massive decrease in affluence for millions and millions of people, they don’t want it. Since, in addition to words, their only important tool to fight deflation is inflation, they are using inflation to fight deflation.

They also fear too much inflation or hyperinflation. They want modest inflation, perhaps about 2 or 2 ½%. So their economic goals are (1) to avoid deflation and (2) to have some—but not too much—inflation.

The immediate crisis began in 2007. How’s the war against deflation going 5 years on?

Not well. The additional currency did inflate the prices of commodities, stocks, and junk bonds to rise at the cost of undermining the dollar and postponing the reckoning that is coming with respect to the impending private debt implosion (not to mention over one hundred trillion dollars in unfunded liabilities for popular government programs like Social Security and Medicare/Medicaid).

It is impossible to postpone deflation indefinitely without ruining the currency. That war cannot be won.

We are in a financial mess that is going to get a lot worse before it gets better.

(It’s our own fault. Who elected the government leaders? We did. My interest here is not making political points. It’s easy to blame both Republican and Democratic politicians. Instead of pointing at them, turn your finger around. We elected them.)

Now what?

Forget assigning blame. There’s plenty to go around. That’s a losing strategy.

Instead, start thinking really hard about how to get out of this financial mess. Stop insisting that others fix whatever is wrong with your life; instead, think “if it is to be, it’s up to me.”

Ask: “What can I do?”

My answer: “Get your own balance sheet in order and then help others to do the same.”

How well does it work to tell someone else how to lose weight if you yourself are fat? Take care of yourself first, which will automatically show others what to do.

If you are middle class, it’s likely that your balance sheet is melting faster than Greenland’s ice. Since the middle class is disappearing, you need to choose to be relatively rich or poor.

Since I don’t want to be poor, I’m trying to educate myself with respect to money matters. (Writing these posts helps me to clarify my own thinking as well as, I hope, stimulate yours.)

A good place to begin is to start dealing more effectively with inflation. To do that, it helps to put inflation fighting in context:

There are five types of investments: businesses, [income producing] real estate, paper assets [stocks, mutual funds, bonds, savings, annuities, insurance], commodities, and gold & silver [traditional money].

It’s possible to stay ahead of inflation in any of the five. Why not pick one and master it? Then, since multiple streams of income are preferable to one, why not pick another and master it? If you have two significant revenue streams that are both staying ahead of inflation, you won’t be poor.

How? How do you beat inflation using these ways?

Simple: employ your greatest asset, which is your mind. (Ultimately, money is an idea anyway!)

Simple, though, is not easy. Furthermore, I don’t know what you should do.

What I can report are my initial steps.

First, I won’t make things worse by taking on any more consumer debt. If I want a better car or television and cannot afford a new one, either I’ll purchase a used one or save up to buy a new one.

Second, I’ve paid off my credit cards. When I’m tempted to use them in the future, I’ll refrain from using them unless I’m sure that I can pay them off completely at the end of the month.

Third, I’d like to eliminate all financial debt. I don’t have a second mortgage or line of credit on my house or a mortgage on a second house. Even though it has a low interest, long term, fixed rate note that is more than paid for by rents from the apartment building on the property, I’m working to retire the mortgage on my property. Once it’s retired, I’ll have shelter for the rest of my life as long as I keep up on the taxes, insurance, and maintenance (and the rental income will more than offset that).

Fourth, I’m continuing my financial education and planning additional investments. I’ve never paid much attention to money, and, since I don’t want to be impoverished, it’s better to learn now than after I start drooling.

If those steps makes sense to you and you are not already implementing them, you now have an initial plan. If you work your plan, your plan will work for you.

As always, I encourage your feedback and suggestions in the comment section below.

Real estate investing can be very lucrative. It can be a great way either to store or increase your wealth.

However, it’s such a vast and tempting topic that it’s easy to get started before you really understand what you are doing.

I’ve been a small-time real estate investor for over 30 years. Naturally, my experience has taught me a few lessons. I thought it worth passing along the five most important ones.

First, don’t lie. Lying to others is bad, but it’s actually easier to avoid doing that than it is to avoid lying to yourself.

Hope for the best, but plan for the worst.

I doubt that I’m the only one doing real estate investing who likes to think well of his investments. I practice being positive, even optimistic. Caution: don’t take that mindset too far.

