14 Dec 2009

Like Taking Money From a Bryan

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Bryan Caplan bet me $100 that we wouldn’t see 10% CPI inflation in any 12-month period over the next five years. What Bryan doesn’t realize is that I would have paid $100 just for him to link to my article on the dollar. Heh heh, all too easy.

14 Dec 2009

An Unfair Coincidence

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Do you think Jesus’ relatives would double-up and give him one present for both Christmas and his birthday?

14 Dec 2009

"But how do you explain Japan’s deflation?"

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Those of us who have been warning of impending (and large) price inflation have thus far been kept at bay by the apparent counterexample of Japan. It’s what Scott Sumner brings up to me when we really go at it (that and the bond market), and it’s how Paul Krugman dealt an apparent death blow to Alan Meltzer back in May.

At the time, I didn’t know how to process it, because I hadn’t really done much research on Japan. But in doing the research for my Depression book, I knew that Krugman’s discussion of the “lessons of the 1930s” was often the exact opposite of what I ended up believing after looking at the data myself, so I remained skeptical.

In response to Arthur Laffer’s WSJ op ed, Krugman attacked with this chart showing (apparently) that in Japan the monetary base also shot up like a rocket. So again, the idea is that Japan is a counterexample to all of the deficit hawks’ warnings.

But wait a second. Look closely at that chart. Japan’s monetary base went up by about 90% from 1997 to 2005. That’s a growth rate of about 8.4% per year. In contrast, under Bernanke the monetary base almost tripled in a little more than a single year.

So it’s still true that Japan provides an interesting case study; I admit I would not have thought those charts–especially the M1 chart–could be right. However, it’s misleading to say, “Japan had a big growth in the monetary base, just like we have now, and their currency didn’t tank.”

Of course, the other main difference is that we are currently experiencing price inflation. Absent another major terrorist attack or a financial panic, I don’t see why the demand for USD would rise, meaning I don’t see how its purchasing power can remain stable if those excess reserves begin leaving the banks, as I expect they eventually will.

14 Dec 2009

I Feel a Thrill Go Up My Leg When I Listen to Jim Manzi

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For some time now Jim Manzi has been my favorite blogger on climate change issues. Up till now I have never watched more than about 30 seconds of “Bloggingheads” because it was never instantly gratifying. Yet I just spent a good half hour listening to various clips of Jim Manzi’s discussion with Grist’s David Roberts. If you want a good start, try it at 35:50 or so and listen to Manzi try to frame the issues to see if Roberts agrees that mitigation strategies will have opportunity costs.

(If you don’t get the post title, try this.)

13 Dec 2009

Steve Landsburg’s Case Against God

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Steve Landsburg’s Case Against God
By Robert P. Murphy

University of Rochester economist Steve Landsburg is one of my favorite writers of popular articles and books. I often disagree strongly with him–indeed I use his “more sex is safer sex” thesis as a primary illustration of mainstream economic self-parody–but even when he’s wrong, he’s brilliantly wrong. It is with some disappointment, then, that I have to report his case against God is uncharacteristically weak.

Before proceeding to my critique, I should say that overall Landsburg’s new book, The Big Questions, is well worth the purchase price. (Although in my case, as a blogger who would likely review it, Landsburg arranged for me to get a complimentary copy. But hey, the book is definitely worth more than I paid for it!) In particular, Landsburg wrote one of the most succinct defenses of free trade that I’ve ever seen, and he also does a great job explaining the seminal contributions of Robert Lucas and his critique of old-fashioned macroeconometrics. If you are a fan of Landsburg’s previous books, there is still much to enjoy in his latest.

Yet as I said, if you are a theist and were expecting to be shaken to your core, I think you will be disappointed. Onward to Landsburg’s case against God.

Why Does the Universe Exist?

