Shortly after they exchanged hellos, an old friend of Dan’s enthusiastically told him about all the money he’s made in penny stocks.
And what he said next pretty much stopped Dan in his tracks…
On this week’s rant, Dan takes a look at the continued rise of risky speculations in the markets… and gives some advice for anyone still dabbling in them.
Then Dan invites economist Per Bylund in for a conversation about a topic not often discussed on the show. Per is Assistant Professor of Entrepreneurship and Records-Johnson Professor of Free Enterprise in the School of Entrepreneurship at Oklahoma State University.
His research focuses on issues of entrepreneurship, strategic management and organizational economics, especially where they overlap with regulation and policy.
Per explains how the long term effects of regulation are easy to ignore because they are often unseen. But if we want as prosperous a world as possible, we should all pull our head out of the sand and begin to pay attention.
Dan and Per also touch on the minimum wage debate, the Bernie Madoff fraud, and even some common economic fallacies touted by Nobel-Prize-winning economists.
Then on the mailbag, Dan has a couple follow up questions about buying into GBTC. Another listener writes in asking for some clarification on Dan’s take on Warren Buffett and gold. And another listener asks Dan’s thoughts about when it’s time to take some profits off the table in Bitcoin.
Listen to Dan’s take on these questions and more on this week’s episode.
4:32 – Dan opens the show with a troubling story about an old friend he recently caught up with… “This time [when I saw him], within two minutes, he’s telling me about all the money he’s made in penny stocks…”
8:05 – To anyone dabbling in risky speculations, Dan says, “Be careful, if you’re really happy with what you’ve done in some speculative thing, take some money off the table, for god’s sake…”
8:50 – This week’s quote comes from John Kenneth Galbraith, “Regulation and more orthodox economic knowledge are not what protect the individual and the financial institution when euphoria returns… There is protection only in a clear perception of the characteristics common to these flights into what must certainly be described as mass insanity. Only then is an investor warned and saved…”
9:52 – On this week’s interview, Dan invites Per Bylund onto the show. Per is Assistant Professor of Entrepreneurship and Records-Johnson Professor of Free Enterprise in the School of Entrepreneurship at Oklahoma State University. His research focuses on issues of entrepreneurship, strategic management and organizational economics, especially where they overlap with regulation and policy.
12:50 – Per says the effects of regulation are often unseen, so they’re easy to ignore. But if we want as prosperous a world as possible, we should all pay attention.
17:55 – Dan explains a rarely-discussed consequence of too many regulations, “… it changes the relationships, without really knowing anything about them, and it prevents new relationships from being formed at all…”
22:09 – Dan asks Per point blank, “What do you think is one of the worst unseen consequences of minimum wage?”
28:15 – Per explains how a much higher minimum wage would likely stifle entrepreneurship… “What kind of businesses will not be able to pay the minimum wage? Well those are the startups…”
33:35 – Dan calls out a well-known economist for falling for a common fallacy. “I feel like we’re not making a lot of progress in the world when a Nobel-Prize-winning economist is touting the benefits of the ‘broken window’ fallacy!”
41:02 – Dan plays devil’s advocate and asks Per, “What regulations, if any, are justified? What might be a good regulation?”
47:18 – Dan says that regulations intended to protect consumers often set them up for disaster, “…The Madoff example is great. As we know, Harry Markopolos took that information to the SEC 10 times over several years and they balked every time… We never found out until Madoff actually turned himself in.”
50:38 – Per leaves the listeners with one final thought, “Consider becoming economically literate, by which I mean simply, learn to think like an economist… Economic reasoning is super powerful.”
53:45 – On the mailbag this week, Dan answers your questions, comments and politely-worded criticisms. And this week, he has a couple follow up questions about buying into GBTC… Then one listener writes in to share a slightly different take on Warren Buffett and gold. And another listener asks Dan’s thoughts on taking profits from Bitcoin… Dan gives his take on these questions and more on this week’s episode.
Announcer: Broadcasting from the Investor Hour studios and all around the world, you're listening to the Stansberry Investor Hour. Tune in each Thursday on iTunes, Google Play, and everywhere you find podcasts for the latest episodes of the Stansberry Investor Hour. Sign up for the free show archive at investorhour.com. Here's your host, Dan Ferris.
Dan Ferris: Hello, and welcome to the Stansberry Investor Hour. I'm your host Dan Ferris. I'm also the editor of Extreme Value published by Stansberry Research. Today, we'll talk with economist Per Bylund. He'll share some of his free market philosophy with us, and we'll talk about the contents of his new book, which I highly recommend.
This week in the mailbag, comments about the Grayscale Bitcoin Trust that we talked about last week. And in my opening rant this week, I'll tell you a story I recently shared with paying Stansberry subscribers about a guy who got lost 44 years ago and became a celebrity for 10 days. That and more right now on the Stansberry Investor Hour.
And he wanted to go to San Francisco. He wanted to see the Golden Gate Bridge. He'd seen a picture of it. He didn't know much else about San Francisco. He knew there was a place called Chinatown. He wanted to try Chinese food there, and he didn't know much else. He didn't really know what it looked like, you know?
So, he gets on a plane, flies across the ocean, and the plane was on the ground. He woke up, and the plane was on the ground. And one of the stewardesses who knew that he was really looking forward to this trip, said, you know, “Have a nice time in San Francisco. It was nice meeting you.” And then he saw her walk off the plane and he was like, oh, OK, great. We're here.
