There are few economists and economic writers that can clearly articulate complex economic concepts as well as L. Carlos Lara and the other members of the United Services & Trust Corporation.  Here is an historical and factual discussion of…

Sound Money

In-Depth by: L. Carlos Lara | Friday, February 5, 2010                            

My thoughts on the subject of sound money, of course, are not original. They have been guided here by my own private study of writers of a unique school of economic thought. These great thinkers, to whom I refer, can be traced to Salamanca, Spain as early as the 15th century. Later they were found in Austria, but now are centrally located here in the United States. These economic theorists have at their core of thinking the principles of scarcity and choice. More importantly, they believe that economic value is subjective to the individual. These concepts, when used in the thinking process, provide the ability to see the world and especially the market economy in a uniquely different way from all other schools of thought. What becomes apparent by utilizing this way of thinking is that an idea has crept into our world that is destructive. Ludwig von Mises, one of the greatest of these economists, believed that this idea was evil and that no one should give in to it.  He felt, as most Austrian economists do now, that fighting against this idea was a responsibility each one of us had to society because the stakes are extremely high. They are nothing less than the future of human freedom. (1.)

Young or old, our own education is where our fight must originate. However, learning how the world works according to this manner of thinking is a different type of education not earned in the classroom. In fact, this type of education is an individual endeavor and each of us must decide when we really want to take it up in earnest. What most disappoints us is that even after we decide to take up this intellectual battle sometimes our understanding comes slowly. Painful experiences, for example, can be some of our greatest teachers, however, it is not until these experiences are combined with a sound body of knowledge and historical evidence that an epiphany occurs. As for me, I am “too soon old, too late smart.” (2.)  Nevertheless, it is never too late to begin.

To understand what is meant by sound money, we need to examine a bit of history.  There are a few unique characteristics about money that I suggest we revisit in order to obtain a full perspective on this matter especially in light of our current economic environment.

The Genesis of Money

First of all, money did not come into being by some sort of agreement, or social contract. Money comes into being freely in the market place by trial and error. This happens as individuals begin to facilitate the process of exchanging goods with one another.

In the days of bartering (what economists refer to as “direct exchange”), problems arose when people attempted to exchange two different commodities. For example, if you had butter to exchange for beef, but no one wanted your butter, then you obviously had a problem without a solution. This exchange problem, because it came up quite frequently, forced society to search for a commodity to serve as a temporary exchange, or what economists refer to as an “indirect exchange.” Obviously, the commodity society ultimately selected for the indirect exchange had to be highly marketable. It may have been eggs, milk or bread, but, whatever it was, society eventually employed it as money.

Over the course of time the one medium of exchange that won over all other forms of money has been gold. Why gold?  Because it has features no other commodity has. For example, it is divisible. Imagine trying to divide butter to pay for something. Gold, on the other hand, can be cut up into tiny pieces while retaining its prorata value so that money calculations can be made. By making gold in either bullion bars or coins, it becomes very portable and very convenient to use.

There is also the fact that from time immemorial gold has been valuable as jewelry principally because of its decorative beauty. In addition to this, we must not forget that gold is limited in its supply. It is mined from the ground at great expense in order to get more of it.  But that is not all; gold is extremely durable and non-perishable. It can last for centuries. And finally, gold is homogeneous.  It can be made to look exactly like another of its kind, as in gold coins. For these reasons it is not surprising why historically gold has been the money of choice. No doubt, gold is sound money.

This brings up two extremely relevant questions.

What is the right quantity of money? How much should it grow?

These questions have been asked by economists for centuries. The struggle continues.  As we well know, there has been an astronomical increase of the money supply by the Federal Reserve Bank during the last four decades and especially last year. The general public, I believe, innately knows that all this new money creation is not a good thing for society. I also am also convinced that only one man in a million knows how it is done and why. To help understand this and know for certain what the right answers to these two questions are, we need to try asking ourselves this question: What should the optimum amount of canned peas be in society? Or, what is the optimum amount of fresh turkeys, or watermelons, or cattle, or whatever commodity comes to mind. The point is that the more consumable goods we have in society the better it is for everyone. In fact, more goods in the market help bring down prices and our standard of living goes up. However, this is not the case with more money. An increase of money provides no social benefit whatsoever.

Why no benefit?  Because money cannot be eaten or consumed. Money, remember, is used for exchange purposes only. Once a commodity is in sufficient supply as money, no further increases are needed. Any quantity of money is optimal. The more mining of gold for uses other than money, such as jewelry, is perfectly fine, but more gold as money is not needed. An increase in money only dilutes its value. And, it is this last point–dilution–that represents the sum total of our money problems today.

Legalized Counterfeiting

To put my points into perspective, imagine a free market economy where gold is the money. In such a society one can acquire the gold in one of three ways– mining, selling, or as a gift. In each one of these methods of acquiring gold, the principle of private property is strictly honored. However, let’s suppose an individual decides to take advantage of gold’s homogenous feature and creates an enormous amount of counterfeit gold coins for himself. This act will create a permanent destructive rippling effect throughout society. In addition to its fraudulent method of acquiring the gold and undermining the foundations of morality and private property, the counterfeiter will also increase the money supply substantially when he spends the money in the marketplace.   With more money in supply, its value will necessarily decrease and drive up prices on all goods. This, of course, is price inflation. It is very destructive because it impoverishes the whole of society, while the counterfeiting continues. The counterfeiter obviously benefits immediately by getting the money first, as opposed to the later recipients of the money, or those who never get the money at all…usually the average hard working citizen. These good people wind up paying dearly because they are left to deal only with the increased prices on all the goods in the market place. For them the cost of living simply rises year after year, and no one can provide an explanation as to why it happens. For this reason, Austrian Economists have always said that the inflation process (the increase of the money supply), is a form of indirect or invisible tax on society. This entire counterfeiting scheme is cleverly hidden.

