Finance ministers, central bankers and politicians around the world are pursuing economic policies that have serious implications for those with wealth. Their Keynesian agenda, which involves the suppression of interest rates, massive money printing, and government intervention in both the economy and financial markets, is designed to create inflation.
In his book, Dying of Money, Jens O. Parsson explains that “Negative real interest rates resulting from deliberate inflation are not accidental. Lord Keynes knew very well what he was about in his attack on the interest rate… His goal was the ‘euthanasia of the rentier,’ which is to say the extinction of the holder of money wealth. He described the assault by inflation on money wealth with approval as ‘a process of continuously disinheriting the holders of the last generation’s fortunes.’”
When he refers to “money wealth”, O. Parssons is referring to those who have money invested in bonds and other fixed income investments. In an environment of negative real interest rates (as we have today), the holders of this type of investment are not compensated for holding them. As a result they have their purchasing power continuously eroded by the debasement of money.
O. Parssons goes on to explain why the pursuit of Keynesianism, i.e. the economic policies advocated by John Maynard Keynes, has serious implications for investors who are continuing to pour money into bonds.
“Persons incautious enough to become holders of money wealth should beware that the announced intention of Keynesian economics was to effect their extinction. Just as the vastness of money wealth is essential to the success of an inflationary tax, so too is the numb insentience of its holders. Lenders never seem to understand what is happening in an inflation, no matter how long it continues or how explosively it compounds itself. They increase their interest rates as a crude way of defending themselves, but they never increase their interest rates enough. The lender habitually seems to think that the loss of value of money wealth is about to end, although the government cannot permit it to end.”
Inflation as a form of taxation works so well becuse people don’t understand what it is and therefore struggle to respond to it before it has had a chance to rob them of a large portion of their wealth.
Keynes saw bond holders as “the sheep to be shorn by inflation” and thought of them as “idle rich men and coupon-clippers” who were less valuable to the economy than active entrepreneurs or workers. However, as O. Parssons describes, “the rentiers are not the rich men, and it is not the rich who pay. The rich tend to be relatively bright men and therefore to be net debtors, not creditors, in an inflation. The dull-witted rentiers who stand still for the shearing are the more modest savers of lower income, even the workers themselves. Pension plans, savings deposits, and life insurance companies alone accounted for more than $700 billion of the net money wealth of the United States in 1971. These are what the less wealthy savers invest in, and those who do are the rentiers.”
How to survive Keynesianism, inflation & euthanasia of the rentier
Those looking to preserve their wealth in this environment should consider investing in hard assets that cannot be debased and therefore are not subject to the inflation tax.
Historically these assets have included prime residential property, gold, land, art, diamonds, oil, classic cars and blue chip stocks.
The ultimate wealth preservation portfolio (Click on the chart for a larger version)
Those looking to build a portfolio of blue chip stocks would do well to focus on those that have strong balance sheets, a history of increasing their dividends, and what is known as pricing power.
One strategy for selecting these types of companies is to track the so-called Dogs of the Dow. The Dogs of the Dow is an investment strategy popularised by Michael O’Higgins, author of the book Beating the Dow. The strategy involves investing annually in the ten Dow Jones Industrial Average stocks whose dividend is the highest fraction of their price.
The rationale behind the Dogs of the Dow approach is that blue chip companies seldom alter their dividend to reflect current market conditions, and therefore the dividend is a measure of the average worth of the company. In contrast, the stock price fluctuates along with the business cycle meaning that companies with a high yield are near the bottom of their business cycle and are likely to see their stock price increase faster than those with a low yield.
The 2013 Dogs of the Dow crop include companies such as AT&T, Intel, DuPont, McDonald’s and Johnson & Johnson.
Another strategy for selecting a portfolio of blue chip stocks would be to follow in the footsteps of famed value investor Warren Buffett – a subject that was explored in the article An introduction to Value Investing.