So, he grabs his bag, gets off the plane, gets a cab, goes to a hotel, and walks around for four days looking for the Golden Gate Bridge and Chinatown, and he doesn't find them. And he figures well, OK, I must be out in the suburbs or something here. So, he gets in a cab and says, “Can you take me into the city, into San Francisco?” And he's doing all this in really broken English. Doesn't really speak English at all. And the cab driver says, “I can't do that because San Francisco is 3,700 miles away.”
The plane had stopped in Bangor, Maine to refuel and to get the foreign folks, to get the passengers through U.S. customs. So, he thought he was in San Francisco for four days and it wound up he was in Bangor, Maine. Now, look, it's got a happy ending. You know, he told people – he finally figured it out when this German couple, or German-speaking American couple actually, sort of took him under their wing and explained what was going on. And he was like, oh, OK.
And he was a happy go lucky guy. He went with it, and he had a wonderful time and became a local celebrity. They talked about him in the news and on TV. He celebrated his 50th birthday while he was there. They went to McDonald's, and he asked to flip a hamburger and they let them do it. And, you know, he was made an honorary member of the local Penobscot Indian tribe and other sort of honors like that. Great time. He vowed to come back to Bangor. He loved it.
And like, we never talked about what I did for a living because our interaction is always about what he does. That's our commonality, right? That's what we have in common. But this time, I'm talking within like two minutes, he's telling me about all the money he's made in penny stocks. And, you know, in my head, the bells are ringing, right? The sign of the top bells are ringing. And then it hit me, you know, and I'll just tell you, he was telling me, you know, he made a ton of money. He's down a little bit since February, but he's hanging on. He thinks that's the right thing to do.
And he's reading lots of trading books, and he wants to get into trend following. And his son is in it with him, and his son is making money. And he mentioned the possibility of teaching his staff at his business to trade. And he said, “Wouldn't it be cool if I could make them all millionaires?” And I stopped him right there. I said, “You're not going to do that. Don't even try it.”
I was polite, but, in so many words, I said, “You know, you're sort of like the 98-pound weakling who feels great because he's been lifting weights for, you know, six months and now he thinks he's going to compete in the Olympics this year." You know what I'm saying? And it hit me. I got home and thought about it. This guy, Joe, is Erwin Kreuz. He doesn't know where he is. He doesn't know what he's doing, but hey, he's having a great time.
It feels great. So, who cares? Obviously, different situations, big difference, right? Erwin's deal is over. It's been over for 40 odd years, and it's in the can and he had a great time and you can't take it away from him. But Joe's still in it. And you know, penny stocks are like the latest big rage – one of them anyway.
You know, NFTs, right? Non-fungible tokens are another big rage. But, you know, the penny stock transactions last month... there was a New York Times article that said penny stock transactions last month were like 20-fold increase – were up 20-fold, like 2,000% over the prior year for the month of, I think it was February. It must've been February.
I mean, if you look at these things on a chart, it's ballistic, right? The penny stock trading is ballistic and you know, as the Times article pointed out, you know, it's a typical thing for a penny stock mania to take off within a raging bull market. They use that phrase “raging bull market.”
And look, it's, it's just another sign of the top. And I hope Joe – he gave me some hope though. He said, “I want to learn how not to fall in love with the position and how to exit right” and stuff. I was like, OK, cool. You do that. Don't fall in love and get the hell out. So, you know, I'm optimistic that he'll sort of figure it out in time to preserve some of what he's made.
But man, you just know that most people won't, right? And penny stocks are like... the bid is there, and then it's not, you know? Stuff goes from 5 cents to $1 or $2 or $10 and then it crashes and there's no bid. You can't get out. That's the way that works. You know, over the counter markets, it's not like trading, you know, Tesla or something on the NYSE or Nasdaq or whatever.
Man, be careful. If you're really happy with what you've done in some speculative thing, take some money off the table for God's sake. Take your original stake plus something, you know, cut your position in half. Be smart. Don't sit there thinking about where the top might be, saying, “I'll hold on and I'll get out next time it goes up.” Just be smart, all right? That's all I got for you in the rant.
And the quote of the week comes from a must-read book by John Kenneth Galbraith called A Short History of Financial Euphoria. It's like 100 pages or so, and it's a fantastic book. Perfect for the present moment. And here's the quote: “Regulation and more orthodox economic knowledge are not what protect the individual and the financial institution when euphoria returns. There is protection only in a clear perception of the characteristics common to these flights, into what must certainly be described as mass insanity. Only then is an investor warned and saved.”
Protection only in a clear perception of the characteristics common to flights of mass insanity. Got it? Yeah. So, what did I do? I walked into Joe's place of business and I was like, this is a characteristic common to the flights into mass insanity. Be careful here. Be careful, OK? And read that book. Read that Galbraith book. It's excellent.
Alright, we're going to talk more about regulation with today's guest, Per Bylund. Let’s talk with him right now. Let's do it. I'm really, really looking forward to this because we're going to talk about something hardly anyone ever talks about, which should be talked about all the time. And our guest is Per Bylund, assistant professor of Entrepreneurship and Records-Johnston professor of Free Enterprise in the School of Entrepreneurship at Oklahoma State University.
His research focuses on issues of entrepreneurship, strategic management, and organizational economics, especially where they overlap and intersect with each other and/or regulation and policy. Per, welcome to the show. I'm really glad you could join.
Per Bylund: Well, thanks for having me. I look forward to this.
Dan Ferris: Yes. So, I just want to dive right in because like I said in the intro there, what I want to talk about is actually the topic of your recent book, The Seen, the Unseen, and the Unrealized: How Regulations Affect Our Everyday Lives. And that "unseen," especially the word unseen, it really just resonated with me, and it gave me a warm, fuzzy feeling from reading Henry Hazlitt Economics in One Lesson, which then refers to Frédéric Bastiat, which you refer to also in your book because it's the ultimate statement of that, which is not seen. And I guess, first of all, we should acknowledge, it makes a lot of sense that nobody talks about the unseen and the unrealized in our economy, doesn't it? It's just sort of intuitively, right?