We are fortunate that private counterfeiting has really never been much of a problem in modern times. The shaving of the edges of gold coins, the customary method of counterfeiting, ceased when milling was developed. However, when counterfeiting is mandated by government, when it is legalized, we have a serious economic and moral problem for all of society. Historically, there have been two major kinds of government mandated counterfeiting-(a) Government paper money and (b) Fractional Reserve Banking. This is precisely what we have today in our United States, but not just here-now it is all over the world.

 ”There is in all of us a strong disposition to believe that anything lawful is legitimate. Thus, in order to make plunder appear just and sacred to many consciences, it is only necessary for the law to decree and sanction it.” (3.)

    Frederic Bastiat        
    1801-1850        

The American public, in just this past year, has become increasingly more informed in the absurd concept of printing dollars on a printing press, and then spending them as a solution to  stimulating the economy. They realize that a flood of dollars into the market only devalues the currency. However, a much more insidious and camouflaged feature of our banking system is Fractional Reserve Banking. If you have the time, you can learn how that works by watching this educational video “The Mystery of Banking.” In the meantime, the most important thing to comprehend and remember is that so long as government paper money is redeemable in gold, it is as “good as gold” and can be said to be sound money. Our paper money, however, has not been linked to gold since President Roosevelt made that linkage illegal in 1933.  Since that time, the continuous expansion of the money supply, mandated by government through its Federal Reserve Bank, has devalued our money by 97%.  There seems to be no end in sight.

Message of Hope

Obviously, we must re-link our dollar back to gold. By doing so, we would all own, by assignment, property rights to a unit weight of gold. If our dollars are redeemable in gold, all banks would automatically be 100% reserve banks. More importantly, inflation would stop because gold cannot be inflated.

Next, we must privatize all banking, thereby abolishing government’s monopoly over our money. If step one and two can be accomplished, then there would be no need for the Federal Reserve.  Step three would be to close it down. If that happened, the size and expense of government would decrease immensely; our taxes would go way down, our savings-which fuel investment-would go up.

Think this is too big to accomplish? You would be amazed at the literally hundreds of thousands who support this solution. This support has been fueled in large part by the Mises Institute, the Foundation for Economic Education and other such private institutes, funded with no connection to powerful elites. These centers of education have become the places for learning the economic principles that our children and grandchildren need to be taught. They continue to fan the flame of liberty by publishing articles, scholarly journals, books, by holding conferences, and teaching students. Because of their efforts spanning more than 60 years here in America, there is faith, hope and expectancy at these independent scholarly institutions that a dramatic change in the political and social landscape is right around the corner, a belief that a great change can take place overnight when the ideological conditions are right. These institutions continue to provide the educational fuel to keep the fire burning. Every conscientious citizen should join and become a member of one.

Remember, we do not need to convince the entirety of the United States. With only 10% of the population supporting this solution, public policy can actually change. In the end, all economic policies are ultimately dependent on the views of the general public and our choice is final! America was founded on the principle that the masses, the people, determine the course of our history, but this movement for change must start with the individual–that means you and me.

L. Carlos Lara is President of United Services and Trust Corporation, a Management Consulting Firm specializing in Business Consulting, Corporate Trust Services, Corporate and Private Seminars including Speaking Engagements.

Notes: ___________________________________________________
 

1.    Special credit to Ludwig von Mises, Austrian Economist born 1881 Lemberg, Austria-Hungary, died 1973 New York City, NY. Noted for Praxeology. The Science of Human Action. Also, special credit given to Murray N. Rothbard, Austrian Economist, 1926-1995, student of Mises, for all information in this article.
2.    From the title of the national best selling book Too Soon Old, Too Late Smart, Thirty True Things You Need To Know ,   by Gordon Livingston, M.D. Copyright 2004 by Gordon Livingston published by Da Capo Press

3.    Frederic Bastiat 1801-1850, The Law-the classic blueprint for a just society. Republished by the Foundation for Economic Education, Irvington-on-Hudson, New York

Copyright © 2009-2010 United Services & Trust Corporation. All rights reserved. Repreinted with permission.

Filed under: Money, Personal Economy, austrian economists, bank, banking, banks, credit, economic theorists, economics, economy, liberties, ludwig von mises, Money, sound money | Post a comment

Over the past decade or so, the fallacy that home equity should be “harvested” by means of mortgage refinancing or home equity loans and converted into equity in some other investment has been foisted upon Americans as a legitimate financial strategy.

The most common presentation of these schemes suggests that home equity should be redirected into what some advisors call ”investment grade life insurance.” Other schemes suggest turning equity you control into annuities, real estate, gold, mutual funds, or some other investment - aka speculation - that you do not control.

The consistent mantra of the promoters of this idea is, “That’s what the wealthy do.”  They want you to believe that following their advice is the path to wealth that those who were already wealthy followed. 

BUNK!

Each of these demonstrably unsuccessful and failed schemes relies on the flawed principle that you should convert and asset - over which you have control - into cash.  Having done that, you should then give the cash to the financial advisor/planner that recommended the transaction who will then invest your money into whatever financial product or service s/he is promoting and earning commissions from selling or fees for managing.

The results from this so-called strategy are apparent in the home foreclosures many Americans face today.  They also appear in the non-performing, under-performing, and money-losing investmentsinto which the advisors often directed the American consumer’s home equity dollars.

