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The Solution (Editor's note: As most of you might have noticed, we frequently post articles in "the War" forum that are concerned with domestic, rather than international issues. I believe that we should consider ourselves at war with anything, anyone, or any group that threatens our survival, financial or otherwise. I would say the following might be considered a domestic issue. "The Solution" is the seventh chapter of a book by Mr. Pugsley entitled "The Alpha Strategy", written twenty-eight years ago. We intend to post a chapter each week. Links to the previous chapters can be found at the end of this chapter-JSB)
The best solution is the simplest solution, and the simplest solution is the easiest to overlook. With a couple of exceptions, all of the savings and investment assets discussed in the last chapter have one glaring fault in common: each is a claim on wealth, not the real thing. Modern paper money is not a real commodity. Paper money is a claim on real wealth; a claim on money, such as a bond or a passbook for a savings account, is the same thing doubled; a share of stock is a paper claim on business profits. As was pointed out in Chapter One, wealth is made up of real things. It is hammers, lathes, shovels, typewriters, windows, doors, walls, pencils, shirts, shoes, rugs, apples, automobiles, and bread. Wealth comprises all those things we use, enjoy, and benefit from. It should be obvious by now that real wealth is your objective. paper, once it is printed into money, cannot be consumed; it can only be traded for real wealth. Stocks, bonds, and savings accounts, the, are only ways in which to store purchasing power until you are ready to use it. They are an intermediate step between earning wealth and consuming it. As long as you have your wealth in the form of paper claims, you are prey to swindlers and con men, both those who work through government and those who work outside the law. Since almost all of the manipulation, subterfuge, and theft of your wealth occurs while it is in paper claims, you have a simple and obvious defense: keep your wealth in real goods instead of paper claims. The only safe, rational investment program for the average person in today's turbulent economy is to eliminate the intermediate step. Instead of converting labor into money, money into investments, investments back into money, and money into real goods once again, convert your surplus earnings directly into real goods. Simply stated, invest your savings in those real things that you will be consuming in the future. Save only real wealth. The production and savings parts of the Alpha Strategy are plans by which an individual completely avoids conventional investment markets, and instead invests his surplus wealth in real tangible and intangible goods, and stores these goods until he is ready to consume them, or until it is convenient to trade them for goods he wants to consume. Goods to be saved will include (1) the knowledge and skills of his trade, (2) the tools, supplies, and inventory for his business, (3) the regular consumer products he uses in his everyday life, and (4) raw materials and finished products that he can store for later trade with others. In the area of the knowledge and skills of your trade, it means investing as much as you can in education in order to increase your rate of production. In your business it means converting surplus cash into tools, supplies, raw materials, parts, and inventories. In your home it means saving real goods such as soap, underwear, tires, laundry detergent, toothpaste, and lightbulbs, rather than paper claims in the form of bank savings accounts, bonds, and stocks. If you still have money left after investing to the maximum in these three areas, then it means converting your paper claims into real goods by buying and saving things that others will need in the future; this could mean finished manufactured goods, but more logically, it means the raw materials used by industry. The Alpha Strategy has one primary purpose: to protect wealth. As such, it will work for any amount of capital. If you have only have $100, you can protect it completely against inflation and all investment risks by simply buying things now that you know you will have to buy next week, next month, or next year. If you have $1,000 or $10,000, the same thing holds true. As the amount of capital you have available increases, it becomes less practical to store items for your own personal consumption, and more sensible to store things that you can eventually trade or sell. Only when your assets exceed the amount you can conveniently store in education, business assets, and consumption goods should you consider saving tradable goods. The Benefits There are multiple benefits to the Alpha Strategy. First, on the level of storing future consumables, you are totally and permanently insulated from inflation. A case of aluminum foil, once purchased and stored away, cannot go up in price; the same aluminum foil on the shelf in the store will continue to rise in cost every year. The difference between the price you pay now and the price you would have to pay in the future is yours to keep. There is no investment that is a complete and total hedge against inflation, but saving storing consumables for the future is. Second, you avoid tax on the