Per Bylund: Yeah. Why talk about something you can't see? So that, it does make sense, but it also does not make any sense to not talk about it because it’s so important.
Dan Ferris: Right. And specifically, maybe I should let you encapsulate for our listener to whom some of this might be new material I have to say, we usually focus on finance and investment. So, we're in pure economics territory here today. So, maybe I should let you just encapsulate, if you could, what we mean. Why are we talking about the seen, the unseen, and the unrealized? What does it all mean?
Per Bylund: It’s really a way of thinking that is common in economics or used to be common in economics. It's been the core of thinking about the economy and understanding what is going on for the past quarter millennium or so. And it's easy to see what is going on and just observe everything that you can tell exactly what is happening. So, say you have a new law put in place. Say you increase the minimum wage, which is probably the most common law talked about.
And after the fact, you can see that, well, there are as many jobs and people make more on those jobs. So, obviously it had no bad effects, and that's what you can see. What you don't see is all those things that would have happened had you not enforced that law. So, a good economist, you mentioned Hazlitt and Bastiat, and both of them claim that a good economist needs to look at both sides.
So, you need the counterfactual. You can't ever say that any change – not necessarily only regulations – is good or bad by just looking at what actually happened. You have to compare it with what would have happened had it not been in place because the economy is so advanced and everything is interconnected, meaning that if you have one change, that's going to change a whole lot of other things.
So, you have to tease out the logic and walk through step-by-step all these changes that occur as a result of whatever it is you're doing. And in order to figure out whether it had a good effect or not, the only way of doing that is to walk through the same steps without this addition. So, you need both sides of the story and walk through both sides in order to estimate or assess the actual impact. So, that's the seen and the unseen, sort of the classical one. My addition is the unrealized, which is a long-term view on the unseen.
So, the book is specifically on regulations and, in a sense, I follow a very small, simulated sort of artificial society, and I follow those people through their entrepreneurship, their interactions, their trades, and their productions and everything like that. And then I walk through the example of what happens and then I step back in a sense. I add the regulation in one specific place which should have a sort of a limited effect on that little economy.
And I walk through the same logic to see what happens and show thereby that the unseen is quite a bit of stuff, quite a lot of impact on this little economy, even though it's a very, very specific regulation imposed on it. And my claim then is that all of those opportunities that would have arisen had it not been for this regulation remain unrealized. So, this is of course new goods and services that consumers will never be able to choose and never be able to buy because they’ve never realized, they're never offered.
But it's also about new careers, new jobs, and all of those things on the production side that never happened because someone was regulated or set back by a disaster or what have you. And I think that is important when talking about general prosperity and wellbeing in society and that if we want as prosperous a world as possible and to lead really good lives, then we should look at the long-term impacts and implications of everything that we do to the economy basically.
Dan Ferris: And that's really hard, isn't it? People don't like to think that hard.
Per Bylund: Yeah. Yeah, you're right. It's super hard because the economy is so complex, and the economy is basically just us and all that stuff that we have produced and that we imagine that we will produce and that we imagine that other people will value and all these ideas that we try to implement in the form of innovations – all of this stuff is really the economy. So, it's really not a difference between society and the economy.
It's just that when we're talking about the economy, we tend to think of it in terms of goods and services and money and stuff like that. But it's really just people interacting. And since that is the case, the economy is super complex. In a sense, it's like the butterfly that flaps its wings and causes a hurricane on the other side of the world. And the economy is that integrated in a sense that any little change has ripple effects that might cause all kinds of damage and also create all kinds of opportunities in some completely different place, really, in the world.
Dan Ferris: So, it sounds like we're making a case. This is how I see it anyway. It's like we're building this case that sort of generalized top-down regulation of the activities that the myriad of unfathomably deep, interconnected activities of millions of people cannot possibly be made without substantial trade-offs. We should throw Thomas Solo’s name. We should drop his name too as an economist here, because he talks about trade-offs, right? Nothing is just all good or all bad.
There are always trade-offs. And this top-down regulation that we get it, it messes with that, doesn't it? It changes the relationships without really knowing anything about them, and it prevents new relationships. That's really the unrealized over time. It prevents those new relationships from even being formed at all.
Per Bylund: Yeah, exactly. And all those opportunities that would have arisen because of those new relationships and those new ideas and everything. But yeah, you're absolutely right. And in a sense, regulations – there's this ideological almost religious view of regulations that you can just tweak the economy in any way you feel like. In a sense, it makes sense for politicians to advertise what they want to do in this manner, but it doesn't make any sense for voters, for instance, to accept that view because regulations are really blunt tools.
A regulation... it basically just says you cannot do this, but it doesn't say what you should do instead because obviously they can't because we're all very different. And we all have our different preferences and we value different things. So, if we can't do that thing that politicians think is harmful or they don't want to see it, or for whatever reason, then we will do something else. If it's really valuable to us, we might still do it, which explains black markets.
But many of us will not because suddenly it's costly or the risk of ending up in jail or what have you. Then we will choose the second-best option that we have, and those are different for different people. Which means that even if you try to calculate the world without this, whatever it is that you try to regulate away, it might still emerge. And other things might also arise in this economy that you had no clue might actually be the result of people's choices. And they might be a lot worse.