Average Rate of Return…

The promotional basis for most of these schemes is the mythical Average Rate of Return.  The average rate of return shell game uses illustrations that show a consistent seven to eight percent return over multiple intervals - usually annual.  A typical $1,000 investment example used by this scheme with an average rate of return of 8% might look like this:

• Year 1 - $1,000 x 8% = 1,080
• Year 2 - $1,080 x 8% = 1,166
• Year 3 - $1,166 x 8% = 1,260
• Year 4 - $1,260 x 8% = 1,361
• average rate of return = 8%
• actual compounded annual return = 8%

However, even though this illustration shows an average rate of return of 8% over a four year period, it is unlikely, if not impossible, to earn an actual8% year upon year compounded return. (Just ask one of Bernie Madoff’s clients if you don’t believe that.)  A more honest illustration of an average 8% return might look like this:

• Year 1 - $1,000 x + 40% = 1,400
• Year 2 - $1,400 x + 22% = 1,708
• Year 3 - $1,708 x - 15% = 1,450
• Year 4 - $1,450 x - 15% = 1,233
• Average rate of return = 8%
• Actual compounded annual return = 5.38%

Even though the returns in the gaining years far outweigh the negative returns in the losing years, the average rate of return is still 8% while the actual compounded return is about 5.38%  It’s possible to show a much lower actual compounded return with a little bit of creative arithmetic, but this is enough to make the point: average rate of return is always deceptive, is always hypothetical, and is never guaranteed.

The fact that the returns on the investments recommended by the harvesting proponents are not guaranteed or even predictable compounds the primary deception in these schemes, which is that real estate values always move upward.

Granted, over the few years before the real estate bubble burst, the values assigned to real estate moved predictably higher.  However, the assigned values were often determined by the amount of money an advisor suggested the owner harvest and invest  in the financial product s/he had for sale.  Add to that the painfully unethical behavior of the mortgage industry granting loans to enhance the compensation of executives and brokers in that industry and the outcome was predictable.

The wholesale failure of financial Behemoths like Freddie, Fannie, Lehman, and so on is proof positive that the actual values of real property were artificially inflated to accomodate harvesting equity and other schemes designed to move money from the pocketbooks of American families into the coffers of corrupt Behemoths.

EUREKONOMICS! - The Return of Common Sense

Let’s turn the equity harvesting scheme on its head.

First, I have known many wealthy people.  I have known some who harvested equity from their homes and business properties.  I have known not even one that becamewealthy by harveting equity.  However, I have known some that became paupers by doing so.

The wealthy people that have commented on or reported about this concept have harvested equity only when they could guaranteethat the use to which they put the money converted from equity would return more than the cost of converting the equity.  In their decisionmaking, it was always more important to avoid or minimize risk than to hope for returns.  They used harvested equity to get richer without risk, not to get rich in the first place.

Conversely, even considering minimal risk investments, few of the wealthiest people I have encountered over the past four decades of my career would ever consider placing a mortgage on their paid-for personal property, least of all their residences.  They worked diligently for decades to pay off their mortgages and protect their personal assets from business failures and legal actions.  Why, in God’s name, would they ever want to put those assets at risk? 

What common sense program would ever warrant taking the chance that the family home would be lost to some investmentthat promises only that it promises nothing.  What about a greater return?  Think about it.  Is there a rate of return that is worth more than peace of mind, carols around the family Christmas Tree, or candle lighting at Hannukah?

If you would have a strategy regarding equity harvesting, why not consider harvesting equity from a source that you control and using it to pay off your mortgage and eliminate interest payments to the Behemoths?  Why not first build and then harvest the equity from your cash value life insurance policies, use it to reduce and eliminate debt to others, and repay the low or no cost policy loans so you can do it agian and again?  Why not learn how to BE the bank?

This is the inverse approach to risking everything you own to get an impossible maybe.  It is a way-certain to reduce and eventually eliminate debt-to-others and guarantee that the equity you build in your home, your other personal property, and the cash values in your life insurance policies remain under your control.

Finally, the most powerful argument for this approach is that it has been tried, tested, and proven over many lifetimes and generations.  It works in good times and bad.  It allows you to grow rich without risk and secure wealth without worry.

Filed under: Ethics and Morals, Money, Personal Economy, Your "Bank", annuities, average, behemoth, financial, financial strategy, gold mutual funds, home equity loans, home foreclosures, inflation, investing, investments, life insurance, Money, mortgage, mortgage refinancing, mortgages, rate of return, risk, s, speculation, wealth | 2 Comments

Joseph J. Ellis in His Excellency George Washington [Vintage books, NY] writes that the Father of our Country, unlike Thomas Jefferson and others from the elite class of the day, demonstrated “…concern for his own economic interest…” and adds paranthetically that “Perhaps this is the underlying reason Jefferson and so many other[s]…would die in debt, and Washington would die a very wealthy man.” p47  It may also be why George Washington was chosen to be our first President.  Early America knew that looking out for our country’s financial well being was a primary duty of our Presidents.

Washington, unlike many of his peers, chose “…to act in a direct and personal fashion to recover his own independence from…” the British government and their elitist allies in business and commerce who treated Americans with a certain amount of disdain and ignored their cries for justice and pleas for liberty.

How did Washington unfetter himself from the British elite?  The Ellis biography describes it this way: “Starting in 1766 he abandoned tobacco [a British obsession at that time] as his cash crop at Mt. Vernon…From now on he would grow wheat, construct his own mill to grind it into flour, and sell the flour in Alexandria and Norfolk…” He also “built his own schooner…to harvest the herring and shad in the Potomac and sell the fish locally…He…purchased a ship…to carry his flour, fish, and corn to such distant markets as Lisbon…he developed a full scale spining and weaving operation…” he “…made it quite clear that [he] was determined to defy the pattern of indebtedness [to the British Behemoths] that swallowed up…” his contemporaries and that “he was hell bent on freeing himself from the clutches of…” the British Behemoths of the day.  pp 52, 53 

What the Father of America and the other Founders discovered and understood in 1766 was that liberty and freedom cannot be had by people that are subservient to government or to the business, union, and lobbyists that maintain symbiotic relationships with government.  George Washington knew Eurekonomics in the terms of his day.  Americans today do not.

