A Little Game of Old Maid, Part III

By Robert Ringer

(The content of this series of articles has been taken from my 1982 book “Civilization.” Part II covered what I said in my book about banks and savings and loans. Now, let’s take a look at what I said about some other Capital Black Holes-insurance companies, government and corporate bonds, mortgages, Treasury bills, and money market funds.)

Insurance Companies

Insurance companies are not much better off than banks. First, they have a majority of their assets tied up in bonds and mortgages, which is like the blind leading the blind. Second, as times get tougher, more and more people will want to borrow on the cash value of their life insurance policies.

This money is lent at rates far below the going interest rates in the financial markets, which, of course, is a disaster for the insurance companies. If too many people decide to borrow the amounts they are legally entitled to, insurance companies, like banks, are forced to dump securities and mortgages at depressed market prices, which can lead to insolvency.

Government and Corporate Bonds

Government and corporate bonds are a joke among sophisticated investors. On the one hand, the federal government is a hopeless deadbeat, along with its state and municipal partners in crime. On the other hand, these bankrupt entities, in an effort to put out their own fires, continue to devastate corporations (and thus corporate bonds) through high taxes.

Squeezed by these onerous taxes-along with price inflation, piranha-like trade unions, falling demand for their products, and consumer, health, and environmental regulations, among other problems
- the balance sheets of most large corporations are looking more and more like they just came out of an alley fight with Bigfoot.

While it is true that whenever interest rates drop sufficiently short term (bond prices rise when interest rates decline), you might be able to make enough of a spread (through an increase in bond prices) to cover taxes and price inflation, it’s pretty much wishful thinking.

First, the long term direction of interest rates is up ─ way up ─ and you would have to be a lot more omniscient than the so called experts to catch so brief a downward trend before it bottoms out and starts moving in the other direction again.

Second, it’s doubtful that any such downward trend would be significant enough to bring bond prices up to a profitable level. So why bother to take the risk-especially when you know that, even if you win, you will be paid off in more paper? Besides, this book is concerned with long term survival, not speculation.

Mortgages

The “entity” behind a mortgage, or deed of trust, is a piece of real estate, and the problems associated with real estate, which will be discussed in more detail later, are many. For now, let it suffice to say that most mortgages today exceed the true value of the properties that underlie them.

Treasury Bills and Money Market Funds

Finally, I should mention two Capital Black Hole favorites, Treasury bills and money market funds. Treasury bills mask the realities of lending money to the government long term, because they are only ninety day instruments.

However, if a person were to continually roll over his money in T bills, “the house” would eventually wipe him out through price inflation. Short term visits for your money are okay, but don’t make the mistake of getting overly relaxed while your capital is in the hands of the government. And never forget that Treasury bills pay off in paper.

Money market funds are really nothing more than an extra middleman, their sole assets consisting of the paper of other Capital Black Holes. Their advantages are twofold.

First, because they deal in large sums of money, they are able to command high rates of interest and thus pay relatively high yields. Second, they offer immediate redemption without penalties.

If you wish to park some capital in a fund for a short period of time (and do make sure that it’s a short term proposition), you should make certain to choose a fund with a high grade portfolio (relatively speaking, that is). In this respect, money-market funds invested solely in Treasury bills are safest. Those in CDs and commercial paper (unsecured loans to major corporations) are the most dangerous.

In any event, never forget that money market funds, like Treasury bills and all other Capital Black Holes, pay off only in paper and will, therefore, ultimately cause your capital to evaporate.

In Part IV, we’ll take a look at what I had to say back in 1982 about “Capital Crapshoots” and a couple of “Capital Question Marks.”

______________________________

Today’s Reflections:

If you have difficulty comprehending just how overvalued real estate is nowadays, remember that I wrote the words (above) “most mortgages today exceed the true value of the property that underlies them” twenty-seven years ago! And that was before Barney, Fannie, and Freddie jammed the lending pedal to the floor.

It should also help you understand why I’ve been saying for three decades that the U.S. is in an “invisible depression.” Had the depression been allowed to take its natural course and become visible for all to see, America might now be financially sound-and capitalism would be sitting on its rightful throne.