Before tackling Landsburg’s specific critique of theism, we need to first explain his own explanation for why we exist. To get things going, Landsburg first establishes that the “natural numbers (i.e. the counting numbers 0, 1, 2, and so forth)” are real things, not arbitrary social conventions: “You and I know the natural numbers are real. Not only are they real, they are necessary. By their very nature, they could not fail to exist” (p. 7).

Landsburg then generalizes to mathematical truths as a whole:

And likewise for other mathematical structures, of varying degrees of complexity….The natural numbers together with the laws of arithmetic form a mathematical structure of profound complexity. The human genome, with its combinatorial structure of A’s, C’s, G’s, and T’s, can be described entirely in the language of arithmetic, so the very least, arithmetic is as complex as human life, and therefore as complex as your brain and the pattern of your consciousness. (pp. 7-8)

Already I think Landsburg is in serious trouble, but let’s hold off criticism and let him make his case. In the interest of brevity I can’t reproduce his whole argument, but here’s the punchline:

The Universe itself, in other words, is a mathematical pattern, containing your consciousness and mine as subpatterns. The Universe exists because it can; a logically possible Universe is a mathematical object, and mathematical objects exist by necessity. (p. 14)

So we see that Landsburg thinks he has disposed of the need for God, by offering an alternative explanation for the most eternal of questions. Yet I think Landsburg’s “proof” suffers from the exact problem that he fingers in Saint Anselm’s famous “ontological argument” for the existence of God. I’ll reproduce Landsburg’s handling of this matter, and then circle back to show why Landsburg’s own explanation is similarly flawed:

Anselm defines God as “the greatest thing imaginable.” Now, existence is really really great, so if God didn’t exist, he couldn’t be the greatest thing imaginable, now could he? Therefore, by definition God exists! Case closed!

Regardless of what Anselm chooses to “define,” there can instead be something very great, and then something even greater, and then something greater than that, ad infinitum—just as there are numbers, and then larger numbers, and then numbers that are larger still, ad infinitum. Anselm starts by assuming that there is a greatest thing imaginable. Start with an unjustified assumption and you’re sure to reach an unjustified conclusion.
(pp. 34-35)

I think that Landsburg’s own explanation, while at first seeming quite profound, is just as question-begging as Anselm’s. Landsburg has replaced the traditional questions, “Why should we have consciousness? Why is the universe constructed this way, just-so in order to sustain our lives and allow us to ponder our existence?” with the question, “Why should mathematical structures exist, in such deep complexity?”

Landsburg spends most of his time going from the fact that purely abstract mathematical structures exist, to the conclusion that therefore we sentient beings exist and perceive “solid” objects around us. Now that leap may itself be invalid as well—I’m actually sympathetic to Landsburg’s arguments, which I’m not reproducing here—but my point is, Landsburg never really explains why these mathematical objects exist in such complexity so as to “give rise” to the traditionally complex subpatterns that every other philosopher seeks to explain.

For example, how do we know that mathematical patterns “really” exist? Maybe Euclid’s proofs just seem a priori true to us, because of the way our brains are hardwired. Perhaps other sentient beings could possess a “different logic” from ours. That strikes me as impossible, I grant you, but wouldn’t it seem impossible if what I am saying were true? Here’s what Landsburg has to say about the ultimate foundation of his whole worldview:

I am confident that mathematics exists for the same reason I am confident my hopes and dreams exist: I experience it directly. I believe my dining-room table exists because I can feel it with my hands. I believe numbers, the laws of arithmetic, and (for that matter) the ideal triangles of Euclidean geometry exist because I can “feel” them with my thoughts. (p. 6)

And so we’ve moved in a circle (assuming circles exist…). Landsburg explains the existence of everything we “know” in day-to-day life by pinning it on the ultimate existence of mathematical objects. And these exist because we directly experience them. As to why these mathematical truths have the form they do, Landsburg offers no other explanation except they have to have that form. How do we know? By thinking about them, in other words by “feeling” them with our thoughts.

