08 Aug 2011

Free Advice That Was Totally Worth the Price

Economics, Gold, Shameless Self-Promotion 35 Comments

This Wednesday I will have a spirited take-down of Krugman’s “I told you so” column from last week. In writing the piece, I dug up this oldie but goodie from the days when Free Advice wasn’t yet potty trained. In all seriousness, I can sleep at night knowing this is what I advised on August 23, 2008:

I am pessimistic about the U.S. economy‘s prospects for the next five years. So let’s go over some very basic and obvious steps every household should take, as quickly as possible. Note that the goals don’t have to be achieved overnight, but setting those goals should be done ASAP.

(By the way, I admit that what I am talking about in this post is nothing brilliant. But it’s like going to church every week to hear a sermon on what you ought to be doing. You know what you’re going to hear, but you need someone else to say it once in a while.)

OK so here are some basic steps every American household should take:

(1) Set up a monthly budget that has a long-range view. Make it very convenient for yourself, to be able to just change a few entries and then see how, say, saving an extra $100 per month, impacts your net worth in five years.

(2) Don’t pay off dollar-denominated debts, even credit cards. Rather, defer those as best you can, and use the freed up dollars to tackle steps (3) and (4).

(3) Figure out how many months you would need, in order to find a job that could pay the bills, assuming you lost your present source(s) of income. People throw around rules of thumb, but I think that’s ridiculous; individual circumstances are very different. For example, in my case I have bounced around quite a bit, and do most of my work on a laptop. So I figure I really only need about two months’ worth of regular income in terms of very liquid reserves. That’s because if something happened and I lost my major source of income right now (I’m a consultant so I don’t have “a job” to lose), we could go into austerity mode and make two months’ of normal income stretch out for three, and I am certain that I could at least partially restore my income flow within three months. Even if I were in a car accident, I could still work unless I died (in which case my life insurance would cover things).

Yet for somebody else, maybe someone who works at a factory but doesn’t have obvious alternatives if that factory should shut down, maybe that household ought to have six months’ of income in the bank. Also remember that if you lose your job because of a crisis, then a lot of other people will be looking for work too. So the question isn’t, “If I quit tomorrow, how long to find another comparable-paying job?” No, the question is, “If I get laid off tomorrow, how long…?”

(4) If you currently do not have the liquid funds that you figured out in step (3), then start working towards that amount. When doing so, consider acquiring actual gold coins as at least a portion of your liquid savings. Again, some might quote you formulas for what percentage of your reserves should be dollar-denominated, and what percentage should be in gold coins, but it will depend on the individual’s tastes. Some people might feel like Indiana Jones if they kept $15,000 in gold hidden around their house, and economics can’t say that preference is irrational. People spend lots of money on fancy sports cars too; there’s nothing wrong with spending your money in a way that pleases you. So by the same token, if it excites you to own gold–maybe you are a libertarian and think you are giving a nod to a time when the dollar was tied to gold–then go ahead and make a larger fraction of your liquid fund consist of gold coins. On the other hand, if gold seems really scary and volatile to you, then invest in government bonds to supplement your checking account. (In future posts at Free Advice, we will develop more formal analyses as to “smart” investments, but a lot will still ultimately depend on subjective tastes.)

One final thought on gold: Unless you have to deal with tax consequences (because you have an IRA etc.), I would recommend getting the actual physical gold, rather than gaining exposure to a gold ETF in your portfolio. In the type of scenario where you might really need to access those emergency, liquid funds, the government could quite easily declare a financial crisis and suspend withdrawals from commodity ETFs. So in such a calamity (after a terrorist attack, or if Israel starts bombing Iran suddenly), you would be in a much more secure position if you held the actual coins in your possession.

So yes, I’ve been off in my warnings about CPI, but I don’t think anybody who did the above steps would be kicking himself right now. (Unless the guy happened to be a really flexible masochist.)