The economist Ludwig von Mises sort of semi-famously said in his Magnum Opus that the problem with regulation is that first of all, you will not get to where you think the regulation will take you. You will not actually create that world that you're aiming for. So, if you outlaw something, you will not get rid of it. It will still be there, but it will be in the black market and so forth. And the other result is that you will cause other problems.
So, instead of having only that problem, which you could potentially inform people about or provide some, I don’t know, knowledge or information or subsidies or what have you to make sure they don't do, but you will still have that problem though it’s smaller and probably harder to deal with and you will cause other problems, too. So, instead of one problem you have two, and that's typically the result of regulations, unfortunately.
And that, of course, is a good thing if you're a politician because now you have two problems to solve instead of one. So, you need more power and more influence and more votes. From their point of view, it makes complete sense, but from a voter’s point of view, it doesn't make any sense at all. But as you said, it's really hard to think about because it requires so many steps and it requires a different way of thinking than we're used to.
Dan Ferris: Yeah, different than just about any human being is used to, right? We're wired to not be eaten by a bear and survive another day, and that doesn't lend itself to thinking about the unseen and the unrealized. It's true. And yet we can't make excuses though. We know about these things, all these people are, as you say, the last quarter of a millennia, this has been part of the framework. And yet, we still get these things. Let's be more specific though, Per. I don't know.
We could just stick with minimum wage not because I have any view about it one way or the other. I certainly do, but we've mentioned it so we can stick with that one. Let's try to just be specific. What do we think is one of the worst unseen consequences of minimum wage?
Per Bylund: Well, the unseen, since what the minimum wage does is – it doesn't actually raise people's wages. That's usually how it's sold, but it's not what the law does. What the law does is just prohibits jobs that earn below a certain threshold level. So, if we would, say, set the minimum wage at $100 dollars an hour, then any job where you produce value less than $100.00, it doesn't make sense for anyone to hire you for that job because no employer is interested in paying you to do work.
They want some net benefit out of what you're doing. It shouldn't be just a net cost because that's not a real job. That's usually what the government does in jobs programs and so forth. So, what this means is that the first –
Dan Ferris: So, Per, wait a minute. I'm just going to stop you. I have to say, already, we’re knee deep or hip deep in what you were saying von Mises said, which is that you aren't going to get the thing you think you're going to get.
Per Bylund: Yeah, exactly.
Dan Ferris: And we're already knee deep in impacting the people you purport to help, which is one of the things about regulation that drives me up a wall. They always say it's to save the poor, and it's always hardest on them, all kinds of things. Drug prohibition and gun control and all of it, it hurts them worse than anybody, and it drives me nuts. Anyway, I did interrupt you if you'd like to continue your thought.
Per Bylund: Yeah. Or I’ll just continue where you were, what you said now because that's where I was going. When you raise the bar for what jobs can exist, then the first ones to go are the jobs where you produce the least value, which is pretty obvious. Raise the minimum wage a little bit and whoever is producing sort of where the wage was at, but not a whole lot more, suddenly it doesn't make any sense to have them hired anymore.
And it's not like they're magically going to produce more value just because the minimum wage is higher, which means you have the – these are the low wage-earning jobs that disappear. And that might sound like a good thing, but people want to get into the job market and get experience. So, it's going to affect the young, the inexperienced. Those are the ones who lose their jobs. And like you mentioned, it's going to affect those without education or with insufficient education for a higher paying job. It’s going to affect minorities because suddenly employers need to pick and choose, and they're going to use whatever bias to pick their employees. And then it's going to affect people with some kind of disability and whatever is holding them back from creating more value.
It's going to affect those people. And those people are the people who need the job the most, whether it is because – it could be as simple as they just want some work experience to prove themselves and prove that they can do a whole lot more so they can get a better job. But if they don't get this first job, they're not going to get the second one either, which means they're going to be basically condemned to be unemployed for the rest of their lives or until something else happens in the economy that makes them worthwhile to hire. It's exactly what you said. It's going to harm the very people that you intend to benefit with this regulation.
Dan Ferris: Right. So, a nice concrete example of this besides minimum wage would be these laws, and they're local. They're not federal, but they still have this awful top-down effect. These laws where in the cosmetology industry, the beauty industry, where people are required in some places to take like a $20,000 course in cosmetology to get a license so that they can braid hair and actually charge money to braid hair.
Meanwhile, braiding hair is not anywhere in the law or the license or the course or anything. It's ridiculous. Is it not? Licensing in general is a huge scam, in my opinion. What do you think of that?
Per Bylund: Yeah, it is. Very often it’s a way of protecting the incumbent. So, whoever is already in that market usually gets grandfathered in and it's the way of protecting their profits at the expense of consumers. That's usually what licenses do.
Dan Ferris: And regulation in general I find does that. We can go into banking and they have these – I know a banker who told me once, at $10 billion in assets – I think it was $10 billion and $50 billion – he said, “When we crossed $50 billion, we needed another $2 billion in assets to pay for the bump up in regulatory requirements.” So, of course, they find their $2 billion and they're effectively in.
And then anybody else who can find it, it's a way of tamping down the competition. It would be hilarious if it weren't so tragic because once again, all this stuff is alleged to keep the banking consumer safe, but it just offers them fewer choices and we would suspect makes things more expensive. This subject drives me nuts, as you can tell.
Per Bylund: Yeah. It is really a sad state that we're in, where we're supporting and even calling for all these measures that are really causing us harm, which doesn't make any sense at all. But I mean, if you allow me to elaborate a little bit on the minimum wage thing because what we haven't covered – we covered the unseen, right? All those people who will not be able to find jobs. That could be the next generation, or it could be next year or whatever, but the long-term effect of this is the unrealized.
