Financial crisis ethics

Folks, we have to talk.

I am an honest guy and I try to be ethical.

My ethical code

My personal code of ethics, which was above the door and framed in each of my sons’ rooms when they were growing up is

• Tell the truth.
• Keep your promises.
• Treat others the way you want to be treated.

Within my real estate profession, I add a fourth tenet:

Do not enter into sophisticated contracts with unsophisticated people.

This is well-known in the securities industry as the “Know your customer” Rule or the “Suitability” criterion

Throw up your hands?

Since 2010, I have been writing about how to prepare for severe financial crises. This has attracted to me a group of readers who are extremely cynical, maybe somewhat paranoid, and too quick on the trigger to claim, “To hell with the law and ethics, it’s every man for himself.”

A steady series of emails to the effect that “If we have hyperinflation it will be Armageddon anyway so why prepare” caused me to write an article titled “Should you just throw up your hands at the probability of hyperinflation & depression?” That seemed to have the desired effect of ending the “why bother?” emails.

No ethics or law abiding in a crisis

More recently I am getting emails with the message “you say the government is dishonest and stealing from us so why should we worry about things like paying capital gains taxes on gold?” Government and politicians have been dishonest since the beginning of time. And the citizens have refrained from following that example. All that is different now is they have become more brazen and are pushing their tentacles out farther and farther into more and more of our lives. I recommended that you get Anna Eisenmenger’s diary from your library back in March. I recommend it again. It is an actual case history on the morality and practicality of obeying the immoral laws that are passed during financial crises.

In that diary of her experience living through Austria in 1914-1924, which included hyperinflation, Anna, a formerly law-abiding, pillar-of-the-community, prominent doctor’s wife, admitted to breaking the law repeatedly. She justified her law-breaking on the grounds that the laws were impossible to comply with if you wished to avoid starvation or death from illness or injury.

Actual deaths

Her aunt, who lived with her, had trouble breaking her life-long, Germanic habit of abiding by laws and refused to eat more food than authorized by her ration coupons. But the ration coupon amount was too little to live on—not in an subjective way but without any question. I surmise she violated the rules at times and ate some of Anna’s black market illegal food, but not enough to avoid dying, apparently from a combination of malnutrition and lack of coal to stay warm. Anna’s daughter had no such qualms about the legal limits on food, but she also died of the combination of malnutrition and cold.

So Anna’s rationalization of law-breaking was not some anticipatory cynicism or everybody’s-doing-it relativism but a real, right-now, life-and-death situation with actual, not hypothetical, deaths.

You cannot obey immoral or impossible laws in a desperate crisis

I have been thinking that the good-guy leaders I hope would emerge from the coming financial debt crisis need to set forth a list of laws that citizens should feel free to violate during the crisis while making it clear that good people should not adopt an anything-goes attitude and violate all laws.

I would also draw your attention to an article I wrote for military personnel titled “The morality of obeying stupid orders.”

I will now try to set forth the general list of immoral laws which you should not obey other than to avoid trouble with the law.

• all price limits (ceilings like rent control and floors like the minimum wage)
• laws that limit your movement or that of your capital (capital controls) across domestic or international borders
• laws that make normal economic activity illegal and thereby create black markets (where Anna and any other Vienna resident “shopped” if they wanted to survive)
• laws that tell you how to run your business beyond the ethical code I set forth above
• laws that restrict your right to make a living ethically (typically were passed at the behest of competitors who want competition held back like licensing laws—see the book The Right to Earn a Living)
• laws that prevent you from getting needed food, water, medicine, sanitation, medical treatment, fuel (the laws Anna violated)
• tax laws that tax you on nonexistent gains like where the value of the dollar fell and your home value kept pace in terms of purchasing power but because capital gains are not indexed in the U.S. you are falsely said to have earned a gain triggering gains tax

Apparently, whole lot of current cynical, survivalist, paranoid, people are already violating laws on taxes, guns, precious metal capital gains, and so on. And they are citing the fact that the government is bankrupting the nation and using taxpayers’ money to buy votes and all that to excuse their illegal behavior. As I said in a recent gold article, not my crowd.

Obviously, there is a practical problem with that: the possibility of getting caught and the costs of avoiding getting caught and the psychological stress of worrying about getting caught.

Too many laws

I have been thinking about writing an article about how the Democrats, with the perennial acquiescence of the Republicans, are creating too many laws and regulations. “If you have 10,000 regulations,” Winston Churchill said, “you destroy all respect for law.” According to John Stossel, the number of new U.S. federal regulations is now 10,000 a year!

Prohibition almost destroyed respect for the rule of law in this country. It did turn the Mafia into a huge crime organization that did not disappear when Prohibition ended. The prohibition on recreational drugs of the last 50 years has had a similar effect and will probably have a similar end.

I know a little bit about lots of regulation. I lived under such a regime at West Point as a cadet there for four years. Then I was an Army officer where I saw total disrespect for law caused by having far too many regulations and inability to enforce them. The Army was trying to bluff its own men into obeying an impossible amount of regs, many contradictory or conflicting with each other. (West Point had too many regs but not as bad at the Army and at West Point they were enforced—at least when I was there. On the other hand, I and other West Point grads still have nightmares about living under that oppressive regimentation 45 years after graduation. I have no nightmares about anything else like, say, my tour in Vietnam.)