When it comes down to it, I think Landsburg has done nothing truly deeper than to say, “Why do trees exist? Just look our your window, man! They do exist, that’s why.”

A Note on Complexity

I am by no means an expert on information theory, but I want to mention that some people also do not agree with Landsburg’s argument that arithmetic is more complex than human life. (I am grateful to Silas Barta for discussions on this topic.) In particular, it’s not true that one can “represent” all of human life—and especially human consciousness!—by a sequence of four nucleic acids (in DNA). It reminds me of a critique I read of Michael Crichton’s Jurassic Park. In the movie (and presumably the novel, which I haven’t read), the scientists are able to grow a bunch of living dinosaurs from DNA they find preserved in a mosquito that had bitten a dinosaur millions of years in the past. But that alone wouldn’t be enough, because the dinosaur would have to develop inside its mother before being laid as an egg.

The same is true with humans. Contrary to science fiction plots, you couldn’t clone an adult replica of someone just from a blood sample. Someone’s DNA wouldn’t contain the history of that person’s environment as he grew up, and it wouldn’t contain the memories of his experiences and so forth. If lab technicians could provide an adequate simulation of the person’s mother’s womb, then at best they could reproduce an identical twin as a newborn infant. But in order to literally reproduce an exact replica of an adult human being, the scientists would need to reproduce (in principle) the entire universe in which the person grew up. And this all assumes that the philosophy of functionalism is true! If it turns out that people have immortal souls, for example, then the scientists still wouldn’t have truly reproduced the “person,” just at best his physical body.

Before leaving the point, let me share Silas Barta’s analogy to show (part of) the problem with Landsburg’s procedure: Landsburg is saying that if X can produce Y, then X is necessarily more complex than Y. But bricks and mortar can produce a house, and not many people would say they are more complex than the house. If you try to point out the “flaws” in this analogy, just realize that they apply with equal validity to Landsburg’s assertion that arithmetic (using just A’s, C’s, G’s, and T’s) can describe all of human life.

I Predict Landsburg Didn’t Really Try to Understand Theists

Although I think Landsburg’s argument about the existence of the universe is ultimately a non sequitur, at least it’s a serious argument and something that theologians should grapple with. I personally think the existence of mathematics is one of the most beautiful flourishes of God’s creation. Mathematical laws cannot be overridden, even by the most despotic of earthly rulers, because we simply perceive logical relations in the way we do; that’s how our minds work. (Landsburg would say, I believe, that this is so because our minds could not conceivably work differently, whereas I would say our minds work like this because God wanted us to live in an orderly, logical universe and so chose to design it this way.) Another neat thing about mathematics is that it shows the practicality of pure thinking. Pragmatists can deride poets for wasting their time daydreaming, but nobody doubts the usefulness of geometry textbooks.

So although I think the existence of mathematics per se can’t bear the explanatory weight that Landsburg puts on it, I at least understand his fascination with the approach. Unfortunately, there are other sections of the book where Landsburg’s hostility to theism struck me as downright silly. Here are a few excerpts and my reactions:

Now, to a true religious believer, the conviction rate [after committing a crime] is 100 percent. God sees all, knows all, and punishes all. Based on everything we know about deterrence, true believers should almost never commit crimes. But I have not been able to uncover a shred of evidence that those who profess belief are any more law-abiding than their atheist neighbors….[H]ere we have a testable implication of the hypothesis that religious beliefs are sincere, and I look forward to seeing that test conducted. (p. 58)

This argument might hold for some religious doctrines, but not for Christianity. Christians believe that Christ died for their sins and that they are therefore forgiven. You don’t “get into heaven” by being a good enough person to pass some threshold. Once you accept Jesus as your Lord and savior, you are saved. (This is one of the reasons Christopher Hitchens finds Christianity repugnant, because it allegedly relieves individuals of responsibility for their actions.) Let’s get back to Landsburg’s testable hypotheses:

Many religions promise not just punishment for the wicked, but a glorious afterlife for the righteous, and if believers are sincere, this, too, should affect their behavior. Surely people who expect to survive their own deaths should be less reluctant to die, and should therefore invest fewer resources in self-preservation. Do those who call themselves religious spend less on health care than the rest of us? Do they buy fewer smoke alarms? Are they more likely to jaywalk? Less likely to flinch when a foul ball is hit in the direction of their foreheads? I’m guessing not, and if my guess is right, it becomes almost impossible to imagine that their “belief” in an afterlife could be sincere. (p. 59)

Again, I don’t think we should waste time collecting the data, because I am not convinced that Landsburg has in fact teased out a true implication of religious belief. Christians, at least, are also supposed to view their bodies as temples to the Lord; doing reckless things would be sinful for that reason alone. To see the point a bit differently, does Landsburg think believing Christians ought to go on murder sprees (at least among other believers), in order to send as many brothers and sisters to be with Jesus as quickly as possible?

Christians do not enjoy the suffering of this world, and they do indeed look forward to the day when they can be reunited with their Creator. But in the meantime, we have a job to do, namely to spread the good news to as many others as we can, in the short time we have on this earth.

I’ve saved my favorite for last:

Religious believers, then, should, by and large, be students of—well, of what, exactly? Religion is first and foremost a physical theory—a theory of how the Universe was formed, what keeps it going, how it will end, and what sort of stuff (souls? angels?) inhabits it. I predict, then, that true religious believers should have a passionate interest in fundamental physics—even if only to figure out what’s wrong with the mainstream theories. But I also predict that the bookshelves of the average churchgoer are no more likely than anyone else’s to contain a good survey of, say, quantum chromodynamics. I conclude that the average churchgoer is not a believer. [Emphasis in original.] (p. 62)

Landsburg has gone entirely astray here. He is fascinated by physical theories, and so that’s why he thinks that’s what religion is “first and foremost.” If you asked the average believer, “What is the Bible all about?” I doubt many would say, “It’s about the origin of the universe.” Of course it does explain the origin of the universe, but that’s, well, just the first two chapters. The heart of the book, of course, is the personal relationship between God and His children.

Let me offer Landsburg some rival “predictions” that are think are much fairer to the theory that some people really are sincere in their religious beliefs. It would be easy to say things like, “They go to church more than professed atheists,” or, “They have more books about God on their shelves than atheists,” but Landsburg could dismiss that as a recreational activity.

Okay, what about this: I predict self-professed Christians donate more money than self-professed atheists. For sure, I predict they give more to churches, but I will go beyond the obvious and so they also give more to charities, if we include tithing in the total. This is a classic example of putting one’s money where one’s mouth is, so Landsburg should appreciate it. (To be really safe—and protect my prediction from people who really are just paying lip service—I could flip it around and say, “People who donate high fractions of their income are more likely to say they believe in God.”)

For another example, I predict that self-professed Christians are much more likely than atheists to travel to foreign countries—often at great personal risk—to help build churches and spread the gospel. Some things of this nature can be dismissed as vacations paid for by other people’s donations, so Landsburg can restrict it however he wants. For example, “mission trips” to countries where other missionaries have been imprisoned or murdered within the last x years. Assuming it turns out that more professed believers engage in this behavior than people who say it’s all nonsense, isn’t the most obvious explanation that they actually believe in it? Why else would someone risk his freedom or even life to spread beliefs he doesn’t actually believe? Landsburg is a clever guy and will surely come up with theories, but I think the most obvious one is staring us in the face: many people actually believe.

Conclusion

Steve Landsburg’s new book is very provocative and covers an audacious range of topics. Yet on the issue of the existence of God, I found his arguments to be below his usual excellence.

Robert P. Murphy holds a Ph.D. in economics from New York University. He is the author of The Politically Incorrect Guide to the Great Depression and the New Deal (Regnery, 2009), and is the editor of the blog Free Advice.

