Ron Paul’s Financial Bubble Theory
Ron Paul believes that we are currently looking at the greatest financial bubble in history. Is his assessment correct? What is he doing about it? What are my thoughts?
Before we take a look at this whole bubble situation, I want you to take a second and remind you to give the blog a thumbs up and share it with your friends and you can also check out the Making blogs for you guys is a blast, but it takes a lot of time, and your support is what keeps me going.
Ron Paul is convinced that we are currently in the most massive financial bubble ever. Yes, you heard that right. And, well, if you have been keeping up with the latest news from the financial world, you have probably picked up on the commotion.
Ron Paul is convinced that we are facing the (and I quote here) “biggest financial bubble in the history of monetary policy for the whole world”. Mr Paul believes that once the bubble bursts, the correction will be quite violent. And, well, if you have been keeping up with the news, coming from the financial world, you have probably noticed quite a bit of commotion. Even before the pandemic and following lockdowns shook up the entire world, the economic situation was already in a state of disarray.
But why does he believe this?
Unlimited quantitative easing
During the initial stages of the pandemic, the Fed announced that they would allow unlimited quantitative easing to support the economy. Which, if you think about it, was the only real choice. I mean, if everything is going downhill with the speed that it was, the system is almost guaranteed to crash and burn. The solution? You put more money into it.
Or, as they put it, purchasing of securities and agency mortgage-backed securities in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broaden financial conditions and the economy.
So, with no limit to the amount of money that can be printed, the Fed’s balance sheets are pretty much off the charts, with over 7 trillion dollars.
This lowers the interest rates, allowing the government to … borrow even more money. You can see how this can be problematic in the long run.
Ron Paul says that (and, again – I quote here) “they created 3 trillion dollars to bail out the first part of the downturn, and now they are talking about another $1-$2 trillion for the next episode.” He then goes to suggest that people should prepare for the consequences of this.
Not long ago, Forbes decided to look into the stimulus checks. In their article, we can see that 59% of the stimulus bills went towards covering expenses, 13.3% – towards debt and 11.98% for savings and investments. Companies and banks are receiving money that they wouldn’t have access to, debts and loans are being paid off, and people are investing in the stock market. All, with money that was not going to be available under normal circumstances.
It’s all artificial.
And it creates this colossal bubble that Mr Paul is talking about.
What will happen when it finally bursts?
Well, Ron Paul has an answer for that as well:
People are going to get a lot poorer. He goes on to point out that his efforts to (quote here) “convince people that the wealth they are using comes out of a printing press” have been largely unsuccessful. Most people are currently living beyond their means. As the money circulates, individuals benefit from the low interest rates and can make big purchases – real estate, stock market and so on.
Dr Paul is convinced that “It’s a system that can’t last in the long-term”. And, I don’t know about you, but this makes a lot of sense to me. Here’s the example that he uses:
Imagine that you didn’t have to go to work. Imagine you could just get money from somewhere (a loan) every month. You don’t have to worry about bills or living expenses. You can do whatever you want, whenever you want, and you are still going to get a bunch of money to spend. Sounds pretty great, doesn’t it?
Okay, and what happens when your creditor realises that you don’t plan on ever paying back what you owe?
They stop giving you the money. And, if you don’t have anything to fall back on, things are going to get bad.
This is precisely what is happening with the economy, says Ron Paul. We are already seeing the effects of this, and many people are a lot poorer than they used to be.
The United States Federal Reserve (commonly referred to as “the Fed”, for those of you unfamiliar with the terminology) aims for 2% inflation year-to-year. Or, rather, they used to aim for 2 percent. Recently, they have decided to change things up a bit. Now, their goal is to average a 2% inflation rate. What does this mean? This means that they are willing to allow inflation to go higher or lower, as the situation demands. They believe that this will result in a stronger labour market and benefit the broader economic situation.
So far, so good, right?
Well … not exactly.
While this might sound good on paper (or, I guess – on video), there are a lot of issues that can come from this change.
Ron Paul, for example, does not like the idea at all.
And why is that?
To answer this, we need to go back to the basics. Now, I know that most of you are familiar with the basic terms in finance, but please bear with me here.
Let’s look at the definition of inflation.
“Inflation means an increase in prices and fall in the purchasing value of money.”
So, this essentially means that with time, cash becomes less valuable if you hold on to it.
Ron Paul believes that the purpose of the policy is just that – to decrease the value of the dollar as much as possible. And, with bank interest rates being as low as they are, keeping your money in the bank does nothing for you. If inflation keeps going strong, it ends up hurting your financial situation more than anything.