35 Responses to “Free Advice That Was Totally Worth the Price”

  1. Tel says:

    But the policy disaster of the past two years wasn’t just the result of G.O.P. obstructionism, which wouldn’t have been so effective if the policy elite — including at least some senior figures in the Obama administration — hadn’t agreed that deficit reduction, not job creation, should be our main priority.

    If deficit reduction was their “main priority” then I’m deeply thankful they weren’t trying to fix my life.

  2. AP Lerner says:

    Sorry Mr. Murphy, but I would not be so quick to pat yourself on the back with this free advice. The deflation trade has massively outperformed the inflation trade. If people actually followed this advice:

    ‘I would recommend getting the actual physical gold, rather than gaining exposure to a gold ETF in your portfolio’

    They would have gotten crushed by the bid/ask and with storage costs relative to ETF’s. Sure this trade will outperform if the financial structures collapses and we are all trading gold for cat food But if we ever get to that point, I’ll just take your cat food, there will be no bartering gold for cat food. People will just take your cat food

    And while you were absolutely correct to say ‘invest in government bonds to supplement your checking account’ clearly by your recent comments on inflation and US credit quality, your preference is for exponentially more gold than bonds.

    The reality is the deflation trade (government bonds) has MASSIVELY outperformed the inflation trade you and other Austrians have recommended. Any treasury fund manager with half a brain has crushed gold over the last 1, 3, 5, 10, 20, and 30 year period. Some curve trades mixed in with STIPS and a few timely IO’s crushed gold on an absolute and on a risk adjusted basis. I recall giving this free advice on this very site many times. Even Krugman got this one right, so I would careful about your take down. He has been more right than wrong lately.

    PS – ever thought about updated your site so commenter’s know when they have been responded to? I have little interest and coming back to the site and randomly checking the comments of my posts, especially since most responses are gibberish and/or hate mail.

    • Teo says:

      If you care so little about commenting on this site, then why even bother? Just stay in the moral high ground where stealing cat food is OK and be happy!

    • Bob Roddis says:

      When MMTer AP Lerner shows up to lecture us on our economic ignorance, keep in mind that he claims (without argument) that catallactic exchange became irrelevant under our “pure” fiat money system in 1971. When I directed him to Mises’ evisceration of MMT hero Knapp and his wacky state theory of money a century ago:


      AP Lerner responded:

      That essay is irrelevant since it was written in a period of time when the current monetary system did not exist. The rules changed in 70’s. The US left the gold standard.


      That was August 17, 2010. He has never explained that preposterous statement although I have asked him to explain it probably 10 times.

      And as a bonus, let us not forget that AP Lerner and his Chartalists seem to believe that they have discovered the secret to abolishing the law of scarcity. I’ve asked AP Lerner to explain where all the stuff is going to come from to satisfy the government’s debt at least 30 times and have never received a response.

      Does that quality as hate mail or gibberish?

      • Major_Freedom says:

        That’s funny.

        Mises considered state issuance of fiat money, criticized it, and AP Lerner claims that Mises’ arguments are invalid because… there happened to be a gold standard at the time? Hahaha

        Yeah, the presence of our fiat system does not prevent him him from making arguments on gold money, but the presence of a gold standard somehow invalidates all of Mises’ arguments on state issuance of fiat money.

        That’s hilarious. By his logic, we could make any valid arguments on emancipation as long as there existed slavery. What a loon.

      • MamMoTh says:

        David Glasner:

        …This doctrine was dubbed by Keynes as chartalism. I believe that at least some of the bad press that chartalism has gotten over the years is due to the hostile and dismissive treatment Knapp’s theory received at the hands of Ludwig von Mises in his Theory of Money and Credit, which grossly misrepresented what Knapp was trying to say. Offering few specifics, Mises heaped scorn on Knapp’s work, unjustly accusing Knapp of a complete lack of understanding of economic theory. However, 15 years before the State Theory of Money was published, P. H. Wicksteed, in his magnificent Common Sense of Political Economy (1910), the most elegant and most comprehensive verbal presentation of neoclassical economic theory ever written, a work subsequently embraced by Austrian economists as one of their own despite the lack of any interaction between Wicksteed and the Austrian economists, based his explanation of why inconvertible paper money had a positive value squarely on its being made acceptable by the government for the payment of taxes (volume 2, pp. 618-22). So any notion that chartalism is at odds with orthodox economic theory, as Mises alleged, is utterly unfounded.