For example, suppose you consider your house an investment (as opposed to just a shelter). Let’s say that you purchased it for $100,000 at the end of 2010 and that it appraises for $110,000 at the end of 2011. You may think: excellent! I made 10% on my investment.

No you didn’t. Measured against gold, the U.S. dollar declined 10% in value during 2011. If you figure in the diluted dollars, your house hasn’t at all changed in value.

My point is not that you shouldn’t have purchased it. My point is that it’s a bad idea to lie to yourself when doing real estate investing.

If you believe the falsehood that real estate always appreciates in value, you are deluded. The problem comes when you apprehend the world in terms of your deluded thoughts. You “see” what isn’t real. Then you make decisions based on what you “see.”

A single poor decision in real estate investing can cost you tens of thousands of dollars. To decrease your chances of making mistakes, don’t lie to yourself.

It’s especially important not to lie to yourself by thinking that you understand what you are doing when you don’t.

The way to avoid that is to select what kind of real estate investing you want to do. Specialize. Then ignore all other kinds of real estate investing while you focus on mastering that single area. Do not learn a little about it, do it once successfully, and go on to something more interesting! (That’s my tendency!) Instead, do it over and over and over again until you really have it down cold. Let your winning formula run.

Always remember: success in one kind of real estate investing does not necessarily transfer to other areas of real estate investing.

When you enter a new domain, admit that you are just a newbie and act accordingly.

Second, don’t underestimate expenses. Inflation isn’t just driving up property valuations. Those valuations drive up taxes.

Furthermore, the dollar cost of maintenance is also increasing steadily as the dollar declines in value. So it keeps getting more expensive to replace roofs or furnaces or appliances or carpeting. Do you purchase landscaping service? Do you purchase property management? Even if you do it all yourself, the price of supplies such as paint and cleaners steadily increases.

Major repairs are easy to underestimate. For example, as oil rises from $100 a barrel to $200 a barrel, the cost to replace the siding on a building increases because oil is used to make plastic.

Yes, rents, too, increase. Let’s hope that the demand for your property remains constant or increases sufficiently so that you can raise them enough to cover rising expenses.

Always do this before closing a deal: double the actual expenses that you have calculated. If the deal doesn’t work with doubled expenses, walk away from it.

Real estate investing is a way to obtain tax advantages as well as cash flow. Take full advantage of both. A good introductory book is Kiyosaki & Lechter’s Real Estate Loopholes.

Third, focus on cash flow. Do not get sidetracked focusing on the supposedly ever increasing valuation of your property.

Keep counterparty risk in mind. For example, suppose you have purchased a single family home as an investment. You rent it to a family and its breadwinner loses his or her employment. Uh oh! This is a major reason why, for example, counterparty risk is lower when you do real estate investing by purchasing large apartment buildings rather than single family homes.

It does not follow that it is better for you to purchase large apartment buildings rather than single family homes. The point is to keep your eye on your cash flow from real estate investing by, for example, factoring in counterparty risk.

Fourth, buy right or don’t buy.

This is what distinguishes the pros from the amateurs. Pros make money buying, not selling.

To buy right, focus relentlessly on cash flow. This involves two factors: terms and price.

Terms are critical. If you are unable to obtain favorable terms from the seller, walk away from the deal.

This is where due diligence pays off. For every one hundred properties you look at, perhaps only three will yield the kind of favorable terms you require. If you make an offer on those three, you may eventually purchase one.

If you are not willing to do that kind of work, avoid real estate investing. If you don’t understand how to do that kind of work, learn.

Getting the right price means understanding the real estate cycle and knowing what phase of the cycle applies to the real estate you are thinking about purchasing.

Fortunately, there’s an excellent book about this that I recommend if this topic interests you, namely, C. Hall’s Timing the Real Estate Market. I don’t recommend buying any real estate until you read and understand that book.

(If you are interested in large apartment buildings, you might also look at D. Lindahl’s Emerging Real Estate Markets or take his course.)

Fifth, think long term.

By itself, this will foster your taking care of the interests of others. If you practice only thinking in terms of your short term advantage, you may cut corners or proceed without taking the interests of others into account. This tends to create enemies.

If you approach all others as if they were potential, long term business partners, you will automatically begin looking for win/win outcomes. If someone else would sooner or later suffer from your doing a deal, walk away from it.