12 Dec 2009

Potpourri

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* While you were asleep, banks’ excess reserves smashed through $1 trillion. They’re around $1,100 billion at this point.

* “Six Files the US Government Keeps On You, and How to Obtain a Copy.” (Here.)

* I’m guessing Dick Clark’s law school prof doesn’t get too many papers like this.

* Darren C. said this debate between Peter Schiff and David Epstein was the best thing he’d seen all year. He obviously doesn’t watch 30 Rock.

* Steve Horwitz lectures on the subject, “Do we really need a central bank?” I haven’t watched the video yet but I’m really hoping he says no.

* MercedesRules passes along this interesting blast from the past: Ron Paul trying to hinder Fed and Treasury gold manipulation back in 2002. C’mon Dr. Paul, do you really want Congress manipulating the gold price instead?

* Some interesting fun with emissions targets in the WSJ op ed pages. I checked RealClimate and Joe Romm’s sites, but so far no pushback on this one. I am not vouching for the analysis but his projections looked plausible to me.

* Tyler Cowen stoops to grabbing for the legendary “Murphy bump” in Tweeting.

12 Dec 2009

Personal Financial Advice

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You know how every once in a while MTV actually plays a music video? Well I thought it appropriate that I dispense some free financial advice to guide you through these choppy waters, which is what I originally started the blog for.

A reader asks:

I’m curious what flavor of personal finance advice you give about debt management/elimination/control, and savings accumulation? I’ve been a listener of Dave Ramsey, who I think provides an excellent service for the completely ignorant and completely buried-in-debt folks who don’t have discipline in their lives. He even offers decent advice for those of us who are disciplined but don’t always see things from “all the angles.”

But he doesn’t believe in investing in gold. He only believes in term life insurance. And I’m coming across investment advisors (I work in a retail store and meet many customers who come in for training, and so I get to know them a bit more personally) who don’t recommend using extra money to “throw at the house” and pay the mortgage down early.

Anyway, I’m curious where you fall on some of these things. Personally, I’m debt-free but the house, school is paid for (and being paid for in cash), and all our cars are paid for. No gold yet. Still on the fence about that.

Here are my quick thoughts:

(1) You should SAVE more than you used to. I don’t have a magic number but I think it’s safe to say that however much you have been saving in the last few months, is too low. Save more. That means, out of your disposable income each month, devote a little less of it to going out to eat, gas (i.e. drive your car less), and other things that leave you with nothing to show for. Instead devote more of your monthly income to investments, which can include paying down debt. The rest of the items discuss how best to allocate your (larger) savings each month.

(2) If you are currently carrying credit card balances that are based on the prime rate (i.e. you don’t have a locked-in balance transfer deal), then I think your objective should be to knock it out ASAP. The credit card companies have been dropping the hammer lately, even on their customers in good standing. For example I have never missed a payment (except a year ago because of traveling and it just slipped) but a few months ago they jacked up the minimum payment. The same happened to my friend, who is paying down law school debt and so he is fine financially. He had moved a bunch of his student loans onto credit cards because it was a better rate, but recently they upped his repayment schedule and it’s chafing him.

Why are the credit cards doing this? I’m not sure. I think part of it is due to “helpful” government regulations that force you to pay back your loans more quickly, but I think it also might be as simple as the credit card companies needing to call in the loans from their good customers because they’re getting killed on delinquencies from their bad customers. In any event, the good times are over. If you’re queasy about a balance rolling over at 15% but you’re hoping any day now a new 0%-through-October-2010 offer will show up in your mailbox, I suggest you stop hoping and start paying.

To motivate yourself, think of it like this: If you have a balance rolling over at 15%, that’s a guaranteed 15% return you make for every dollar you “invest” in knocking down your principal.