        • bobmurphy says:

          It’s funny how Mises is a crank sitting in the corner to whom no one listens, and at the same time he singlehandedly can discredit a theory that was advanced by the author of the most elegant and most comprehensive verbal presentation of neoclassical economic theory ever written. I guess Mises had some good days, and he had some bad days?

        • Bob Roddis says:

          So, where’s the substance of the argument in this superficial recitation? Is the state of theory of money baseless or not? How did the state establish the initial value of its “money” as Bob Murphy once asked? Where is there any focus upon catallactic relationships in MMT or the Knapp theory? Mises states emphatically that Knapp’s theory was acatallactic. Is he right? If not, why exactly? How does going off gold in 1971 make any difference regarding the importance and applicability of catallactics?

        • Bob Roddis says:

          The fact that the government can switch from paper money being a warehouse receipt for specie to a receipt for nothing is simply a trick played upon a dim-witted public. It does not prove the state theory of money because it does not deal with the INITIAL issuance of such money which the Knappies say preceded gold and silver having market value as money. The trick of switching from real money to funny money is not the same thing. The fact that fiat money can have value also proves nothing. Mises’ point was that Knappie theory was acatallactic and is oblivious to acting humans engaging in exchange. Glasner misses the point of Mises’ takedown.

          I am an economist at the Federal Trade Commission. Nothing that you read on this blog necessarily reflects the views of the FTC or the individual commissioners. Although I work at the FTC as an antitrust economist, most of my research and writing has been on monetary economics and policy and the history of monetary theory. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey’s unduly neglected contributions to the attention of a wider audience.


        • Richard Moss says:


          Well, I am a bit suspicious of Glasner is saying wrt Mises on Knapp.

          As you say in his post he says the following (his “evisceration” of Mises);

          “I believe that at least some of the bad press that chartalism has gotten over the years is due to the hostile and dismissive treatment Knapp’s theory received at the hands of Ludwig von Mises in his Theory of Money and Credit, which grossly misrepresented what Knapp was trying to say…”

          But, later in the comments on David Glasner’s post there is this exchange;

          Nick Rowe:

          “The Chartalist theory is totally false. (And Knapp’s book is awful. I tried to read it once).

          Von Mises is roughly right, I think…”

          David Glasner responds:

          “:…I faulted Mises for his treatment of Knapp, not because I thought Knapp’s book was any good (and you have extinguished any flicker of desire on my part to ever try reading it), but because he did not address Knapp’s key claim about acceptability in payment of taxes, satisfying himself with ridiculing Knapp as a bad economist and an etatist…”

          So, Glasner says Mises treats Knapp unfairly (he does not cite actual quotes from Mises as far as I can see to justify this comment) and then later says he has never read Knapp’s work. Where is he getting his idea of Knapp “was trying to say?” If it is from what Mises says then how does he know Mises is misrepresenting ‘what Knapp was trying to say?’

        • Major_Freedom says:

          I have my own theory on how to reconcile Mises’ regression theorem with the idea that money has to have value in the forward looking sense in order to be money.

          The argument is centered on the requirement of money to have a calculation ability criteria, and a universally accepted criteria.

          Relative prices, the price system, can only come to be through the regression theorem. If not, then it would be impossible for a paper money supply that is introduced into an economy to be able to price goods and services relative to the paper bills. It would be like asking people to price their real goods in paper bills, without referring to the valuations that have already attached to the real goods, as well as where the new paper bills would fall in people’s subjective value scales.

          Thus, it is impossible for a paper money to be imposed by fiat, without a connection to past prices. The regression theorem holds.