This really means always using high standards when doing business. There are a number of good books on this, including John C. Bogle’s Enough.

If you do real estate investing and enter the marketplace with goal of getting value for yourself, you may indeed get value. Even if you gained great monetary wealth, however, that would only be another sad instance of winning the world at the cost of your true self.

Instead, if you enter the marketplace with the goal of giving value to others, you are not only more likely to succeed in enriching yourself, but doing it by serving others will also enrich them as well. That’s the only kind of worldly success that involves well-being.

What’s the best way to buy gold?

Please understand the context of my answers in these posts. For the simple reason that, like everyone else, I lack all evidence of what the future will be like and because the future consequences of our actions are relevant to their evaluation as right or wrong, I don’t know what would be right for you to do.

I don’t know what would be right for me to do.

Nobody else has knowledge of right or wrong, either.

In particular, nobody understands the future of the global economy. Nobody even understands the global economy today; it’s way too complicated.

So, like you, I am reduced to acting on the basis of opinions that may be false. I make decisions and live with whatever consequences unfold without understanding in advance what those consequences will be.

I approach the topic of deciding the best place to buy gold this way: “If I were to buy gold, what’s the best way for me to do that?”

Your opinions about the answer to the question may not be the same as mine. If they differ, that doesn’t not mean that I think you are ignorant or stupid. So, where we disagree, please don’t take the disagreement personally! Instead, think of it as an opportunity to re-examine your own opinion. If you do that, whether we wind up agreeing or not, my writing and your reading these posts will have a beneficial outcome.

In the case of financial issues such as the one about where to buy gold, there are two factors worth emphasizing.

First, it’s not just a matter that one of us is overlooking obvious facts. It’s important to understand why.

Nobody perceives what is there; we all perceive what we think is there. In other words, nobody has God’s eye view, an objective overview of what-is. What we perceive is infected by our opinions. So apprehending different facts becomes possible only when opinions change. It requires a lot of work constantly to examine one’s opinions, and, even if one does the work, there’s no guarantee of success.

Economists with different theoretical commitments simply “see” the economy differently.

Second, it follows that it’s not as if we can just ask an expert. There are no experts on the economy! If we understood enough to select an expert, we wouldn’t need to select an expert!

So, like everyone else, I’m just muddling along financially. Furthermore, when it comes to the best place to buy gold, I have no practical experience to rely on. My understanding here comes solely from reading.

Why buy gold? As Stephen Leeb noted in his 2006 book The Coming Economic Collapse, “when times are tough, gold springs into service as one of the few investments that can get you through . . . gold is an essential hedge during periods buffeted by inflationary or deflationary forces alike” (p. 171).

Gold is scarce and has intrinsic value, which explains a lot about why there’s been a bull market in gold for years. It’s not just that it’s gaining value against all the world’s fiat currencies, it’s also that, “If governments don’t want to reinstitute gold standards, private citizens will do it on their own” (Schiff & Downes, Crash Proof 2.0, p. 288). That’s not a prediction; it’s already happening!

To confirm that, have a look at James Turk’s goldmoney.com. It works like online banking except that your account is not measured in currency like dollars but in goldgrams and mils.

Once you realize that it isn’t just another commodity, that gold is money, you are ready to consider the question of where to buy gold.

‘Bullion’ refers to bulk gold (or silver). There are two kinds: (1) ingots or bars and (2) coins. It is the quantity and purity of bullion that determines its value.

If I were to buy gold , I’d only buy bullion. My preference of the two kinds would be coins such as the American Eagle, the Canadian Maple Leaf, the South African Krugerrand, or the Australian Kangaroo.

If, for some reason they were in short supply or I had hundreds of thousands of dollars or more to invest at once, I would buy bars.

Unless you are a wealthy, experienced investor in precious metals, I recommend against other ways of buying gold.

You could, for example, go for exchange-traded funds (ETFs) or buying stocks in gold mines or pool accounts or certificate programs or options or numismatic (collector) coins. Not for me! There’s way too much risk and volatility, and they require way too much sophisticated understanding. If you want to buy gold ETFs or set up a margin account or acquire heavy leverage with futures accounts or FOREX or whatever, my only suggestion for you is not to bet more than you can easily afford to lose. (I’ve personally known more than one person who gambled like that and got burned.)