Then I had partial dictatorial powers as an Army officer, landlord, property manager, and coach. I learned, and this is explained in detail in my books on football and baseball coaching and How to Manage Residential Property for Maximum Cash Flow and Resale Value, that rules are required in all human organizations.

But those rules must be

• as few as possible
• reasonable
• clearly explained
• strictly enforced

If you do that, it’s like magic. Once the people in the group are convinced you strictly enforce the rules, they obey them instinctively. I saw that happen to us at West Point. It’s amazing how well behaved people can be when they have to. For example, I was late once in four years at West Point and we had to be on time to the second hand hitting the 12 or the last note of the bugle call “Assembly” about eight times a day. And the only time I was late was when I got two conflicting orders and obeyed the wrong one.

Accidental president

I am writing a novel about a guy like me who accidentally becomes president of the U.S. One of the things he does is tell the cabinet departments to identify all the conflicting laws, after which he announces which will be enforced and which will not, to howls from Congress. He also directs his cabinet departments to list all the laws they are each required to enforce, how much time, staff, and money each requires. Then he prioritizes the laws that can be enforced with existing time, staff and budget and announces the list of the laws that will not be enforced under the legal doctrine of impossibility. “Congress is very fond of passing new laws,” he tells the American people. “But they are less fond of funding the enforcement of them adequately. We cannot perform loaves and fishes miracles. And to prevent loss of respect for laws, I have announced which ones will be enforced given our insufficient resources to enforce them all.”

Again Congress howls. They like neither his policy of not enforcing all laws nor which ones he chooses to enforce and not enforce.

“My predecessors did not enforce all laws either. It is impossible. The only difference is I am honestly admitting we cannot enforce them all and telling you which ones we will enforce.”

My unelected president’s goal is to restore prosperity to the U.S. and he knows that requires respect for the rule of law.

When we get hyperinflation, we will also get laws governing every price in America, laws governing foreign travel and moving your money into foreign assets, laws governing how much food and fuel you are allowed to stockpile, etc. etc. These will be impossible to enforce, will gum up the economy severely to the extent that they are enforced, and will kill respect for rule of law in this country. All of which will kill prosperity and make it much harder to restore prosperity if anyone in charge actually wants to do that rather than just win election to be president of the financial rubble.

How about avoiding the situation

Then there is the possibility of avoiding the situation.

That is how I and most Americans deal with the Kafkaesque nightmare that is the federal government. I was in it for eight years at West Point and the Army, then I got out. Most Americans vaguely are aware that bureaucracy sucks and avoid working there. But increasingly, and greatly during hyperinflation, we essentially all end up being treated like low-level federal government employees—or minimum security prisoners with prison jobs—whether we like it or not. I got out of owning apartment bulidings in part because there were so many new laws and regulations I felt like I was back in the Army, only without the pay and benefits.

It is now being said almost daily in the media that this impending financial crisis is the most well-known-to-be-coming financial crisis in the history of the world.

Quite so.

Few anticipated the Great Depression before it happened. And even fewer had the courage of their convictions to take the indicated steps to protect themselves.

The same is true of the 2008 subprime crisis. And you can read about most of the few guys who had the courage of their convictions to take the indicated steps in Michael Lewis’s excellent book The Big Short. His other book Boomerang belatedly tells about one of the guys he left out of The Big Short, the guy who recently bought two million dollars worth of nickels. Those guys got filthy rich as a result of having the necessary foresight and courage of their convictions and acting on them.

Then there’s you. You are alive and still affluent and healthy on the eve of probably the worst financial crisis in U.S. history: the meltdown of the U.S. dollar caused by the sequence of the bond market no longer buying U.S. bonds followed by hyperinflation, price controls, and capital controls, followed by massive cuts in federal spending and a brand new U.S. currency that you will be given little of in return for your old dollars that need replacing.

You are warned about it daily on TV in the print media, on the Internet, and here at my Web site. To an extent I am preaching to the choir now, but a lot of you are just blinking in disbelief at it all and not taking steps to protect yourself. A financial crisis we can see coming a mile away is a Godsend if we have to have a financial crisis—unless you throw away the opporunity to prepare for it. I can see hundreds of millions of Americans spending the rest of their lives wondering, “What was I thinking? It was on the news every night for years and I did nothing!”

Big picture is clear

The details of the crisis are not pin-pointable. But the general outline is. I have told you about the historical parallel episodes again and again especially in my book How to Protect Your Life Savings from Hyperinflation & Depression, 2nd Edition

which has a history chapter and detailed time line of this same sort of crap going back to 4,000 BC.

You know it’s coming, unlike 1929 and 2008

The good news is we can see this coming from miles away and we probably have time to save ourselves by rearranging our financial affairs. The further good news is that while the vast majority of your fellow Americans know nothing about the sort of advice on this web site and in my book, you are informed about what’s going on and how to save your life savings. Yet there you stand, like a deer in headlights, applying the age-old “remedy” of denial to a classic stitch-in-time-saves-nine problem.