NOTE: If you are seriously awash in credit card debt, at some point you might decide it makes more sense to give up and declare bankruptcy. I personally would hate if that happened, because not only would it ruin my credit but, to the extent it was a conscious decision, I would feel somewhat unethical about it. But I mention it because some people may be seriously deep in credit card debt, and perhaps trying to pay it down before serious inflation kicks in would be pointless.

(3) As long as your mortgage, car loans, and other debts are fixed-rate, then I would NOT do anything except the minimum payments. (And if they are variable rate, I think on Monday you should call the bank and find out what you need to do to get into a fixed rate loan.) The one thing that keeps me fairly calm in the face of Bernanke’s money madness is that he will basically give me my house. Right now I think I’m probably underwater, but a few more cranks of the printing press and my monthly mortgage payments might be equal to how much I get for writing an op ed.

(4) If you still have a few decades working years ahead of you, I would plan on dealing with the threat of hyperinflation by stockpiling in your physical possession enough gold and silver coins to tide your household over the hump when it hits. For example, if the dollar crashes 80% in January, and prices at Wal-Mart end up rising by 50% within the next few months, while gas shoots up to $9 $15, your salary is probably not going to instantly accommodate you. So that’s what the stockpile of coins is for, that you start drawing it down (through ebay or something) until the point at which your paycheck has adjusted to the depreciated dollar. I personally cleaned out the local coin shop of his “junk silver” collection, meaning actual US coins (quarters, dimes, nickels) before 1962 when they had silver in them. So this way other Americans know what they are, and they can google to find out how much they’re worth, given that day’s spot price of silver. I also have some gold coins, but if it ever came to actual “barter” (in quotes because it’s not really barter if you’re using silver!) I feel more comfortable with old-school US coins that everybody recognizes, as opposed to American eagles or something.

(5) In terms of just hyperinflation, the only long-term assets that would truly be awful are dollar-denominated ones. So that obviously means bonds, but also life insurance policies. (However, if you have a whole life, dividend paying policy with a mutual company–as Carlos and I will recommend in our forthcoming book–there’s still a lot you can do to position yourself. In particular, you can pump your extra cash flow into your policy, then borrow it right back to invest in gold coins or real estate or whatever.) If it were just the fall in the dollar per se, then your retirement would be OK if it consisted of stocks because share prices would rise with prices in general.

(6) However, I think overlaid on the dollar’s collapse will be an awful “real” US economy. So once you’ve built up a cushion of gold and silver, if you are looking for long-term investments that will protect you from a dollar collapse, you might consider things like an ETF that exposes you to global stock markets, or Asian markets if you think they’re the wave of the future.

(7) Last point, you should try to develop more than one source of income. If and when things get bad, you don’t want to lose your job and then wonder where your next check will come from. Ideally you’d want two or three things in motion at 10% strength, say, that you could ramp up if you really had to. For some people, that might mean buying a small rental unit right now, and learning the ropes of how to find a tenant, how to replace a toilet, etc. Then after a layoff, with enough savings that person could buy eight more units and be a landlord full time.

Or I know a former student who, on the side, used to go to garage sales and find stuff to resell on ebay. If you’re racking your brain trying to figure out ways to make money, you could try doing that a few Saturdays to see how much you can make per hour.

Obviously I can’t give everyone a magic answer; the way you earn money in a market economy is by spotting an unfulfilled consumer need and then satisfying it. What I’m saying is that you should START LOOKING NOW so that you can experiment with a few things, or at least do a bunch of research, while you still have your regular job. If and when things get awful, regular companies are going to lock up. Nobody is going to be hiring at that point, so you will need to be able to be an entrepreneur at least for a few months.

11 Dec 2009

I’m Guessing Gary North Won’t Give Us a Blurb…

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…on Carlos Lara and my forthcoming book marrying Austrian economics and Nelson Nash’s infinite banking concept. North exploded on the topic:

Whole life insurance is bought by economically ignorant people. The industry profits from buyers’ ignorance. It charges huge commissions, which are paid to salesmen. This is why corrupt salesmen over time cease to listen to their consciences about deceiving the ignorant….