What types of businesses will not be able to pay the minimum wage? Those are the startups, right? So, the startups, you can't pay a whole lot and you might not be able to pay at all for the first months or years. And instead you give them ownership shares in the business that they might be able to get something out of it if the business takes off, right? All of these things are problems that entrepreneurs are dealing with.
Well, if we set the minimum wage really high, that means that startups will not be able to hire anyone, which means they will probably not be started even. So, the unrealized here would be that we simply have fewer businesses producing fewer goods, which means fewer jobs, and all of these things. So, we're going to be having a much less dynamic economy and a much less value-producing economy, too, because these startups – those that take off – are going to be the ones to innovate and really disrupt the economy and produce goods and services that people really, really want and really, really benefit from.
And we're not going to see them because we tried to, through regulation, raise people's wages. This is an implication – the result of the minimum wage law that no one ever talks about. Sometimes economists talk about the unseen because you can almost measure it, and it's part of economics and economic research since at least 100 years or 200 years or whatever. But the unrealized is not really talked about a whole lot because it seems like almost philosophy, almost speculation.
We can walk through the logic and we can walk through the steps and we can pretty easily see that, well, this is not going to be very harmful or a problem for big businesses like Walmart or Amazon or something like that. But in both of them, of course, support the minimum wage raising to a very high levels. Instead it's going to harm the small businesses and startups, and that's going to harm all of us later on.
Dan Ferris: Well said. Per, let's do something if you feel like it. Why don't you tell our listener the story of the broken window? Let's talk about that a little bit because that's in your book. That's a part of this discussion, and it's a really important, simple, powerful argument that I'd like people to know about. Would you like to do that?
Per Bylund: Yeah, absolutely. It’s even called the broken window fallacy because of this little anecdote, which is originally from Bastiat, whom you mentioned, and it's really about how he goes through and shows the seen and the unseen. And what he says is that you have this little boy playing with rocks and he throws a rock through a window, say, a baker's window, and crashes the window.
And the first thing that happens is people see the boy, and they talk to him, “Oh, naughty boy, you can't do this. That's destruction. That's not good. Hasn’t your mom taught you anything at all about how to behave?” But then someone, Bastiat says, is bound to say, “Wait a minute, this is good because the glazier will get more business because of this because now the baker has to buy a new window, and that's more business for the glazier."
And then that means that he can spend more money on something, maybe hire more people or buy from the next guy. And that means that someone else gets more income. So, this is just more activity in the economy. This is good, right? And everybody will agree that, yeah, oh yeah, good with a lot of activity. This is this awesome. And that's the seen, right? That you destroy the window and then you realize, oh, that means that the baker has to buy a new window and that means more business for someone else and so forth.
The unseen is that, well, the baker would have had the window and the money to buy a window had it not been broken. What would he have done with that money had he not had to buy a window instead? Maybe he would have bought a coat or shoes or something like that, which means really that by breaking the window, you take the money from the baker, which he would have put in someone else's business and keep the window. He would instead invest that in buying a new window.
So, you just shift his investment from coats or shoes or whatever to buying a window. That's obviously not a gain for society that someone else gets the business than what would have been the case. The only difference for society is that we lost a window, right? So, the destruction is the only effect here. And you can't really say that, oh, this is good for the economy because the glazier now sells another window because the coat maker sells one coat less than he would have. And that's the unseen.
Dan Ferris: Right. And perhaps the craziest example of this in real life – to me it's the craziest – is that a Nobel prize winning economist, Paul Krugman, asserts that such a thing would have an increase in spending and a positive effect on the economy in the example of coal-fired power plants. He said if we forced the closure of these – basically if we destroy them, destroy their economic value – it would force new investment in new, greener power plants, and it would probably raise power prices.
And he says it would yield an increase in spending and a positive effect on the economy. This guy won a Nobel Prize in economics. Now, Per, I feel like we're not making a lot of progress in the world when the Nobel-Prize-winning economist is touting the benefits of the broken window fallacy, right?
Per Bylund: Yeah, no kidding. But Paul Krugman seems to be falling for this fallacy over and over again. It seems to be his favorite fallacy and not in a good way. So, he's used it in the wrong way many, many times, but that's a perfect example. I think at one point, he suggested that the government should fake a martian attack so that we invest a whole lot in military defense.
And of course, that means that we're taking money from somewhere else. But he wanted to see more activity, and then we would invest that in a completely useless global defense. He later said that was a joke. But you never know with him actually, since he typically falls for this fallacy.
Dan Ferris: Yeah. It's sad that you're never sure if it's sarcasm.
Per Bylund: You know what, one thing that you can say here is just use Bastiat and Hazlitt and say what distinguishes a good economist from a bad economist is the ability to see the unseen, and Paul Krugman does not see the unseen. So according to Bastiat and Hazlitt, then he would be a bad economist.
Dan Ferris: Sounds about right to me, but what do I know about what makes a good or bad economist? So, I'm glad we looked at the unrealized, and I'm glad that we've emphasized that because like you said, that's your big contribution to this, and it is a huge contribution. The longer and longer term you go out in time, it's like a negative compounding effect, right? You get more and more negative effects through time from a regulation established right now.
But there is something else. I have to say it seems to me that laws and regulations are static, right? But we economic actors, human action in general is dynamic. I sort of noticed that it's more dynamic the more wealth you have, right? It seems like if you're not very well off, you're just not as dynamic and you can't get out from under it as easily. But if you're wealthy and you can move capital around the world and stuff, then you're great. It's like go ahead, raise my taxes. I'll send the money to the Cayman Islands or something.