Americans today have been misled and misinformed about almost every aspect of wealth creation and personal financial management.  Americans today need to relearn what the Founders knew about money; they need to practice what the Founders practiced when they created wealth and managed their personal finances.

Americans today are blessed with advanced financial products that the Founders were just beginning to develop.  In particular, Americans in the 21st century have access to the most powerful, versatile, and flexible financial product ever conceived: participating whole life insurance, which allows today’s Americans to control the money that flows through their lives. 

Remember the Golden Rule: Whoever controls the gold makes the rules.

To the extent that others - especially governments - control the money that flows through the personal economies of individuals, to the same extent those others deny individual liberties.

“Individual liberties create and nurture free markets.  Free markets encourage and nurture healthy personal economies.  Limiting individual liberties necessarily damages personal economies.  Damaging personal economies necessarily limits individual liberties.” - Dr Agon Fly

Think it through.  Who among us has the greatest liberty?  Is it not those who control and are good stewards of their personal economies?

• The construction worker that lays aside extra ready cash to carry him through a tough winter or a downturn in new housing construction
• The nurse that adds a specialty to her RN degree and makes herself more employable even during the bad times
• The small business owner that reduces inventory and overhead at the first sign of reduced sales to insure the jobs of his or her employees
• The entrepreneur that nurtures his business to create personal wealth
• The retiree that opts to reduce current income to accommodate a longer life span

Unfortunately, many Americans have been led astray, have relinquished control of their money to investment advisors, qualified retirement plans like 401(k)s, and have opted out of actively creating wealth and managing their personal finances.

Beginning during the Carter administration and continuing during the Clinton, Bush, and especially the Obama Presidencies, the federal government, financial entities, and social institutions seized control of more and more of the personal finances and economies of individuals and families based on the faulty premise that BIG knows best.  The effect of these decisions on personal economies is apparent today in the painful rate of unemployment, the high foreclosure rate, falling investment values and returns, and the tsunami of bankruptcies.

However, in the past few years, an old and thoroughly proven idea - that each American and each American family can and should keep control of the money that flows through their lives - has risen like a Phoenix from the ashes of a conflagration of disinformation and misinformation that started in the 1970’s.

We call this resurrected idea Eurekonomics!

Eurekonomics aims to show Americans how to create a personal economy that lets them…

• Thrive in good times and bad
• Grow rich without risk
• Secure wealth without worry

by taking advantage of the power, flexibility, and versatility of participating whole life insurance.

Here is a list of the 13 Immutable Laws of Eurekonomics that the Founders knew and followed.  Modern America has been taught that these laws are no longer valid and that we should trust the government, the financial Behemoths, the unions, AARP and its ilk…NOT!

1.   The Law of Liberty: When others – especially governments – control your economy, they deny your personal liberty.

2.   The Law of Economic Know-How:  Successful personal economies rely on knowledge of personal economic principles, understanding the application of those principles to one’s personal situation, and wise decisions about how and when to apply them. 

3.   The Law of the Behemoths:  The economic system in the modern world champions the economies of Behemoths – big government, big unions, big bureaucracies, and big businesses – at the expense of individual personal economies.

4.   The Tax Law:  The government always writes tax law to its own advantage.  Tax deductibility is a trap.

5.   The Foundation Law:  Every successful personal economy rests on the foundation of accessible cash money and participating whole life insurance policies are the best product available for that foundation.

6.   The Law of the Four Pillars:  There are four, and only four, measures of successful personal economies: freedom from debt, ready cash, secure income, and a legacy.

7.   The First Law of Wealth Creation:  You must manage cash flow to create wealth. 

8.   The Second Law of Wealth Creation:  You cannot buy wealth.

9.   The Law of Debt:  Debt is never good.  It can be useful and important, but it is never good in a personal economy.  Borrowing money from others is NOT how the rich do it.

10.    The Law of Speculation:  What conventional wisdom refers to as an investment is really a speculation according to Benjamin Graham.  Speculation is gambling.

11.    The First Law of Investing:  Investing is appropriate only for a very small number of Americans.

12.    The Second Law of Investing:  If you invest, invest only from savings, never from income.

13.    The Law of Returns:  Average rate of return, whether illustrating past performance or future results, is useless in managing a personal economy.  The actual rate of return - year after year - is the surest, safest, and fastest way to wealth.

For more information contact Jeffrey Reeves or visit www.youBEthebank.com

Filed under: Money, Personal Economy, debt, economic interest, economics, economy, financial, indebtedness, investing, investments, legacy, liberty and freedom, Money, s, saving, Taxes, wealth | 1 Comment

The Oxford Dictionary defines an oxymoron as “a figure of speech in which apparently contradictory terms appear in conjunction.”  Claiming that financial planning is an oxymoron, therefore, suggests that the terms financial and planning are contradictory. 

The Certified Financial Planner Board of Standards stated mission is “to benefit the public by granting the CFP® certification and upholding it as the recognized standard of excellence for personal financial planning.”  The CFP Board’s web site discusses and defines financial planning as “the process of meeting your life goals through the proper management of your finances.”

Here’s the contradiction.  Planning is one thing.  Management is another thing altogether.  Planning may be a prerequisite to managing personal finances but it is not the process itself.

Planning is a map-making process.  Map-making is done from an aloof and uninvolved position using esoteric engineering tools to describe real terrain in abstract terms.  Managing is what you have to do when you come to the river on the map and discover that there is no way to cross the turbulent waters at that particular point because last week’s flood washed away the bridge on last month’s map.

Financial planning, as described and defined by the CFP® training program, is akin to map-making.  The planner is not actively involved in the “the process of meeting [a clients] life goals through the proper management of [their] finances.”  The planner’s role is to recommend and sell financial products and advisory services that may or may not actually support the goals of the client during the management phase.