Other possibilities are just scams, such as buying commemorative coins advertised on television, buying supposedly rare coins pitched over the telephone, or buying counterfeit numismatics.

Where should you buy gold coins?

Unless you already happen to know a trustworthy dealer, buying them online by wiring money to a reputable dealer beats buying them from a coin shop.

Before doing anything: have you thought through a plan for your portfolio? What percentage will be in precious metals? What percentage of that will be in gold? Where will you store your gold? Assuming that you don’t want to keep it all at home, should you use segregated (or allocated) vault storage somewhere within your own country or store it outside your own country or both? When the time comes, how will you sell your gold?

In you want financial peace of mind, you must train yourself to act and think long term. As Benjamin Franklin said, failing to plan is planning to fail.

If you actually buy gold without having at least read a few books on how to do it well, you are a fool. Good books on the topic will also alert you to some excellent newsletters, too. It’s also easy to find free talks online at YouTube and other places by such experts as Michael Maloney and James Turk.

[Incidentally, if you would like me to do posts on certain topics, I’m always open to suggestions.]

A related story: I’ve been a small-time landlord for about thirty years. Since I give good value and know what I’m doing, I’ve never had any serious problems with tenants. Occasionally, though, I’ll find myself chatting with someone who, upon finding out that I’m a landlord, tells me some horror story about renting real estate. When I ask the simple question, “How many books did you read about how to be a landlord before you started doing it?” I’ve always either been met with a blank stare or an answer of “none” accompanied by a sheepish look.

If you insist on going through life making all your own mistakes, please stay away from me!

Which dealer? Bullion coins have a relatively low bid/ask spread, but it still varies. Usually, buying in quantity can save you money.

Do your research. Check with the Better Business Bureau [bbb.org]. Is the dealer a member of the Industry Council for Tangible Assets [ictaonline.org]?

Ensure that the price you pay includes all shipping and handling charges as well as full insurance through successful delivery.

Should you buy gold at all?

Your answer should depend upon your analysis of the economy.

If you are attached to a certain metal, you have a psychological problem.

If you want temporarily to own a passive asset that has no tax advantages, that doesn’t provide a cash flow, and whose price has been increasing for years because you understand that its value is only going to continue to increase for quite a while, then your analysis is similar to mine.

If you’d like to own a hard asset that has tax advantages and provides plenty of cash flow such as a large apartment building, instead of trying to buy that apartment building now, consider putting your dollars into precious metals such as gold and wait until after the currency collapse to buy it.

In other words, at this time, I think it’s a good idea to buy gold. Eventually, the bull market in gold will end and it will be time to sell and transfer your wealth to other assets. A strategy to buy gold is just a way to buy gold low, ride the bull market up, and sell high.

It’s nothing but a way to win the game of wealth-building.

Unless you want to be poor, which has a negative effect on happiness for nearly all people, it’s a game that must be played. Since being rich is no more conducive to happiness than being middle-class, it is not necessary to master that game, to become an expert wealth-builder. In fact, there are much more important tasks in life. All that is required is to master it well enough to become and remain middle class.

A thoughtful strategy that includes a plan to buy gold low, hold it, and sell it high may be an integral part of such a strategy.

Actually, buying silver right now appears to be an even better strategy than buying gold.  I intend to explain that in a forthcoming post.  If you don’t want to miss it, just sign up to be notified automatically.

Here’s all you really need to understand about peak oil.

First, what is it? Second, what are its implications? Third, what, if anything, should we as individuals do about it?

First, energy is the lifeblood of every economy. The globalized world economy today is tied to oil.

This is the critical fact: oil is a finite commodity.

In particular, we in the United States depend heavily upon oil [see below]. Roughly, the best estimates as I write this are that there are just over 7,177,000,000 human beings and, according to the U. S. Census Bureau, only 312,774,000 are Americans. That means that we are less than 5% of the world’s population.

However, we consume about 25% of the oil in the world today.

Furthermore, we import over 70% of the oil we consume!

We are not in imminent danger of running out of oil; the world’s supply of petroleum is not yet depleted. However, there’s more to this story.

“Peak oil” is the name given to the time when all the petroleum that is relatively inexpensive and easy to find is gone. In other words, at some point rate of the extraction of petroleum around the world will enter a terminal decline.