Per Bylund: The more wealth you have, the more purchasing power you have, the more options you have, too, of course. That just follows logically from having more purchasing power. So, this is another way that regulations harm the poor. And I think we also see – I'm not sure if you were getting at this – but we see a lot of the really rich people saying that we should raise taxes.
Well, I mean, they are the only ones who can avoid those very taxes. It’s disingenuous what they're doing in a sense, and they probably want to sound good or something, but I'm not sure what their end game is.
Dan Ferris: Yeah, who knows? That thought scares me, but I want to say something, Per. We sound like we're really, I don't know. I don't want us to sound like a couple of dour complainers. And one of my complaints about – if you go to a free market conference or something when we used to all gather in physical places and go to these things, one of the things when I've been to these events that kind of bothers me a little is that there's less celebration of the dynamic, wonderful nature and the benefits of free markets than there is criticism and fear, and one might almost say fear-mongering about that which may or may not inhibit free markets.
What do you think of that? Do you think I may be right or no? Because you're in this community.
Per Bylund: Yeah, right. I definitely think so. In a sense, that's a huge problem for economics as a science... that most things in the economy are not what they seem. So, when you observe something, it looks one way, but you have to think through the unseen, and that makes it really hard for people who have not really been trained in how to think like an economist and who have not really – most people, they neither have the interest nor the time to learn this stuff, and I don't blame them.
But as they are all part of the economy, they tend to see a lot of problems. And there are a lot of problems... And they hear on television and listen to politicians and I don’t know what else saying that this is the market's fault, and then the government needs to step in and solve the problems through regulations, of course without any at all recognition of the unseen or the unrealized.
So, it's not that strange that people are reluctant to embrace the free market because it seems like it's a place where you can't really control anything, where you have no chance of having a say in a sense, but it's a strange way of looking at it because like I said in the beginning, the economy is just us, it's just us buying stuff, selling stuff, interacting economically, trying to economize, get as much stuff as possible for our money and working in a job and all that stuff. That's the economy, that's the market. It's not Wall Street. Wall Street is a small part of it.
So, if we recognize that the economy is us and nothing else, then it's much easier, I think, to think correctly about the market and the economy. But I think those of us who have some level of understanding of what is going on, it's our duty and our responsibility to teach the rest of the world. And I try to do that, but I don't think that I will be successful just me. It takes a lot of people and it takes time and it takes effort.
Dan Ferris: Let’s be a little devil's advocate here. Do you have rules of thumb or thoughts on the maximum limit? Do you have any philosophy to offer on what regulations, if any, are justified? Is there some way for us to think about what might be a good regulation if you believe there are any at all?
Per Bylund: Well, I think the obvious answer is that regulations are not only by the government. So, there are plenty of regulations that happen through market activities and through market participants. So, plenty of the standards... much like technology standards like a USB memory works the same in all computers with a USB slot. And these standardizations exist in terms of contracting and exist in terms of how to solve conflicts and different interpretation of contracts. We have arbitration courts and things like that.
In a sense, the harshest regulator is the market... because imagine if you're a business and you either screw up or you have intentionally or unintentionally screwed over consumers, and this gets noticed. No one is going to touch you again, and you're going to lose your business and lose all your investment and everything pretty much overnight.
Whereas if you break a regulation, if you're a big incumbent, nothing might happen. If you're a smaller business, then you might get a ticket from the government and so forth, but you can continue doing your business. You might change a few things. So, the market is really merciless as a regulator itself. In a sense, it's letting the scumbags go free and giving them more space and more scope to do their thing by relying on the government instead of market regulations.
In the free market, the consumer is sovereign. So, you can't sell anything unless the consumer is willing to consider your product, right? So, from that perspective, I would say that there are very few, if any, regulations that the government can provide that will make it better than the regulations that the market itself can provide.
Dan Ferris: OK. Devil's advocate here... But Per, if businesses are unregulated, they'll lie to you and they'll get away with it for years and make millions and millions of dollars. The market let, for example, Bernie Madoff steal billions and billions of dollars, complete fraud, for at least a decade if not more. And the market let that happen one might say. What about that?
Per Bylund: Yeah, Bernie Madoff... the government let him do that too for many, many years. So, whether it was the market’s regulation or the government's regulation that failed, who knows? I think if you speculate about the free market, how it would work – because today, businesses are leaning on the regulation. So, you have the insiders, I mentioned Walmart and Amazon before, supporting higher minimum wage. And the reason of course is that the next big thing will probably never be realized because of this higher minimum wage.
So, I mean, it benefits them to take on this higher cost because they can take it whereas new startups cannot. So, many of the incumbents lean on these regulations, and they've already figured out how to survive despite the regulations. Others have not. So, yeah, of course you can lie and cheat as a business and people always do. The question is who has an incentive to figure that out? Well, in a regulated market, it's all government agencies. We know how effective and efficient government agencies are.
In a free market, which is very highly competitive, all of your competitors and your potential competitors, whoever wants to enter the market and businesses and other industries, too, who are indirectly competing with you, have an interest in keeping their eye on you and figuring out what you're doing, not only to copy what you're doing but also to point out what you're doing that is wrong. And the same thing with, I would say, the consumer organizations, consumer protection organizations.
The media has a big role in this, too, I think, to keep an eye on what businesses are doing. And today, unfortunately, they're almost exclusively focused on what happens and goes on Capitol Hill, whereas what they should be doing – They should be doing that too, of course, but in a free market, it will be a whole lot less to do on Capitol Hill. And they could, and they probably should, instead investigate businesses and see what the heck they're doing and figure out if they are breaking some moral code, not necessarily a law, but a moral code, if they are not being true to what they're promising and so forth.