inflationary increase. Even if you earned a rate of interest on your bank account equal to the rate of inflation, which is improbable, income taxes on your interest would still throw you into a loss position. buy a set of towels for $20, however, use them five years later when the price of the same towels has risen to $40, and you will have completely avoided the tax on your $20 inflationary "gain." Third, you avoid all risk inherent in the investment markets. There is no risk that $500 invested in tires for your car will be lost if the stock market crashes, or if the dollar plunges on foreign exchange markets. No broker can absorb your $500 by working your account for commissions and no inept management company can dissipate it. When you put your money into real things, your reliance on the performance of others is reduced dramatically. The Alpha Strategy also provides protection from risks other than inflation. Storing consumption items for the future is the ultimate hedge against recession or depression. When your job becomes insecure, what better assets could you own than a roof over your head, food in the cupboard, and clothes to wear? Your real-goods savings account will see you through good times and bad. Recession may hit, your income may be cut off, and yet prices probably will continue to rise. In a recession, you are better off holding consumable goods than holding depreciating currency. If the nation is thrown into a crisis in which the chain of supply breaks down - that is, if strikes, revolution, anarchy, natural disaster, or even war interrupted your ability to buy goods - then your cache of consumables would prove extremely valuable. Even if our social problems do not result in a breakdown of the production system, we will still have shortages. Inflation will lead us into price controls, and these will lead to shortages and rationing. A few years ago I would have had to explain how rapidly controls can disrupt supplies, but today it is not necessary - we are living among those very conditions. Everyone reading this book is familiar with the meat, plastic, paper, and gasoline shortages of the past decade, all of which were induced by government controls and regulations. As inflation worsens, controls will expand and shortages will spread to other products. The Alpha Strategist will have some protection against these shortages, a protection which is merely a fringe benefit, an insurance policy without cost, that accrues to anyone wise enough to store consumables. Benefits, however, extend far beyond the fact that you beat inflation, avoid taxes on gains, eliminate the risks of fluctuating markets, and insure your self against recession and shortages. You enjoy a substantial initial profit when common items are purchased in quantity. You can't expect a discount from your local grocer when you buy two bars of hand soap. Buy a case, however, and he might offer you a 10 percent to 20 percent discount. Buy multiple cases and you may find you can bypass the retail merchant and order direct from the wholesaler. It's not worth your time to shop around for a ten cent per box saving on facial tissue if you're only buying two or three boxes. if you buy four or five cases, however, a little shopping time is handsomely rewarded. The Alpha Strategist will usually enjoy an immediate profit of 10 percent to 40 percent through bulk purchasing. Money isn't your only savings. You also save time and effort. Merchants are acutely aware of the costs of handling individual items. They must hire personnel to open the cases, stock the shelves, count and price each item, ring up each one on the cash register, and then place them in paper bags. Selling merchandise by the case saves them time. Think for a moment about the time you spend on a single purchase, such as dish soap. You note that you're low and add it to your shopping list. You locate it in the supermarket, peruse the brands, check the price, and decide which size to buy. You pick it up, put it in the cart, and unload it again at the checkout counter. you wait while the checker rings it up and bags it, and then you tote it to the car, into the house, take it out of the bag and put it in the cupboard. Mixed in with all the other purchases, the time you spend on one item seems insignificant. Multiply this time by all the products you buy, and over all the years you buy them, however, and it is not insignificant at all. If you analyzed your time as a cost, as does any sensible businessman, you would be forced to devise a more efficient system. The Alpha Strategy include the system. The Problems If the benefits of this aspect of the Alpha Strategy jump to my mind, I imagine that the problems jump to yours. Let's look at a few of the things that might seem to make saving real goods impractical. Not everything you use in your daily life can be purchased in advance. It would be wonderful if you could store everything that you are ever going to use for the rest of your life. You could buy it all at today's prices (perhaps even on credit), put it away, and live happily, forever protected from money manipulators. it would be the perfect plan, provided you could figure out how to buy all the movies, legal services, milk, automobiles, magazines, electricity, lettuce, vacations, and so on that you'll ever consume. The problems with such a plan are obvious. The truth is