          But, once a paper money has become integrated into the economy’s price system, through something like pegging a paper bill to a certain quantity of gold, then it is possible for a nefarious and morally unscrupulous individual to take violent control over the money production, and from then on, act as a coattail rider on what has been established through the regression theorem, to enable the introduction of a fiat driven pumping of new money that can be absorbed into the greater pricing structure.

          Once the individual gains such control, and imposes legal tender laws for fiat paper bills, then here is where it gets tricky. The nefarious individual, provided he does acquire control, can exploit the pre-existing price structure and will be able to maintain the legal tender fiat law, in addition to succeeding in having his paper currency absorbed by economic actors who can successfully price goods and services in those paper bills on the basis of regression theorem.

          So both are happening at the same time. The fact that the fiat money can be absorbed at all into the price structure is on account of the regression theorem. But the fact that it’s paper and not gold is on account of the individual’s violent actions in imposing his currency and no others. And what sort of violence is this? Well, the individual won’t be able to stop people from trading in non-fiat money with each other, but he can use violence to ensure that they pay him in those fiat bills, and hence coerce them into using it in their own dealings with others besides him.

          So it’s a two stage process. One, the regression theorem has to take place to generate a price structure. Two, once the currency of choice is taken over (the gold standard had to first generate paper claims to gold via regression before the government could take over money production), then the individual controller of currency can coattail off the existing price structure, and start injecting his own produced money into the economy, and it can be successfully absorbed, on the basis of regression once more, ad infinitum. But the type of money as such, the paper, that requires violence in the form of taxing power.

          So the regression occurs, which forms the price system, then the violent take over takes place, then the subsequent acceptance of subsequently produced new currency on the basis of taxation laws.

          Here’s a thought experiment:

          Imagine there is a classroom, and there exists barter trade. Suppose I start offering piles of paper bills in exchange for people’s real wealth. In order for these bills to become integrated into the classroom economy, the students would necessarily have to come up with a value for the paper bills relative to the existing supply of real goods, using the regression theorem. Someone would have to be willing to conclude something like “I want an orange, and I am willing to give an apple, but in order to convince me to accept your paper bills, you’re going to have to give me X of them” No doubt X would probably be very high, but it might not be. At any rate, paper bills would probably be far down the list in marginal wants relative to other goods. My fiat paper would not be a money, because it has been integrated into the price structure not as a medium of exchange, but as just another commodity. Barter would persist. I could not establish myself as a money monopoly. The regression theorem is still in operation.

          But, suppose now that the classroom is further along in economic evolution, and they have come to use pencils as their money. I could again try to take over the monetary structure by creating pencils myself, but that is very costly, and I would in fact just be your average free market money producer (of pencils). Still my attempts are frustrated. Still the regression theorem is operating, now it is integrating pencils into the price structure, and pencils are now money.

          Now, suppose that the classroom has become so productive, that they start depositing their pencils into storage facilities (the desks of some student bankers), and they start to use paper claims to the pencils in their daily transactions instead. These paper claims to pencil money will also be regression theorem based. The pencils need to exist before the paper claims to pencils could be used as money.

          Now’s my chance. I can form a pencil banking cartel with the other major pencil storage desks, and after some time, our cartel starts to issue MORE paper claims to pencils than there are pencils. We can do this and the regression theorem would enable the students to integrate these new additional paper claims into their economy. Although there will be a problem that we all know about. Classroom boom and bust. Our actions will generate student pencil bankers to experience desk runs, as students scramble for pencils.

          After many years of such ups and downs, my pencil cartel buddies and I have an idea. We can get the teacher to establish for us a lender of last resort. The students are told it’s for their own good, and they buy it. So we start our federal reserve pencil bank. We can all inflate paper claims to pencils together in unison. We still redeem paper claims to pencils, in pencil specie, but we only do so for the centralized pencil bankers of other classrooms. We won’t redeem pencils to students. They’ll have to use chalk if they want specie. The regression theorem still enables us to introduce new money into the price structure.

          Then, on one fateful day, we have decided that we will no longer be redeeming paper notes in pencils to the other central classroom pencil banks. They will only get the paper claims that our cartel writes up for next to no cost.