The Hubbert model, developed by M. King Hubbert, showed that the rate of production of a finite resource like oil follows a roughly symmetrical logistic distribution curve. He accurately predicted in the mid-50’s that peak oil in the United States would occur in the late 1960’s.

What about peak oil in the world? Nobody knows. Optimistically, we haven’t yet reached peak oil and we won’t reach peak oil until 2020 or even slightly later. Perhaps, though, we are already past the point of peak oil worldwide. No matter: if peak oil hasn’t happened yet, it soon will.

It’s inevitable.

According to the Association for the Study of Peak Oil and Gas: “the world started using more than was found in new fields in 1981” and the discovery/production gap has been widening since.

Second, what are the economic implications of this? Experts disagree.

The price of oil will rise. Not only is oil at about $100 a barrel here to stay, but expect $200 a barrel oil in the not too distant future.

What about other types of fuel and energy? They will become more realistic as the price of oil rises. In fact, if resources are poured into research and technology soon, they could in a few years force a drop in the price of oil.

However, the alternatives such as wind and solar are not close yet to being able to replace oil.

Will nuclear energy work after peak oil? It’s foolish in my judgment to ramp up power from nuclear reactors for the simple reason that we haven’t a clue about what to do with all the waste from them that will be dangerously radioactive for centuries.

We Americans passed the point of peak oil decades ago and, so far, we have no good alternative. It’s the same, or soon to be the same, worldwide.

Why is peak oil so important?

Well, what is oil important for? It’s almost better to ask the question the other way: what isn’t oil important for?

Refining it produces hydrocarbons that are mixed with nonhydrocarbons to produce all kinds of products in addition to gasoline and jet fuel such as plastics (from alkenes), lubricants (such as light machine oils, motor oils, and greases), waxes (such as paraffin wax and others used, for example, to package frozen foods), sulfur and sulfuric acid that have many industrial applications, tar and asphalt, special carbon products, and petrochemicals used to produce other chemical compounds.

Very importantly, many fertilizers and most pesticides are made from oil – and where would global food production be without them?

The Second Agricultural Revolution and consequent huge increase in human population would not have been possible without oil.  We replaced abundant solar energy with limited energy from a fossil fuel!

In short, with the sole exception of silver, no natural substance rivals oil with respect to its economic usefulness for humans. If you are reading this on a computer monitor, it was made using oil.

So oil is of extreme economic importance. Worldwide demand is increasing, but peak oil is a fact: worldwide supply has either begun a terminal decline or will so do so. It’s the end of cheap energy and many other products from oil.

No alternatives are close to being ready to replace it.

Unfortunately, there’s no quick way to solve the coming energy crisis. Maybe research and technology will eventually bail us out, but they haven’t done much to replace it even though President Carter in the 1970’s warned the nation this was coming decades ago. (President Reagan’s policies severely but temporarily retarded development of alternatives.)

Third, what should we do as individuals?

Conserving energy is an excellent start. As energy gets more and more expensive, the economic savings from energy efficiencies will become greater and greater.

You’ve heard the mantra: Reduce. Insulate your home. Drive and travel less. Drive a more fuel efficient automobile. Re-use. Recycle.

It’s much more controversial, but I happen to believe in zero or even negative population growth. Obviously, a finite energy supply will go further will fewer people using it. Reducing the number of offspring we have could mean a huge improvement over the alternative.

Still, what can we do now to protect ourselves?

My suggestion is simple: if you notice a truck hurtling rapidly toward you, step aside.

Peak oil is one of the factors making an economic implosion inevitable.

Our fiat currency will collapse sooner rather than later. Once you understand that, why not take steps to protect yourself and your loved ones?

For example, I recommend buying silver and gold. Put as many dollars as you are able to into buying silver and gold. I suggest silver and gold bullion such as American Eagles [and I intend soon to do a post on how best to do that].

After the collapse, you can use those precious metals to purchase safe assets with big positive cash flows (such as large apartment buildings). That’s how to preserve and even enhance your wealth.

If you don’t do something like that, unfortunately, if you are middle class you will soon find yourself much poorer than you are today.

If you are alert to the danger, you may be able to mitigate its consequences.

As always, I encourage your feedback in the comment section below.

This my first post of 2012. [If you are curious, there are now over 200 posts!] Permit me to be among the first to wish you a safe, serene, and very Happy New Year!