Dan Ferris: I have this idea about regulation. I tell the story – I forget who originally told it, the fellow who said that he could stop all traffic accidents, even fender benders, with one single requirement, which is that you do away with all safety equipment and put a six-inch steel spike coming out of the steering wheel. And then you better believe we'd all be driving a lot more carefully.
And it made me think that there's a bit of wisdom in that because, and this is from a guy who's been in and beside and around the financial industry his whole career, it seems like the more you purport to protect the consumer or the investor, the more you set them up for a bigger disaster in the end. And the Madoff example is great because as we know, Harry Markopoulos took that information to the SCC 10 times over several years, and they balked every time and we never found out until Madoff actually turned himself in, right? So, 10 times the SCC said no, everything's fine.
And people kept investing and investing and investing and investing. And this idea that the SCC protects anyone from anything actually led to massively more, billions more losses. And that's my great fear about regulation is that, or one of my great fears anyway, is that people think that it helps them and that it protects them. And too often it does the exact opposite.
Per Bylund: Yeah. And I mean, that's definitely true. We’re leaning on it and we’re relying on it, even though it doesn't actually work. We think that we're protected, but it's a false sense of security in a sense. There are studies on this. One study I read was about an intersection with a lot of accidents, and what they did was take away the traffic lights, which doesn't make any sense on the face of it. If there are plenty of accidents, people T-boning each other all the time, despite traffic lights, why would you take them away?
But it turns out that taking the traffic lights away lowered the number of accidents, and they were not as bad anymore because people were not completely just relying on the lights. Instead they approached the intersection, slowed down, they looked both ways, and then they would pass when it was safe. So, it's true what you say that these regulations and these sort of safety measures, these security promises, they take away our own responsibility, which means that we have better things to do.
We're economizing on our time. So, if someone else says, “Oh, I'll take care of that,” then we can just go, "OK, good, take care of that. Then I can do something else." And then, of course, it also creates an incentive to be a little more reckless. If someone says, “I'll cover your losses, don't worry. If something happens to you, then I'll make sure you don't fall too far.” Well, then I can invest a little more, right? It doesn't really matter. I don't need a buffer. I can just invest everything I got. I can possibly leverage everything because hey, if something happens, then he's going to catch me when I fall. And we don't need that reckless type of investment and that type of speculation because that's not really productive in the economy. We need people to economize on the resources and do well-thought-out, grown-up things with their investments instead of being reckless.
Dan Ferris: Here, here. Per, we've actually been talking quite a while, and it's time for my final question. And it is simply this: If you could leave our listener today with a single thought, what would it be?
Per Bylund: It would be, consider becoming economically literate, by which I mean simply learn to think like an economist, not necessarily in terms of analyzing statistics but thinking about the economy in a proper way. Economic reasoning is super powerful.
Dan Ferris: Brilliant. Yeah. And I have to tell the audience, too, The Seen, the Unseen, and the Unrealized by our guest today, Per Bylund, is excellent and can really help you with that. And it'll probably inspire you to learn about Frederick Bastiat, if not others. Schumpeter is mentioned in there and just Ricardo and several others, those classical thinkers that we sort of alluded to earlier. But thank you for that, Per, and thanks for being here.
I feel like we could talk for hours about this stuff and turn it over many different ways. And I'd like to invite you back sometime to do that.
Per Bylund: Yeah, that would be great. Thanks for having me.
Dan Ferris: So, that was really cool. I love this topic. It’s always the stuff nobody's talking about that winds up being so incredibly important. I can't emphasize enough. And another book, by the way, beside The Seen, the Unseen, and the Unrealized by Per Bylund is Economics in One Lesson by Henry Hazlitt. It has that same broken window fallacy that figures really prominently in the lesson. I highly, highly, highly recommend, especially for investors, check out both of these books. It's excellent stuff.
One is a classic. The Hazlitt book is a great classic of economics. You might also check out Thomas Sowell's Basic Economics. That's a good one. There are others, but those are the ones I'm really familiar with. Good stuff, man. All right, let's do the mailbag. Let's do it right now.
Since I've been talking about regulation and policy with Per Bylund in this show, I should bring up cryptocurrencies because that's the polar opposite of organized economics and regulated activity. And the best person to explain what to expect in 2021 in cryptos is Stansberry Research’s in-house cryptocurrency expert, Eric Wade. Next Wednesday, March 31, Eric is stepping forward with what could be the biggest moneymaking prediction this year.
Eric was on the show last month, teaching us all a lesson in bitcoin. But on Wednesday, March 31, he will reveal six tiny cryptos floating under the radar that could multiply your money times 10 in 2021. If you already own bitcoin and you want to know what to do next, then this crypto event needs to be required viewing. You can get all the details right now at www.stansberrybitcoinevent.com. That's stansberrybitcoinevent.com, and be sure to tune in Wednesday, March 31, at 9:30 a.m. Eastern time. Check it out.
In the mailbag each week, you and I have an honest conversation about investing or whatever is on your mind. Just send your questions, comments, and politely worded criticisms to [email protected] I read as many e-mails as time allows, and I respond to as many as possible. Or give us a call at our new listener feedback line. Call us at (800) 381-2357. That's (800) 381-2357 and tell us what's on your mind.
Most of my investible cash is in my Roth and IRA investment accounts, not a cash bank account, and I can't buy bitcoin directly through those accounts, but I was able to buy a substantial sum through my Roth using GBTC,” the bitcoin trust ticker, “and thus able to earn a substantial increase in wealth as bitcoin has gone up over the last year or so. Better to invest several thousand that way, rather than a few hundred from the bank.