          After some time passes, some people start asking why people continue to value the paper claims. Little Mises says it’s because of the paper claims used to be backed by pencils. Little Wicksteed suggested that it was because the teacher demanded that the students give her a supply of paper claims each week, which keeps up the demand for those paper claims.

          Little Major_Freedom claims that both Mises and Wicksteed are right. BOTH of their arguments are required in order for paper claims to function as a catallactic means of exchange in a price system (Mises), and to function as the legal tender and no other (Wicksteed).

          Should either Mises or Wicksteed’s arguments cease to be valid, then the fiat paper simply cannot be a money.

    • skylien says:

      @ AP Lerner

      Could you show us how US Bonds outperformed Gold in the last 1,3,5, and 10 years?

      Golds performance is around 15% annual over the last 10 years. Under
      “crushing another investement” I would at least understand double the performance -> 30% annual return. So people with half a brain could have made about 30% annual return every time within the last 10 years with US Bonds while being the most prudent and safest investement on the world?

    • English Bob says:

      Which treasury funds have “crushed” gold? I don’t see any here.

    • Rick Hull says:

      You can store e.g. a Good Delivery bar of gold ($500k worth) at very little cost by bolting a safe (from the inside) to your concrete foundation. But Mr. Murphy was talking about coins, say $10k – $100k worth, which can be more easily stored at home or put in a safe deposit box.

    • Daniel Hewitt says:

      These replies are clearly hateful gibberish!

    • Major_Freedom says:

      It’s funny watching how MMTers try to defend their paper money fetishism by totally denying economic reality.

      Gold has completely eviscerated government bonds of all maturities, if you select the time period August 2008 – present, which is Murphy’s prediction time horizon.

      Gold was at roughly $800/oz in August 2008. Today, August 2011, it is $1740. That is a $940 total 3 year return of 118% on initial investment, or around 30% annualized.

      The bid-ask spread on physical gold is minuscule. Right now the bid ask spread on physical is 1729.8/30.4, or 0.035%.

      Compare that to the gold ETF spread, (assume IAU, the largest ETF for gold), and the spread is 0.07%

      Second, storage costs? What are we, central bankers? We’re retail investors. Storage costs for $10,000 physical gold for 3 years is around $200 (London standard), or around 0.2%.

      Add all the above up, and we have physical gold returning around 30% annualized for 3 years, with the bid-ask spread beating gold ETFs spread, and the storage costs are so relatively small compared to the return that it might as well be ignored.

      If we compare that to ANY of the top performing, leveraged, long government bond funds, even if we consider the best that the market has to offer when it comes to long government debt funds, it’s not even close. It’s like Mount Everest to your facial zits. The top long government fund was ProFunds US Government Plus A GVPQX, and it returned….a whopping 6.69% annualized for the last 3 years.

      AP Lerner, your post is so full of nonsense, that it is not even wrong. You’re in MMT lala land, desperately clinging to his master like an abused pet, refusing to even speak critically of the dollar or government debt.

      Bob’s prediction fared very, very well.

      • Major_Freedom says:

        But this is all “hate mail” and “gibberish.”

        AP Lerner never engages in ad hominem, the hypocritical creep.

    • bobmurphy says:

      AP Lerner,

      Like some others, I’m curious what you mean when you say government bonds “MASSIVELY” outperformed gold since August 2008. (That would be the relevant comparison, since that’s when I made the recommendation, but it’s included in your claim since you said “over the last 1, 3, 5, 20, and 30 year period.” So OK, show us in the last 3 years that government bonds have “MASSIVELY” outperformed gold.)

  3. Daniel Hewitt says:

    I only paid $0.01/oz/month for gold storage. My only regret was selling too soon….

    • Silas Barta says:

      I’ve paid $0/month for gold storage, and yes, I’m storing gold.

      • Major_Freedom says:

        The nervous sweat would cost something to me.

        • Daniel Hewitt says:

          Nervous sweat cost > $0.01/oz/month. For me, anyways.