There are, of course, ethical standards to which each CFP® must adhere.  There are also practice standards that the Certified Financial Planner Board of Standards, Inc. and other regulatory powers impose and enforce.  Add to that the burden of the standards and rules of conduct imposed by bureaucratic regulatory agencies such as FINRA and these collectively impose a set of “established norms of practice” on the planner that often restrict the options the planner may present to the client.

The restrictions may not overtly deny a client the best option, but often direct the options along the “established norms of practice” and thereby deny the possibility of any other better-suited alternatives.

None of what I wrote above intends to demean either the designation or practices of those who legitimately profess themselves to be financial planners.  It does intend to clarify that the entire process of planning and managing personal finances is shrouded by an imposing oversight structure and that this structure does not always provide Americans with the most appropriate personal financial advice or products.

Case on Point…

Over the past decade, I have met with and trained hundreds of insurance and financial advisors in life insurance and Series 6 pre-licensing, and a wide variety of continuing education topics including ethics.

• Almost every one of these professionals assumed that investing is an appropriate - perhaps essential - part of every American’s personal financial program - an idea that Behemoths in government and on Wall Street slowly injected into the American psyche over the past 30 years.
• One-hundred percent of them assumed that contributing to a 401(k) or its equivalent was the starting point for every personal financial management program - another idea that slithered into our collective psyche in just the past 20 odd years.
• Fewer than one in ten of these - ahem - professionals (not referring specifically to CFPs®) understood the most basic concepts relating to participating whole life insurance, mutual insurance companies, or even the life insurance products they sold most - universal life insurance.
• Only a handful understood the most elemental economic principles that clearly indicate that participating whole life insurance is the best and safest foundation for virtually every personal financial management plan.

One can more easily grasp the reasons for this strange set of facts when one reviews the history of personal financial management in America since 1974, a history that illustrates the slow erosion of control of personal wealth from the pond of individuals to the oceans of government and Wall Street.

Conclusion…

I am often accused of being “down on” financial planners.  Not true.  I am down on lemming-like robotic adherence to “established norms of practice” that have misled Americans into a financial swamp that consumes both their money and their liberty while denying the validity of more conservative and viable financial management strategies.

Financial planning is an oxymoron when it denies the use of planning tools and strategies at the expense of individual wealth and liberty.  

by Jeffrey Reeves  youBEthebank.com 

Filed under: Ethics and Morals, Money, Personal Economy, Whole Life Insurance, certified financial planner, economics, ethics, financial, investing, investments, liberties, life goals, managing personal finances, Money, oxymoron, personal financial planning, wealth | 2 Comments

I recently received this question from Christine:

Hi Jeffrey,

I hear those whole life policys have huge fees, what are all the fees?

Here’s my initial answer…

Great question, Christine!

Unfortunately your question implies a common misunderstanding so lets clarify that issue first.  Clarifying things may be enough, but if it isn’t feel free to question or comment further.

Whole life insurance policies have no fees associated with them other than a small (usually less than $60)  “policy fee” that some insurance companies still charge when an application is submitted.  Whole life policies do, however, have three variables that affect their financial performance…

• mortality, which is the guaranteed cost of the insurance, which guarantees the death benefit.  If the insurer incurs extraordinary claims activity the non-guaranteed dividends are affected but the guaranteed elements are not
• administration, which are variable costs incurred managing the everyday business of the company
  • actuarial, rate making, underwriting, general management
  • policy issue, policyholder services, and ongoing accounting
  • agency management, marketing, commissions, etc.
• investment returns, which pay for administration and create…
  • the guaranteed cash values
  • the non-guaranteed dividends

Whole life insurance policies have been manufactured and sold in America for over 150 years. These three variables are well understood and very closely managed.  That allows mutual companies like Mass Mutual, New York Life, Ohio National Life and several others to perform consistently and predictably decade after decade, pay consistent dividends even during market crashes like the ones we have experienced this decade, and maintain the highest financial ratings possible for decades on end regardles of the performance of the general economy or the financial sector.

On the other hand, Universal life policies (first introduced into the market by stock brokers in the early ’80s), especially variable UL policies (introduced in the mid to late 90’s), and indexed UL policies (first introduced about 2002), have what you refer to as “huge fees.” While whole life policies guarantee the three major elements of life insurance contracts - premium, death benefit and cash value - UL products do not.

The fees in UL policies consist of…

• annually increasing cost of insurance (guaranteed to be level in whole life policies)
• variable administrative costs, which can increase (whole life policies control these costs so they only affect non-guaranteed dividends)
• cash accounts, in which the insurance company shares none of the risk, that decrease as well as increase (whole life policies guarantee these will increase every year)

Because of these factors, these policies are not recommended by the Eurekonomics’ Money for Life Model.  That’s not to say they don’t have a place in the financial lives of some Americans.  They may.  However, they are not apporpriate as the foundation of one’s personal wealth and finances.  Whole life insurance is.

Filed under: Money, Whole Life Insurance, economy, financial, financial performance, financial sector, insurance companies, investing, investment returns, investments, Money, policies, risk, universal life, wealth | 1 Comment

Someone recently asked about FDIC insurance for the money in the “banks” suggested by the EUREKONOMICS’ Money for Life Modelfor creating wealth and managing personal finances, which recommends that each American should act as his/her own banker.  (Some advisors refer to these as “family banks,” “infinite banks,” or “personal banks.”  The use of the term “banks,” “banking,” and “being your own banker” is analogous to how one creates wealth and manages personal finances rather than a direct reference to commercial or chartered banks.)

The answer is…

You can use any savings product - or you can also use your mattress - as your “bank.”  So, if you choose an FDIC insured product that’s where the insurance comes from.