A whole life policy is not indexed for price inflation. Your savings portion gets destroyed by inflation.

I call it a sucker’s product. You may want to call it something else.

Families need term life insurance. But insurance companies like the fat profits on whole life, so the salesmen are rewarded well for selling whole life policies.

If you don’t want to spend money, read this article by Dave Ramsey. He gets to the heart of the matter.

Sadly, over 70% of the life insurance policies sold today are cash value policies. A cash value policy is an insurance product that packages insurance and savings together. Do not invest money in life insurance; the returns are horrible.

His conclusion is my conclusion: “Don’t do cash value insurance! Buy term and invest the difference.”

I regard anyone who sells whole life policies as morally corrupt. He knows they are losing propositions, but he will not sell term policies that would adequately protect widows and thier children in their time of terrible loss. The whole life policies are so very profitable. “Let other men’s widows do without. My widow will do just fine.”

The reason whole life policies have such high commissions (“loads”) is that companies know that the salesman’s time is very valuable. If he can get in the door to make a sales pitch, the company wants him to sell whole life policies. The company pays accordingly.

A WOLF IN SHEEP’S CLOTHING

A month ago, one of these self-deluded sellers of deception joined this site. He wrote to me two days ago.

I just subscribed to your website to learn about your views on money. A close friend and client of mine recommended you to me. So I went by faith and paid the $14.95 for the first month. My main reason to join was to find out what you felt about life insurance. Once I read your thoughts and advice I instantly got offended. I am very familiar with Ludwig von Mises and Murry Rothbard’s works. I have studied “Human Action” intensely. I’m not an economist nor do I want to be. My profession is providing life insurance to clients. About 95% of the type of insurance I provide is whole life. What you said about whole life insurance is true, but it’s not all like that. I suggest that you do some research about what whole life can actually do for a person in their living years…called a living benefit.

He then referred me to websites of some really big-time deceivers. They re-package the lousy product in order to sell to ignorant people with even more money to waste.

The concept is called “infinite banking.” It’s also called “become your own banker.” It is really “Whole Life for Dummies With More Dollars Than Sense.”

Here’s the deal. You buy a high-commission policy. Then, after six years, the company lets you borrow against it. You pay the company interest — to “yourself,” the ads claim.

If you know what whole life insurance is, there is nothing new here. Any whole life policy lets you do this. Then what’s new? Packaging. They sell the same miserable policy to people with more money.

Go to a CPA. Ask him if you can borrow against any tax-deferred retirement plan. You can if you follow IRS guidelines. You can put in the money and borrow when you want it. You pay interest to your plan — not to an insurance company. You are your own banker.

Do you want to start your IRA with a super-high-commission mutual fund or a no-load fund? A no-load fund. Why? Because you can borrow more money from it. You don’t give up a lot of front-end money to a salesman.

This preposterously poor investment plan has been around for 30 years. A critique is provided by two sellers of universal life policies, who complain that the whole life salesmen tell people that the deal is available only to whole life buyers. This cuts the universal life salesmen out of the territory. They deeply resent it. Read their critique here. It’s aimed at insurance salesmen, not buyers. They are furious that the whole life agents are raking in the commission money from rich people berfore universal life salesmen get to them.

This re-packaged hustle is what my subscriber wanted to show me, so that I would understand that whole life can be a very good deal for buyers. He wrote:

The reason I took the time to write you is not to argue about insurance. I want individuals like you who have a following to be speaking the truth about how people can use life insurance effectively. The Lord requires us to seek knowledge and understanding. I pray you take the time to look up the websites. It will benefit you and your life more than you thought possible. Also, give me a call if you would like to speak further about this subject. I’m always wanting to learn about the truth. I have found some great articles written by you. I think you’re doing a great job. Thanks for your time.

I do not like being lectured to by someone I regard as an immoral deceiver of the naive and trusting. When they invoke God’s name, this enrages me as few other things do. That this man thinks I want to hear his self-serving views on this high-commission product is simply astounding.