that the majority of goods and services you consume cannot be stored away. The limits on your choice of Alpha Strategy items are as follows: Many items have short shelf lives. if you do not consume them in time, they disintegrate, rot or spoil. Shelf lives vary: some things last a day, and some for centuries. Only items with a long shelf life will do. Many items become technologically obsolete. Most of the items we use today were not even manufactured fifty years ago. Look in a Sears catalog from the turn of the century, and you'll find few things that you would still buy today (other than for their value as antiques). In the same way, many of the things we buy and use today won't be used ten, twenty, or thirty years from now. They will have been replaced by improved versions, or will no longer be necessary at all because of changes in technology. Just as it would have been folly for me to have purchased a lifetime supply of radio tubes for my original tube-type hi-fi set twenty years ago, so it would probably be stupid of me to buy a lifetime supply of wristwatches today. Who knows what technology will come up with? There is no sense in preventing yourself from being able to enjoy the benefits of change just because you are trying to use up an outdated item. Many things go out of style. In addition to technological obsolescence, we also must avoid design obsolescence. How dreary it would be to have a case of brand new bow ties tucked away, or five cases of hair oil, or two dozen pairs of pedal pushers. You might not live long enough for them to come into fashion again. Many things are bulky. Since space costs money, most people don't have an excessive amount of it. The physical bulk of some items adds to this problem. For example, it might cost more to store a ten-year supply of toilet paper than the inflation protection would be worth. In addition to the cost of storage space, there are other costs. You must prepare for the risk that all or part of your hoard may be stolen. Less likely, but still a risk, is that a fire, flood, hurricane, or earthquake may wipe out your cache. There is a further cost in the event you move. Once you have a cache of consumables, you'll have to show some restraint to avoid increasing your rate of consumption. My first adventure into stockpiling came when I bought what I thought would be a two-to-three-year supply of wine. The convenience of having it on hand each time we had a nice meal turned it into a one-year supply. It's easy to use something that is handy, especially when you have a great quantity of it. Like the child who eats the whole shopping bag full of Halloween candy, you may get sick when you realize your cost of living has risen due to the convenience of your stockpile. Finally, you'll need to recognize that the plan requires forethought, planning, and record-keeping, and these must be considered costs. You'll nee to review those things you consume regularly in order to decide what to buy. You'll need to figure out how much you use, and how large a supply to save. You'll want to spend time looking for the best places to buy, and you will have to create storage space. If all these potential limitations tend to check your enthusiasm for the first level of the Alpha Strategy, bear with me. I am going to cover each problem in detail in the pages to come, and in many cases you will find that an apparent drawback turns into a very real benefit. The Morality of True Saving Saving real goods in times of plenty is looked upon as an eccentric, but innocent, aberration. In times of shortage, however, people's feelings change. If you choose to use the Alpha Strategy to protect the assets you've worked so hard to acquire, and shortages occur, you can expect to have to defend yourself from attack on the grounds that what you're doing is selfish, immoral, and antisocial. Like it or not, you live in a world where most individuals believe that wealth should be shared, that the fruits of your labor do not belong to you alone, and that you should not be free to enjoy them as you see fit. If any of the goods that you save become scarce in the marketplace, you will be labeled a hoarder. If you are old enough to remember the shortages of certain consumer goods that occurred during World War II and the Korean War, you also remember the social contempt in which anyone who stockpiled was held. When people bought larger than normal quantities of un-rationed goods, they were confronted with the scowls of the clerks at the checkout counters, whispered or shouted insults from those "good citizens" who wouldn't do such a thing, threats, and sometimes, even violence. Those who had the forethought to have stocked up on things like sugar, chewing gum, silk stockings, and gasoline while these goods were still available in the stores were not admired for their good sense; they were vilified for selfishness. Saving, or hoarding, if you will, was seen as a trick to avoid one's obligation to sacrifice. How could you share in the hardship of war if you lived fat on your stockpiled goods? Before you succumb to the emotional twaddle that might be heaped on you for stockpiling during the next period of shortages, let's dissect the arguments against stockpiling to see if they really make sense. Shortages result from two basic causes. First, natural disasters that destroy goods or interrupt the chain