However, over the past 100 years participating whole life insurance has proven to best serve those who follow the Eurekonomics’ Money for Life Model for creating wealth and managing personal finances.  When your money is in participating whole life insurance, it is in the most secure place possible.  All state insurance departments require that insurers maintain reserves adequate to cover the death benefits of the policies they have in force and those death benefits are significantly higher than the cash values.  In addition, each state maintains a guarantee fund similar to the FDIC, which guarantees some or all of the cash values in existing policies in the event the insurer fails.

By the way, no American ever lost any of the guaranteed cash value of a participating whole life insurance policy, while many Americans have lost money that was held by commercial banks and especially money that was held in speculativeproducts like mutual funds, ETFs, managed accounts, etc. - aka casinos.

PS - I actually know a man that uses a cigar box hidden under a floor board as his bank.  His pit-bull’s bed is over that spot.  However, we don’t recommend using your mattress, a tin can in the back yard, or a cigar box and pit-bull as your “Bank.”

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During the last half of the 20th century and the first decade of the new century there have been hundreds - perhaps thousands - of the latest and greatest diet books, diet infomercials, diet clubs, diets that are delivered to your door, diets you can pick up at the store, even urban legends about cabbage soup diets.  They all promise miraculous results.

Financial diets have come and gone just like the food diets.  Sometimes it’s been…

• real estate trusts (REITS)
• oil and gas limited partnerships
• harvested home equity
• gold and other precious metals
• mutual funds
• on-line stock tracking and picking services
• ETFs
• financial planning (an oxymoron)
• managed money (remember Madoff)
• 401(k)s and their equivalents
• the list could go on for pages

However, just like the food diet fads, financial diet fads fade and disappear.

Just as the weight lost on food diets returns, the gains from financial diets are lost.

Eurekonomics is the centuries old, tried, tested, and proven system that lets you create and control your wealth.

Eurekonomics relies on principles and practices that support every successful personal economy anywhere in the world in any era.

Eurekonomics denies current conventional wisdom that chants the siren songs…

•  
  • you can have everything you need and want as long as you have enought credit - that means debt on your balance sheet
  • tax deductions for retirement savings are in your best interest - ignoring the fact that the taxes you’ll pay on the investments you made could - and likely will be - much greater than the few dollars you save in current taxes
  • some “adviser” from a Behemoth company, with credentials that restrict the options and choices she can show you, actually knows something other than what her Behemoth allows her to know
  • that Behemoths have some aim other than increasing their bottom line and shareholder equity - as opposed to your best interest
  • and on and on…

Discover and learn more about Eurekonomics.  You will be glad you did.

Jeffrey Reeves, youBEthebank.com, ltd.

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Preamble…

There are hundreds - perhaps thousands - of legitimate uses for participating (par) whole life insurance.

Thoughtful and creative insurance and financial guides recognize par whole life as the most powerful, flexible, and versatile financial tool in the US economy.  These enlightened guides use par whole life for applications as simple as fulfilling basic family needs, as complex as the most advanced estate planning and wealth management strategies, and for every imaginable personal and business financial reason.

The most advanced among these professionals follow - and teach their clients to follow - Eurekonomics’ Money for Life Model for creating wealth and managing personal finances.  The idea that par whole life could also help solve the financial challenges faced by the Social Security System sprouted from the fertile minds of this group of insurance and financial guides.

The Hypothesis…

The premise is simple; the US Congress would exercise its wisdom (hmmm - is congressional wisdom an oxymoron?) and pass a law that required the Social Security Administration to purchase and maintain…

• a ten million dollar ($10,000,000.00) par whole life insurance policy on each member of the House of Representatives upon election
• a fifty million dollar ($50,000,000.00) par whole life insurance policy on each member of the US Senate upon election
• a one-hundred million dollar ($100,000,000.00) par whole life policy on the President, Vice President, and Speaker of the House of Representatives.

These purchases would create an immediate death benefit pool of one billion two-hundred thirty-five million dollars ($1,235,000,000.00).  The death benefit would be payable to the Social Security Trust Fund.  The US Congress would not be able to get its greed and power motivated mitts on it, as they would be prohibited from accessing this money for the General Fund. 

That’s not a lot of money in the grand scheme of things in Washington DC.  However, since…

• the makeup of the US Congress is not static and there tends to be a bi-annual 25% turnover in both the House and the Senate due to retirement, lost elections, and expulsions for criminal or ethical reasons
• and turnover in the White House is guaranteed to occur at least every eight years

one could expect the amount in that pool to grow by about 12.5% each year.  That means that the initial one and a quarter billion would become about 5 billion in twelve years, 21 billion in twenty-four years, 86 billion in thirty-six years, and over 350 billion in forty-eight years.

Here’s an even better idea.  If every US Senator and US Representative had a term limit of twelve years, there would be 100% turnover at least every twelfth year or about 33% every two years .  Then the $1,235,000.00 would grow, based on a conservative estimate, to over two trillion dollars in forty-eight years.

Now, if we inflate the amount of death benefit on new policies issued to the newly elected at the same rate we inflate the compensation and expense accounts of the US Congress, reaching a total of over eight trillion dollars in forty-eight years is a reasonable assumption.  In addition, using the dividends from the par whole life policies to purchase additional paid-up insurance would compound the total death benefit even further and achieving death benefits of over twenty trillion dollars or more in forty-eight years is a reasonable expectation.

Moreover, since the actual death benefits that the Social Security Trust Fund receives would not be subject to the whims of the US Congress they could safely be used to purchase secured debt.  The SSA would thereby retain the principle.  This would create a secure future revenue stream for the SSA.