I have studied this subject for 35 years. Yet he wanted to straighten me out. The product is inherently deceptive. It offers high-priced death insurance under cover of savings — a savings product as poor as the death insurance portion.

I encouraged him to either quit selling the product or quit my site. I called him what I think he is: immoral.

He sent a letter back saying I was mean and that he would pray for me.

This is the second time I have gotten this response from a Christian seller of whole life policies. The first time was about 25 years ago at a Christian conference. Someone knew of my views on whole life insurance. He said I should talk with an insurance salesman in the room. I did. I told him exactly what I thought of his career choice. He said he would pray for me. As I walked away, I said to my companion: “He spells that p-r-e-y.”

Carlos and I are actually visiting with some life insurance executives next week, as part of the research for our book. Although we are not necessarily going to get bogged down in the technical details, I told Carlos that I wouldn’t be comfortable writing the book unless I understood exactly what happens when an owner borrows against his policy, etc.

A lot of people have been peppering me with questions about “becoming your own banker” through a whole life insurance policy, but I have had to defer my answers until I sit down and really try to write the relevant chapters. If it turns out that I can’t “make the numbers work,” then I told Carlos we are going to have to either abandon the project or be frank with the readers that we are discussing a strategy that is poor in some respects but advantageous in others. (In Nash’s book, he has several numerical examples where it looks like a no-brainer that you do great by investing your cash flow into a whole life policy, but it’s not always clear where his numbers are coming from, and what alternative options could have been available.)

At this point let me say three things:

(1) If you follow the link, you will see the gentle tone of North’s correspondent versus the smackdown North administered. I can’t speak for all proponents of whole life, of course, but Carlos and some of the people I have met through him are certainly sincere in their beliefs that they are freeing people from financial bondage by teaching them the ways of infinite banking. They could be idiots, of course, but the people I have in mind aren’t crooks.

(2) The people who are implementing Nash’s idea aren’t simply gullible folk with middle incomes. As North’s article reveals, the very wealthy are some of the prime demographic for the technique. And it’s not even heirs who don’t know finance; there are plenty of doctors and other professionals who (for example) set up third-party leasing companies to finance their office equipment with cash flowing through whole life policies. Say what you will, but when people take Nash’s idea this far, that should be a hint that maybe it’s not self-evidently stupid as Dave Ramsey suggests. You need to think about it more than just glancing at a table of internal rates of return.

(3) North mentions the ability of borrowing against other assets. For example, if Nash thinks it’s such a great idea to, say, borrow out of your whole life plan in order to buy your next car, and then “pay yourself back” with interest, then why not do the same thing borrowing against your IRA? I asked one of Nash’s devotees this very question, but in the context of paying cash for a car if you had the money in your savings account. He answered (paraphrasing), “Because with a savings account it’s a sinking fund. With whole life, the money you borrow is still in the policy, rolling over at interest.”

I didn’t understand how this could be possible, so he elaborated (again paraphrasing): “When you borrow from a whole life policy, there is a lien against the death benefit. So if you die before paying it back, they subtract what you still owe before giving you the payout. If you withdraw money from your savings account to buy the car with cash, then that money is simply gone.”

Now I am still undecided on whether there really is something significant here, or whether it is a “distinction without a difference” as they loved to say in debate. My point is that it is just possible that the quick rat-tat-tat disposal of the notion of whole life banking is wrong, and that Nelson Nash really did discover something amazing.

But I won’t know for sure until I start writing the chapters to convince the reader–because that’s when I will see if I can convince myself. In other words, I have heard the arguments from both sides, and I am going to have to sit down with Excel and do it myself, but only after we meet with the life insurance guys and I really understand what’s going on when they calculate the policy owner’s cash value, death benefit, and so on.

Stay tuned. And if we end up going forward with the book, don’t send it to Gary North!