of distribution cause temporary shortages. But these shortages occur because of inefficiency in the marketplace, and not because of the lower supply. There appears to be a shortage in these situations because merchants do not have time to adjust their prices upward to reflect the lower supply. They leave their goods priced at levels appropriate to times when supplies were abundant, and, consequently demand wipes out their stocks. In an efficient free market, price always rises until the supply of a product and the demand for that product are equal. The only causes of permanent shortages are price controls. Price controls cause shortages whenever the legal price is lower than the free-market price would be. Those producers who are forced to sell at too low a price stop offering their products on the market. Price controls can occur during wartime or peacetime. During war, the government usually commandeers a major portion of production for the war effort, leaving the population to bid for the remaining goods. The result is rising prices. To meet the public outcry against rising prices, politicians institute price controls, and controls drive producers out of business. The result is shortages. Peacetime price controls are the end result of inflation, as I pointed out earlier. The government confiscates goods the same way it does in war, only this time it's done to meet the demands of special interest lobbies and voters. The government pays for these goods by borrowing, and then the Federal Reserve monetizes the government debt. As the new money flows into circulation, prices begin to rise. The people demand lower prices, and government responds with price controls. Price controls eliminate the profit in producing, and shortages quickly follow. Keep this apparent paradox in mind: shortages have absolutely nothing to do with the quantity of a product available. They result only from a product being priced too low. Any product priced too low will disappear from the shelves, and any product that is not, will not. If scarcity could cause shortages, you would have to wait twenty years to buy a Rolls Royce, since they only make a few each week. But you don't have to wait. You can pick yours up tomorrow if you can pay the price. We may pinpoint the major cause of shortages as government interference in the free pricing of goods, may still feel that stockpiling is unfair and destructive if it leaves some without goods. After all, those who find the shelves bare are not personally to blame for government price controls. Is storing consumables for future use unfair if it leaves some people without goods? The belief that saving is immoral during periods of shortages stems partly from our religious and cultural heritage, and partly from envy. We have been taught that selfishness is wrong, and that sharing is good. Parents attempt to train their children to be unselfish by praising altruistic behavior and punishing selfishness. They point to selfsacrificing individuals as models to be emulated. people like Mother Mary Teresa who cares for the poor in India, and Albert Schweitzer, the late medical missionary who devoted his life to treating the poor natives in Africa, hold special places of honor in the modern world. Politicians are fond of referring to themselves as public servants, and protest loudly when it is suggested that they occasionally act in their own self-interest. The hue and cry against selfishness has grown so loud in the world that even our major corporations spend millions of advertising dollars attempting to convince us that their most important business objectives are a clean environment, opportunities for minorities, and service for their customers. When profit is mentioned, it is almost always preceded by the word fair, and is accompanied by an implied apology. In other nations the campaign against selfishness has become a nightmare. Socialism and communism are dedicated to the idea that no one should enjoy a larger amount of property than anyone else. In fact, these systems are based on the complete abolition of private ownership of property, and thus depend on each individual being completely altruistic. All evidence available to an objective observer, however, indicates that humans are selfish, not altruistic. They have acted, do act, and will act in whatever way seems to them to most effectively further their own objectives. Economic Law Number 1 - An individual's primary incentive to work is to increase his wealth - is a recognition and statement of this fact. Different people may value different things, and some may devote their lives to working for charitable causes simply because they value the veneration and admiration of others more than they value the gains they would make by working for themselves, but the underlying motivation is most likely personal gain. If we really are as selfish as the evidence indicates, and I submit it as a premise without supplying the evidence, then the question is: Is individual selfishness bad for society, and should we use public opinion and legislation to control it? If our objective is a higher standard of living for society, then it is in the best interest of the majority to recognize the nature of the human being, and to allow each individual full latitude to pursue his selfish interests, providing he does not interfere with anyone else. In the case