Finally, if the US Congress would allow the SSA to use just a small percent of the current payroll tax to purchase small par whole life policies on the 51,859,000 current Social Security Beneficiaries, then the Social Security System would begin to receive accelerated death benefits as these beneficiaries die and would become solvent that much quicker.

The Real Possibility

Of course, the possibility that the US Congress would actually act in the best interest of “We the people…” or that a scheme like this that might actually work or could overcome political power brokers is about as realistic as the 7.5% year upon year returns illustrated by some insurance and investment advisors for mutual funds and equity indexed universal life insurance policies.

However, if this scenario ever becomes reality, I want to be the agent that sells the policies.

Jeffrey Reeves, youBEthebank.com

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Mystery…No. 5 Volume Is More Important Than Rate

Every major product in the financial services business - every type of mutual fund, annuity, variable insurance product, bank CD, treasury bill, note and bond - proudly trumpets its rates. If 2% is good then 5% is better. If 6% compounded is wonderful then 8% compounded is marvelous.

The rates these products advertise, however, are hypothetical. Rate, like the products it applies to, represents the hypothetical aspect of pure unrelenting risk. The only guarantee of touted rates is that they are volatile and vary widely…in other words, they only guarantee is that there is no guarantee.

The facts are:

• If you contribute to your capital base on a regular basis
• If the financial instrument you chose to protect your capital has a guaranteed rate of return
• If you are using it as a source of borrowed funds for your own purchases
• If you are recapturing the principal, interest and fees you would otherwise be paying to others
• If you are not losing the earning power of your money while you are using it
• Then volume - regardless of rate - becomes more important.

 In other words, if you are managing your money the way banks manage money, volume is more important than rate.

Remember the refrigerator at $1,000.00. If you financed it yourself and paid yourself back at the rate of $100.00 per month plus 12% interest, you would recover the entire $1000.00 dollars in less than a year, capture about $50.00 in interest and have the refrigerator to boot. Does the 12% rate have great value here or does the recovered principal - volume - prove more useful?

Remember what Will Rogers said: “I’m not so much concerned about the return on my money as I am about the return of my money.”

Mystery…No. 6 “Conventional Wisdom” Is an Oxymoron and Tax Deductibility is a Trap

“If you do the same thing everyone else does then you’ll get the same results they do.” - Dr Agon Fly

During the recent bear market, some of the highest paid advisors and investors were able to brag only that their clients lost less than others’ clients lost. “I only lost 35%” is a bragging line. Hardly a single mutual fund showed a gain. 401k investments went down to less than half their original values in some cases. All of these results occurred by following “conventional wisdom,” the thinking that tends to dominate any given topic.[1]

The reality is that current financial thinking, planning, and practices are akin to driving your car by looking out the rear view mirror. You get a great view of where you have been but no perspective on where you are going. You could also say it’s like mapping; it gives you a two dimensional view of what might be in store but cannot tell you about the bridge that just washed out.[2]

Part of that thinking is that you should take advantage of every tax deduction possible no matter what. This is a trap. A client of mine follows this philosophy to the extreme. If there are two choices and one has a tax advantage over the other - even if both were tax advantaged - he always chooses the one with the current advantage.

The results have been demonstrably horrible. His 401k went down almost 80%. His earnings were so low that he lost almost $100,000.00 in the tax deductions that he pursued and his balance sheet is worse now than it was 5 years ago. He is so busy avoiding taxes (legally) that he loses focus on his business and his own best interest.

The Debt Paradigm has created the personal economies of today; low savings rates, loss of the long-term perspective, excessive attention to current tax advantages, follow the crowd investing and saving strategies, high debt, constant refinancing of our home equity and on and on.

It is time to walk away from the madness of the Debt Paradigm and employ solid strategies and practices of the Money for Life Model that promise a solid financial base that the vagaries of the market and the whims of the IRS cannot disturb or destroy.

 Mystery…No. 7 Compound Interest is Magic… Triple Compounding is Astounding

“The most powerful force in the universe is compound interest.” Albert Einstein

Compound interest on money you have saved (not invested) is the secret to financial success. What if you could save your money in a century old financial product where:

It earns compound interest - guaranteed

• You can borrow against it and it still earns guaranteed compound interest even on the borrowed amount
• You can repay the money that you personally borrow and reuse the borrowing power over and over
• Your borrowing costs are minimal or non-existent
• The interest you save by not borrowing from others becomes a secondary source of savings and another compounding factor
• Your money earns tax free dividends even when you have borrowed against the money

There are such products. Cash value life insurance, especially participating whole life insurance, is the cornerstone of the Money for Life Model for managing your personal economy and creating wealth.

Epilogue

There are a couple of thousand insurance and investment companies that do not have reliable cash-value life insurance products in their portfolios.  There are fewer than two dozen companies that participating whole life insurance as one of their primary products.

It’s obvious that the almost one million insurance and financial advisors that can’t sell whole life insurance will not praise it as the most versatile, flexible, and powerful financial product in the marketplace today.

The companies that sell participating whole life insurance policies are the most respected and reliable insurance companies in the world. Here’s a partial list of companies that manufacture and sell participating whole life insurance - in alphabetical order:

• Lafayette Life
• Mass Mutual Life
• Mutual Trust Life
• New York Life
• Northwestern Mutual Life
• Ohio National Life
• One America Life
• The Guardian Life

These companies all understand and support the Money for Life Model in one fashion or another.  They do not specifically endorse the Money for Life Model. However, their products and their practices support the use of participating whole life insurance as a savings vehicle with generous loan provisions, flexible premium options, and technical support for insurance and financial advisors that teach the Money for Life Model to their clients.

If you would like to learn more about participating whole life insurance and the Money for Life Model for creating wealth and managing your personal economy go to www.youBEthebank.com where you can find a link to an insurance and financial advisor that is well versed in the Money for Life Model and the use of participating whole life insurance as the foundation for a successful personal economy.