  4. Subhi Andrews says:

    Yesterday was a great opportunity to dive into some stocks

    • bobmurphy says:

      Just like Friday afternoon was a great time to short them. And yesterday was a great opportunity to dive into them, only if you sold them today near the close. If you hold them until tomorrow, you don’t know (yet) what will happen.

      • Subhi Andrews says:

        Exactly Bob, that goes for dire predictions. I like Austrian economics because they don’t wear psychic hats and pretend to see the future. The temptation to predict the future is so strong that we have to give in, at least, once in a while. I am very optimistic for an Austrian sympathizer.

  5. Bob Roddis says:

    As long as we are celebrating the wisdom of AP Lerner, just remember:

    “Deficit spending creates surpluses in the private sector. Net new financial assets can only be created via deficit spending. Public deficits always equal private surpluses. This says nothing about wealth creation. It’s the tyranny of accounting. Sorry, but math still holds.”


    What could be more obvious?

    • MamMoTh says:

      He is right!

  6. Bob Roddis says:

    FYI, AP Lerner ignores my comments because:

    a) They generally add little value; and

    b) I’m so mean.

    “@ Bob – I normally have little interest in commenting on your posts, since generally they add little value. Calling me AP ‘hut tax’ Lerner, just further supports my decision to ignore your comments. I had a post written up (which unfortunately got lost) about how enjoyable it is to debate folks like Prof. Anderson, Jason h, burk etc on this blog because, even though we disagree on just about everything, at least they are thoughtful and respectful. Calling me ‘hut tax’, and misinterpreting Mosler’s views on money and taxes is not only thoughtless, its disrespectful, and the assumptions you draw regarding chartalism and Mosler could not be more ignorant. And to even imply the things you implied regarding Warren Mosler in your other posts is just disgusting and ignorant.”


    • MamMoTh says:

      He is right, again! (but a) is enough)

  7. Bob Roddis says:

    Was I so wrong to call Mr. Mosler Warren “Hut Tax” Mosler? Let Mr. Mosler himself explain the fundamental and foundational morality and operational reality of his version of the “Controlled Economy“ and his state theory of money. AP Lerner promoted this Mosler explanation of MMT:

    The following is not merely a theoretical concept. It’s exactly what happened in Africa in the 1800’s, when the British established colonies there to grow crops. The British offered jobs to the local population, but none of them were interested in earning British coins. So the British placed a “hut tax” on all of their dwellings, payable only in British coins. Suddenly, the area was “monetized,” as everyone now needed British coins, and the local population started offering things for sale, as well as their labor, to get the needed coins. The British could then hire them and pay them in British coins to work the fields and grow their crops. See Mosler’s “Seven Deadly Innocent Frauds”, page 26.


    My initial reaction to reading this is that I would never invade Africa nor force Africans to pick my crops nor would a normal moral person. My initial response to learning of this episode would be to find the perpetrators of this outrage and then arrest and convict them as the criminals that they are. The reaction of the MMTers is “How cool is this?”

    Perhaps there is a nice way to discuss the joys of enslaving Africans to pick your crops but I don’t know what that is.

    • MamMoTh says:

      You think squandering stolen gas is cool.

      • Silas Barta says:

        Even if that’s true, it’s a hell of a lot better than glorifying the enslavement of Africans through a hut tax. You people are sick in the head.

        • Bob Roddis says:

          Mam-mouth makes these comments about me stealing gas because I once posted that I enjoy driving my car (which, BTW, gets about 29 MPG).

          That’s all there is to it. Seriously. That’s the substance of Mam-mouth’s refutation of my critique of Warren “Hut Tax” Mosler.

        • MamMoTh says:

          I favour a head tax. No tax, no head!

          • Tel says:

            As you rightly point out, the fundamental driving force behind paper money is tax, and the fundamental driving force behind tax is violence. Thus, fiat money is institutional violence in a conveniently denominated and portable format.

            And there’s nothing surprising about that, government is a protection racket. Fiat money is a token to be exchanged for protection from violence.