of saving real goods, this means accepting it as the right of the individual. let me explain why saving is not only harmless to society, but is actually beneficial. If I am not a thief, and I am not rich by inheritance or gift, I will have to produce some product in order to trade for what I need. If you grow potatoes and want shoes, and the cobbler makes shoes and wants potatoes, you exchange. The cobbler is happy because he gets what he wants, namely potatoes; and you're happy because you get shoes. It is clear that others in your town can get shoes in the same way - by producing something to exchange with the cobbler. The cobbler will make as many shoes as his customers are willing to pay for. Perhaps you see problems coming later: for example, you feel that there may be a shortage of leather, or that the cobbler is going to move away. To hedge against this, you decide to buy ten pairs of shoes now. To do so, you must either grow more potatoes, which means working harder; or you must go without some other product that you would have purchased with your potatoes. You choose extra shoes over other products because you believe that you will benefit in the long run. Two things should be noted about this trade. First, by buying ten pairs of shoes, you are not taking anything from the cobbler by force; you are benefiting him. How do we know? Because the cobbler voluntarily makes the trade. He wouldn't make it if he didn't think it improved his position. finally, you are not taking anything from anyone else by force, either. Anyone else could buy those shoes just as well as you, only the others don't see it to be in their best interest to do so. Either they are spending their production on something they value more, or they simply aren't producing enough to be able to afford shoes. If other people take the position that you shouldn't buy the shoes, then they are advocating less production for your community. You won't work as hard growing potatoes if you can't trade them for the thing you value, and the cobbler won't work as hard making shoes since he can't find a buyer. The others won't be any better off, and both the cobbler and you will be worse off. In a free market, when one person saves, it doesn't hurt anyone else. It stimulates the production of the stored item. In an unfree market, however, people are affected differently. If the government fixes the price at which shoes can be sold, and that price is so low that the cobbler is discouraged from producing them, there will be a shortage of shoes. Any buyer who finds shoes at the controlled price is getting a bargain, and would be wise to stock up. If you buy up the remaining supply of shoes, does the fact that the other citizens are deprived of shoes mean you have acted immorally? Who created the shoes? The cobbler. Does the cobbler have the right to dispose of his property in any way he sees fit? He should. If he doesn't, he will tend to produce less, and society's standard of living will fall. Basic economic law tells us so. If he chooses to exchange with you, voluntarily, how can anyone else claim they have been injured? Neither you, nor the cobbler, nor the others have used force up to this point. All exchanges have been voluntary. However, the good citizens may feel injured, and they may decide to appeal to the government to ration the remaining shoes, thus forcibly preventing you and the cobbler from making a voluntary exchange in the future. Their anger at you, the saver, is misdirected. Someone has used force against them, and that is the individual against whom their anger should be directed. They lack shoes because the government has used force to hold down the price of shoes. It is the individual or individuals who demanded the price controls who are guilty. The cause of the problem is the price control, not the saver. Price controls result from public pressure. If shoes have been price controlled it is because the public has insisted that they should have the right to buy them at a price lower than the price at which the cobbler would voluntarily sell them. they have instituted force against him via the government. When this use of force has eliminated shoes altogether, they then turn against the person who was lucky enough to buy them. Viewed in the light of common sense, the saver does not hurt his community. If any damage is done, it is the result of the institution of government force, and the responsible parties are those that advocate the use of this force. The saver is merely looking out for his won self-interest, and the only complaint that others should have is that they were not wise enough to take advantage of the same opportunity when it was available. There is another argument against saving real goods that surfaces whenever increases in the money supply result in rampant inflation. The politicians are anxious to appear to be inflation fighters, but they are loathe to admit that it is the increasing quantity of money that is causing rising prices. They camouflage their guilt by suggesting that the public is at fault for buying so many goods. If the public would start saving more (instead of spending so much), prices would stop rising at such a rapid pace. The political leaders admonish us to curtail spending and borrowing, and to save more. They even pass laws limiting our access to credit, and our right to spend the money