Also, not taxable if I sell later. Until recently, GBTC was the only option from an investment account I was aware of and has worked out really well for me. I also think if you wanted to gift some of the increase to a charity, GBTC and a taxable investment account would be a better vehicle, allowing less taxes when gifted. Thanks for listening, Steve B.”
Thank you for listening, Steve B. and thanks for writing in. I'm just going to continue with these because like I said, we've got a few of them. Next one is Jim M. “Follow-up point on the Grayscale question,” Jim M. says. He says, “I did both, opened up a Coinbase account and bought Grayscale ETF. I did the Grayscale on my retirement accounts as an inflation hedge. Eric Wade had planted that idea a ways back, as long as you don't pay too much for the ETF premium. Jim M.”
Thank you, Jim, that ETF premium was something I forgot to mention that you got to be careful of that because there have been times when people paid a crazy premium for Grayscale, and you don't want to do that. Next comes DM. I knew somebody would say this DM, and I'm glad you wrote in about it. DM says, “Thanks for the podcast. I listen to it almost every week.” Almost, DM, almost? Come on, man. Anyway, DM continues.
“Your understanding regarding Warren Buffett and gold may be a little dated. If my memory serves me right, he recently invested in a gold mining stock, so maybe he sees more luster there than he used to. Keep up the good work. DM.” You know something? I don't think so. I think he saw the gold-mining industry fixing its lack of ability to generate free cash flow and he wanted to get in on it a little bit.
But I seriously doubt if you asked him that same question today that he answered in his 2011 shareholder letter – I'm sure that he would feel the same way. He thinks gold is a pet rock. He didn’t put $10 billion of Berkshire's cash into gold bullion. If he did that, DM, then you're right. My view, that view is dated. Otherwise, he's buying stocks, and we know like this idea that he never sells, like he sells plenty of stocks. He's sold right out of his airline stocks about a year ago or so.
So yeah. Glad you wrote in though. Thanks. Last one this week, John P. John, you wrote a long and really complimentary e-mail, and I just wanted to thank you for it. John says I'm open-minded and diverse in my ideas and guests. And he says my reading list is impressive, and he's read many of the same titles and gotten some benefit. He says I'm his market barometer. I hope I'm not a contrarian indicator, John. He says, “You're my market barometer. I respect your conviction to value. When I sense you’re ringing the warning bell, I pay close attention.”
And I will say this, John, I've done OK with that over the past few years. Overall bearishness has been a mistake because the market's up since I started being bearish. But it's been a volatile time, and we've seen lower lows and higher highs, a wider range of outcome indicating the greater risk that I indeed anticipated. I'll take a little bit of credit there, but I have to acknowledge that overall, so far, I haven't gotten that big bear market that I've been afraid of.
“This leads to my question,” he says. “Your bitcoin recommendation has experienced spectacular gains. You made a recent comment when answering the mailbag about the possibility of taking some bitcoin profits. I think about this at every new high. My thought problem is risk managing the unknown. I'm measuring the current bitcoin correlation, which is close to the 10-year break-even to the projected bitcoin having cycle. I'm interested to know how you think about taking profits. Perhaps it's not scientific at all, and you simply sell half.
Second, at what point will you consider cold storage and wonder if your listening community has any cold storage advice? Thank you. I appreciate all that you do, John P.” Good stuff, John. Thank you. Not doing cold storage at this point may be a matter of laziness on my part. I'm as lazy as any other human being more so than some, and I think I should probably have some of the account in cold storage.
I wouldn't go 100% because, as you say, I am concerned about the way it trades in a risk-on, risk-off fashion, seemingly. At the same time, I have questions about that viewpoint, too, because I'm just looking at it over a short period of time. Basically, John, my concern is the chart is ballistic and you know how ballistic charts end. They usually end by crashing back the other way. It’s not like the law of gravity, right? There's no law of the universe that says that has to happen.
And given what bitcoin is, I could see it selling off in a real panic the way gold and silver do, too. They’re stores of value as well. And they sell off in a panic. But if you go from the beginning to the end of a really nasty equity bear market, you'll often see gold rising overall. Even if it sells off initially, the overall performance makes it worth owning during equity bear markets.
I suspect if bitcoin is all that I think it is, that is what we will see. And look, this issue, I talked about it today in the rant, this issue of selling something that you're basically just guessing about was that the top? Is the top ahead? You can't do that. There's no formula there. You're right. None of this is scientific. I can't look at a bitcoin chart and say, bing, that's it. Know when to sell.
I suspect what we'll do in Extreme Value is maybe recommend at some point, not right now, necessarily, as you say, selling half or two-thirds or some other portion, and then we'll book that in the model portfolio as a dividend that'll be frozen in time. Then if we say sell half, we'll track half the bitcoin price to represent the half that remains. Not quite there yet, but I could get there. That's really the best summation of my thoughts about this right now. And I appreciate the question.
So that's another mailbag and that's another episode of the Stansberry Investor Hour. I really enjoyed it. I hope you did, too. If you're listening to this episode and did enjoy it, send someone else a link to the podcast so that we can continue to grow. Anyone you know who might also enjoy the show, just tell them to check it out on their podcast app or at investorhour.com. Do me a favor, would you? Subscribe to the show on iTunes, Google Play, or wherever you listen to podcasts. And while you're there help us grow with a rate and a review.
You can follow us on Facebook and Instagram. Our handle is @investorhour. Also follow us on Twitter. Our handle there is @investor_hour. If you have a guest you want me to interview, drop me a note at [email protected] or call the new listener feedback line (800) 381-2357. (800) 381-2357. And tell me what's on your mind. Until next week, I'm Dan Ferris. Thank you for listening.
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