So, if we take inflation and we combine it with low interest rates, we come to the logical conclusion – keeping cash in the bank is a bad idea.
Naturally, this change forces people to invest their money into something, because they don’t want it to lose value.
For many, the first choice is obviously the stock market.
So, a ton of people turn to the Stock Market. They go in, and they start buying.
Now, if you’ve been an investor for some time, you can already guess what the result of this is:
That’s right – the stock prices go up because the demand goes up.
If you were to open up yahoo finance and take a look at the S&P 500 index, you would see that the Stock Market has made a miraculous recovery – it’s up more than 45% over the past seven months.
So, even though the economy is still really struggling, the Stock Market is somehow doing great.
“But, Antoaneta, not everyone wants to be on the Stock Market. What about all of those people? Where are they going? What are they doing? Are you sure that this theory is even plausible?”
Well, first of all, of course, I realise that not everyone is going to jump into Stocks. This is why I said “many people”. I never claimed that every single person out there would hop in here with us. And Ron Paul realises that as well.
For those who aren’t interested in stocks, there are plenty of other fields to invest in. Like real estate, for example. I am also an avid real estate investor, and I do keep up with the changes in that market as well. What have I noticed?
I have noticed the exact same thing over there!
The Real estate market is closing in on its all-time-highs as well.
Low interest rates, easy loans, no point to keep your money in the bank …
Yeah, the formula checks out!
And the reason for all of these issues is very simple – we are living way beyond our means.
The US abandoned the gold standard on August 15th 1971, under President Nixon. This change allowed them to print out as much money as they needed (since it was no longer “tied” to anything). I’m sure that many of you have seen at least one blog where people say that modern-day money in the US might as well be worthless pieces of paper. This is the reason for it.
Thanks to this, the USA can go into as much debt as they want (or, well … theoretically, at least). They can buy and produce more than they were able to ever before. It allows their economy to function in overdrive mode.
Recently, however, this tendency of people to live way above their means has given rise to a huge artificial bubble and inflation.
And Ron Paul’s solution to all of this is?
Living below our means.
He is confident that people are going to get a lot poorer in the long run. And, unless we learn how to live efficiently and well-below our means, we’re going to have a really, really bad time.
What does Ron Paul invest in?
And, before we wrap up this post, let’s have a quick look at what Ron Paul likes to invest in. Now, since he isn’t a mutual fund manager, he isn’t required to tell anyone what he invests in. However, a couple of years back (in 2011) he did share a bit of information with the Wall Street Journal.
We already know that he isn’t a big fan of the dollar. So where does his money go?
Well, I can’t tell you for certain what he is planning today, but we can make a couple of educated guesses together if we look at the numbers he gave the WSJ. Back then, Ron Paul’s portfolio was:
- 64% – Gold and Silver miners
- 21% – Real Estate
- 15% – Cash
And, well, we can safely assume that his cash position is a lot smaller today than it was nine years ago. In 2011, his top positions were:
- Goldcorp (GG)
- Barrick Gold (ABX)
- Newmont Mining (NEM)
- Agnico Eagle Mines (AEM)
- AngloGold Ashanti (AU)
- IAM Gold (IAM)
- Mag Silver (MVG)
- Pan American Silver (PAAS)
- Silver Wheaton (SLW)
- Virginia Mines (VGMNF.OTC)
He’s clearly a big believer in precious metals, and I would wager that the money he pulled out of his cash positions probably went towards gold and silver. This theory is further backed by his recent statements that he plans on buying more gold.
I will leave you with a question from Ron Paul himself:
Would you rather put $10 000 in a box for 20 years or a few gold coin?
And that’s all I’ve got for you today. Ron Paul paints a pretty grim picture for the future, but remember – it’s still just a prediction. None of this is exactly set in stone just yet. I want to remind you that there isn’t a single person out there who can reliably predict what is going to happen ahead of time.
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In closing, I want to give a big shout-out to all of you who like and share this blog. You can also check out my previous blogs such Five Tech Stocks to Consider for November 2020. Your support is very appreciated, and the positivity is absolutely delightful. If you’ve got any questions, don’t hesitate to drop me a line in comments below, because I always love hearing from you!
Thank you all and I’ll see you all in the next blog!
Recommended books for further reading:
- The Intelligent Investor – Benjamin Graham
- Rule #1: The Simple Strategy for Successful Investing
- Rich Dad’s Guide to Investing
- Rich Dad’s Increase Your Financial IQ: Get Smarter with Your Money
- The Barefoot Investor: The Only Money Guide You’ll Ever Need