they so blithely print. To them, the saver is the culprit, and his desire to get rid of dollars and buy real goods is tantamount to treason. Certainly, this political argument is right in one respect. The money supply could be increased at any rate, and prices would not go up, provided the public could be conned into holding that money and not spending it. But claiming that rising prices are a result of people spending money is to confuse cause with effect. It is the falling value of money that causes us to abandon it in favor of real goods. We spend it because it's losing its value; it doesn't lose its value because we spend it. Pity the poor dupes who follow the President's admonition to save more during times of rampant inflation. He is handing them the knife with which they cut their own throats. There is one last argument against saving real goods that might be used, and that is that saving consumables diminishes the flow of savings into capital goods (tools and factories), and thus slows down the growth of production. In order to increase his standard of living, man must save a portion of all his labor for the production of tools, that is, capital goods. It is only the accumulation of tools that enables his standard of living to rise. Any society which consumes all that it produces cannot advance, for it cannot develop the tools necessary to increase production. If you were cast away on the island we talked about earlier, and did not spend a portion of your time fashioning an axe, a shovel, a bucket, and other essential tools, you would be lucky to survive at all. Tools are necessary, not only for survival but also as the only means to an increasing standard of living. To illustrate why saving of consumer goods is not responsible for a reduction in capital investment, let us return to your imaginary island. Your friend Maynard, whom you trusted, turns out to be a lazy schemer. If he convinces you that certain kinds of work will better your condition, when in reality it only benefits him, then the more you labor, the less you will have for yourself and the greater is Maynard's incentive not be productive. If he can fool you into working for him, why should he work? If more people arrive on the island and observe you laboring and Maynard relaxing at your expense, will they be likely to follow your example and become laborers themselves? Or, will they try to follow Maynard's example? Obviously, they will search for Maynard's secret to success. We all look for the easiest way to get the things we want. The greater the success enjoyed by the con men, the greater will be the number of con men. people choose a life of theft in a misguided attempt to emulate the success of the thieves, with the consequence that production falls. This analogy is fully applicable to our problems of today. Individuals have found that they can successfully use the force of law to steal from other individuals under the guise of "need," "justice," and "the good of society." Millions of individuals in our society have found that politicians are happy to give them benefits by tapping the monetary system through inflation. This plunder is so subtle that the beneficiaries themselves do not understand that the money is coming directly out of the pockets of the producers and savers. This method of plunder drains directly from the artery of capital, and thus the savers and investors are really the ones who fund inflation. Gradually but surely, this drain collapses the entire economic structure of society. When the drain becomes great enough to begin to cause major distortions in the economy, the politicians do not cut the benefits off to those who have come to expect them. Instead they try to convince their victims that it is in the victims' own interest to save paper claims even more, and to replenish the capital of the country with those paper savings. Those who try to escape and refuse to retain their savings in a form that can be bled by these confidence men are called hoarders, traitors, greedy, selfish, and anti-American. The truth is that in a society suffering from terminal inflation, paper savings do not wind up adding to the tools of production, anyway. Paper savings become nothing more than a method of transferring real goods from those who produce them to those who do not. paper savings only nourish and sustain the disease. There is no damage to society when you or any individual decides to convert surplus labor into consumption goods and store them away for the future. On the contrary, by accumulating things that you will be able to consume later, you have taken the one and only step that can bring an end to the inflation that is destroying the capital base of industry. You are cutting off the source of wealth that has been funding the thieves. When the sickness ends, you can live off your stored goods while directing all of your new production into honest savings - savings that will not be used to feed the vampire of inflation but which can be converted into tools of production. Saving real goods through the intelligent application of the Alpha Strategy is not only logical and moral for the individual in the short run, it is essential for his economic survival in the long run.
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We should reserve a storehouse for ourselves, altogether ours,
John Pugsley is chairman of