[1] Dr Agon Fly defines conventional wisdom this way, “Thinking what everyone else thinks and doing what everyone else does because that’s what everyone else thinks and that’s what everyone else does.”

[2] On a recent trip through New Mexico I followed a “scenic” route on the map that led me down a precipitous, 1,000 foot, one lane, unpaved, twisting and snow covered road with no turn-arounds, into the Rio Grande Canyon. I cursed the map, aka “plan”. I didn’t think about my preparedness, which called on every driving skill I’d ever learned and 40 years of focused meditation practice and got me through the ordeal. My wife, Sandy, on the other hand, was frozen and white knuckled during the descent.

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Mystery…No. 2 You Know Best What’s Right for You

The Debt Paradigm preaches that you cannot fully comprehend your own personal economy. It implies that the professionals who subscribe to the Debt Paradigm are in some way wiser, more knowledgeable about your situation, better informed about your needs, and perhaps even cuter than you.

BUNK!

You do not need a financial planner with an abundance of letters after her/his name and the logo of a big company on his/her business card[1] and a sales oriented computer program to tell you what is right for you and your family.

In fact, the financial and investment professionals most apt to help you are most likely working with smaller firms and choose not to align themselves with just one financial advisory firm’s products. It is also likely that they have narrowly focused practices and a broad understanding of the markets they serve.

Regardless, you need to equip yourself to direct the course of action. Only you should decide to incur the “pure unrelenting risk” of an investment. Your cousin Louie, golf partner, co-worker, or professional colleagues are always available with hot tips and enthusiastic advice.  Ignore them. When you need advice, seek out an investment professional[2] - be it in the stock market, mutual funds, real estate, commodities, foreign currency or any other potentially lucrative investment. 

And remember, it’s up to you to protect your capital base.  An investment advisor is not compelled to do that.

Mystery…No. 3 Don’t Risk What You Can’t Afford to Lose

Ask yourself the question, “What is it that I can’t afford to lose?” This is a money question but the answer is not purely about money. Excessive consumer debt, job losses, family crises, medical expenses and long-term care costs underlie most bankruptcies.

However, all bankruptcies result from a lack of a capital. If you are trapped in the Debt Paradigm, you are at risk. You have saved too little, invested too much, and assured the success of some Behemoth while critically damaging your own personal economy.

Your capital base is not secure or is non-existent. You are at risk because you are employing a set of strategies and practices that are not based on developing a capital base and thereby place your family and your fortune - that which you cannot afford to lose - in constant jeopardy.

It is only by having an adequate capital base that you are able to withstand and survive what Shakespeare called the “slings and arrows of outrageous fortune.”[3]  You cannot afford to risk your capital base.

However, as we point out repeatedly in this booklet, the strategies and practices of The Money for Life Model allow you to build a solid base of capital and avoid the risk of losing it. This model of your personal economy relies on the steady accumulation of capital and the concurrent elimination of debt and guides you through a program that lets you control all of the money that flows through your life.

This leads us to the next mystery.

Mystery…No. 4 Why Debt = Financial Death

The foundation of all banking is debt. The bank borrows from you at 2% in your savings account and lends it to someone for a car at 8% or for some furniture at 15% or on their credit card 22.99%. The reason debt is not death for the bank is that the bank borrows to lend and for no other reason.

The reason debt is death for most Americans is that they borrow to spend. In fact, some put the interest paid out of every personal dollar earned as high as 36 cents. That is higher in some cases than all income and payroll taxes combined.

The average person will pay almost two times the purchase price of their home in interest, will pay enough interest on automobiles to buy an extra car every ten or twelve years and might pay their credit card companies up to 2000% of the principal balance before paying off the card. Is it a wonder that the savings rate is less than 0%? This is financial suicide.

Take the example of a $1000.00 refrigerator. The manufacturer borrowed the money to build the plant and buy the parts to build it. The distributor borrowed the money to lease the warehouse to store it until s/he placed it in inventory and in the store. The trucker borrowed the money to buy the delivery truck. You borrowed the money to buy it.

Who’s making all the money? You got it - the bank. What reduction in cost would occur if each entity financed their part of the process in lieu of borrowing from the bank?  Obviously you control only a small portion of that series of borrowing transactions but, if you could eliminate some or all of the 35% of your income that you pay to others as interest, your personal economy would work better for you and your family.

It’s not a bad thing that the bank - or someone - makes money from lending. Banking is essential to the economy of the world and just as essential to your personal economy. The important thing to be aware of and to remember is that you are not currently in the banking business…but you need to be in the banking business.

You need to find your way out of the Debt Paradigm - where you are a bank customer - and adopt the Money for Life Model where you are both the customer and the “bank.”[4] In The Money for Life Model, your debt is productive for you just as it is for a moneylender in the Debt Paradigm.

This does not imply that you sever your banking relationships or that the commercial bank has no place in your personal economy. There are many occasions when you may want and need strong banking relationships; when following the Money for Life Model makes you a very attractive customer of the commercial bank, and may even earn you preferred treatment and rates.

The Money for Life Model, however, transfers a major portion of your borrowing from moneylenders to your personal “bank” so that you recover the principal, interest and fees that you would otherwise pay to others.

[1] Industry designations and accomplishments demonstrate that an advisor has acquired specialized knowledge about finances.  It is not an indicator that s/he has skill and wisdom…one can know all about sand castles and have the skill to build one but lack the wisdom to wait for low tide.

[2] Part of our practice is to identify and refer these kinds of professionals to our clients when appropriate.

[3] Hamlet, Act III Scene I - William Shakespeare

[4] The word “bank” in The Money for Life Model refers to any savings vehicle that you own and use as a source of borrowing and that you plan to repay as you would repay a loan from a commercial bank, credit union, etc.

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