In my book, I likened it to standing on a train track when people are yelling at you that the train is coming. You can hear it, see it, and feel it—if you read my articles—yet you cling to the belief that somehow it is not coming so you need not get off the track.

I am not certain of what will happen, but my best guess is that I and my wife will take an extended vacation to countries where we have bank accounts in the local currencies. Perhaps our sons, daughter-in-law and granddaughter will consolidate into our current home and cope the best they can. They have relatively few assets to worry about because they are young. Maybe we will have to help them leave the U.S.

But if it goes like that, we will not be violating laws. We will be where Anna Eisenmenger and her family should have been: outside of the hyperinflated country. I will also investigate some sort of house in the country where one can live off the land, i.e. vegetable garden, well, septic system, forest for firewood, fish and game, and some livestock like a milk cow and egg-laying chickens, etc.

Save not only money but also integrity

One of the reasons for my preparations is to avoid having to live the outside-the-law, “solitary, poor, nasty, brutish, and short,” Hobbsean life that Anna Eisenmenger and her family were forced to live in hyperinflated Austria. I prepare to save not only my life savings but also my integrity and ethics and that of my family.

In The Sound of Music, the von Trapp family had a nice life in Austria. Then came the Anschluss, the annexation of Austria by Hitler’s Germany. But they darned well pulled the ejection handle when the Nazis arrived and sneaked over the mountains into neutral Switzerland. The von Trapp story was real albeit Hollywooded up. The actual von Trapps were doing a concert tour in Italy and the U.S. when the Nazis confiscated their home. They stayed outside of Austria settling in Stowe, Vermont. Julie Andrews’ character Maria von Trapp died there in 1987. Had they remained in Austria for the war, there is a very good chance they would have been ordered to do unethical things like help perpetrate the Holocaust. Could they morally argue they had no choice like Anna violating anti-black market laws? Yes, but far better they go to Switzerland (in the play and movie) or stay in America in real life. When it comes to living in the hell of hyperinflation, an ounce of prevention is worth a ton of becoming an outlaw to survive.

From about 1914 to around 1947, Austria was hell because of two world wars and the intervening hyperinflation. I tried to find out what happened to Anna and her family after her diary ended in 1924, but could not. I really hope they did not have to go through World War II there, too. I wonder if they could have even withstood that additional physical and psychological strain.

All is normal just across the river, mountain, or street

But the main point is that when Austria and Germany and Israel and Argentina and Zimbabwe and all the other countries that were so evil and/or stupid as to inflict hyperinflation on themselves were suffering, just across the border, in places like Switzerland and Brazil and South Africa, everything was normal in terms of monetary stability. To a great extent, the same was relatively true of people living within the hyperinflated countries on farms rather than suffering in the cites like Vienna resident Eisenmenger.

I do not recommend the tax cheat, contraband gold, smuggling, black market, contraband hoard of food and fuel, sneak across the border, unable to make a living, worthless pensions and U.S. bank accounts, starving, freezing hell of living in a hyperinflation country’s cities or suburbs. And I surely agree that you must violate the laws there if complying with them means starving or otherwise suffering intolerably.

Ounce of prevention…

But I recommend you take steps now to prevent ever being in that situation, not that you descend now into some outlaw existence in anticipation of living in such a country. To cite one specific, gold is a part of the illegal underworld in hyperinflated countries—illegal contraband and only can be used in secret black market transactions. It keeps you in that situation because you can only get it out of the country by smuggling it past cusoms officers, who will confiscate it if they find it. Foreign currency in other, non-hyperinflated countries, on the other hand, is a way to escape that world. As is a farm within the hyperinflated country that might cost about as much as the gold today. Going on a foreign vacation is typically not outlawed in hyperinflated countries (although taking much money with you when you go might be). Nor is growing a vegetable garden, grain crops, and raising livestock on a farm within the hyperinflated country. But gold and stockpiles of food and fuel and that sort of thing are typically outlawed by the governments that hyperinflate. Read Anna’s diary to get a day-by-day account of hiding coal from the government inspectors, being cheated by fake soap on black market, raising chickens for eggs and rabbits to eat in the basement, etc.

One of my readers read to his grandmother my accounts about Anna hiding food from visitors for fear of being ratted out to the authorities. She told him she had to hide her sugar from visitors to her house during World War II in the U.S. because it was rationed and rationing restricts both how much you can get and how much you are allowed to have on hand at any give time (hardly any). She had more so she could can fruits for the winter. I repeat, that happened here in the U.S. in the early 1940s.

In an article I wrote about my hike with my brother in the Grand Canyon in November of 2011, I repeated the mantra “low probability is not a risk management technique” over and over. Here, I offer a similar mantra: lying, cheating, and stealing are a last resort in life-and-death situations, not a proper plan for a well-advertised, financial crisis that you can remove yourself and many of your assets from the path of.

John T. Reed