## Do equities (and real estate) give you inflation protection? by Detlev Schlichter

Not necessarily, is the short answer to Schlichter’s question. Schlichter uses the German hyperinflation of the 1920s as a example of how equities and real estate can be hammered by inflation.

Confronted with the possibility that the endgame of the present experiment in extreme monetary accommodation may be higher inflation and even currency disaster, many private investors and portfolio managers respond that they should be okay, since their wealth is protected through allocations to equities and real estate. In contrast to cash and fixed income securities, which are certain to get obliterated in an inflationary environment, equities and real estate are considered some form of ‘hard’ or ‘real’ asset, not just nominal paper promises. “Why should I own gold? A well-diversified portfolio of top international companies should give me good protection against any major disaster,” a senior portfolio manager told me. “I don’t know about gold. What’s so special about it? But I own real estate. If we enter a high inflation scenario, real estate will maintain its value”, a private investor said. But how probable is it that those strategies are going to work?

In 1931 the Italian economist and statistician Costantino Bresciani-Turroni published a study of Weimar Germany’s descent into hyperinflation under the title Le Vicende del Marco Tedesco, which was translated into English under the title The Economics of Inflation, and published in 1937. Among many other things, Bresciani-Turroni also looked at how equities fared: in rapidly depreciating paper money terms, in dollar terms (which means versus gold), and relative to the wholesale price index.

Such studies must always be taken with a generous helping of salt, for a number of reasons. First, history can tell us what happened (in specific and always unique instances) but not what must happen (as a general rule). The social sciences know no laboratory experiments. The next inflationary meltdown may look different from this one. There is no reason to believe that what was observed in Germany at the time must be prototypical for all currency collapses going forward. Second, any study that uses historical data, meaning statistics, is potentially subject to challenges on account of the methodologies used and the accuracy of the underlying data, and this is the case many times over when data series are of such staggering volatility and even somewhat dubious reliability as they are in the case of Germany’s quick descent into monetary chaos. Be that as it may, the study is still very interesting.

Sensibly, Bresciani-Turroni starts his account in the summer of 1914, when Germany left the international gold standard to allow for inflationary war financing. As almost always in the history of money, the state decreed to get rid of the gold anchor so that it could fund itself by printing money freely, and not, as the fairy tales that modern macroeconomists tell themselves will have it, because the gold standard was oh so inflexible and deflationary, which it was, of course, but that was a good thing.

Bresciani-Turroni takes the average of an official German stock index for the year 1913, the last gold standard year, as the base and sets it at 100. He then charts the index in paper mark prices through to 1923, and also calculates the index adjusted for the mark’s steep depreciation versus the dollar, and adjusted according to the index of wholesale prices.

I give you the conclusion right away: If you had held paper marks throughout you would have lost everything. Paper marks became worthless by the end of 1923. Equities did much better but over the whole period underperformed the dollar (and thus gold) and the wholesale price index. By the end of 1923, the stock index that was on average 100 in 1913 stood at 26.80 if adjusted for the dollar exchange rate, according to Bresciani-Turroni’s calculation. In gold-terms you had thus lost more than 70 percent of your purchasing power by staying invested in German equities. Adjusted for wholesale price inflation, the index stood at 21.27. Yes, you avoided total annihilation of your wealth but you were still almost 80 percent poorer measured in the real prices of goods and services and also about 70 percent poorer in gold terms.

Interestingly, owning real estate proved disastrous for many people in Weimar Germany. There is no detailed analysis in Bresciani-Turroni’s study but the anecdotal references are hardly encouraging. Rents were regulated by law and in the rapid inflation of 1922 and 1923 could apparently not be adjusted quickly enough. Real estate became a zero-yielding asset while maintenance costs exploded:

“In 1922 and 1923, because of the rapid depreciation of the mark, the old house-rents became ridiculous. Consequently the value of houses fell considerably. Many landlords, for whom houses were now valueless because the rents did not cover maintenance expenses, were forced to sell them.”

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## From Fight Aging!: Small Steps Towards Thymus Regeneration at the SENS Research Foundation

The SENS Research Foundation is funding efforts to regenerate the thymus via tissue engineering. Reason, the author of Fight Aging! blog explains the importance of an aging thymus in compromising the effectiveness of the human immune system.

The immune system becomes unruly and ineffective in old age: on the one hand it generates ever greater levels of harmful chronic inflammation, while on the other it no longer has a sufficient population of effective cells able to tackle new threats, scan for cancerous cells, and eliminate senescent cells from the body. It becomes overactive and underachieving, and a sizable portion of the more obvious aspects of age-related frailty stem from the lack of a robust immune response.

Why does this happen? No doubt the normal culprits leave their mark: the forms of accumulated cellular and molecular damage that degrade tissues and cell populations, including those involved in generating and maintaining immune cells. Beyond this, however, there are problems that inevitably arise due to the evolved structure of the immune system: it has what are in effect built-in limits. The first is a limit to the number of immune cells that can be supported at any one time, as the potential supply of new cells diminishes to a trickle quite early in adulthood, as an organ necessary for their creation – the thymus – atrophies. The second limit of interest stems from the fact that the adaptive immune system devotes cells to remembering threats, and thanks to persistent threats like herpesviruses, ever more of the available cell population is devoted to memory rather than action. So the end result is an evolved system that is front-loaded for early success, but which systematically falls apart much later.

What can be done about this? Destroying unwanted and duplicative memory cells looks promising, as that will trigger replacement with fresh cells capable of action. Increasing control over stem cells offers the possibility of periodic infusions of large numbers of immune cells generated from a recipient’s own cells. This would surmount the natural immune capacity at the upper end. Another approach that might achieve the same result is to restore the thymus, and thus restore a youthful flow of new immune cells. This would use the approaches of tissue engineering and regenerative medicine to either build a new thymus for transplantation, or regrow the existing thymus in situ.

The SENS Research Foundation has been putting a modest amount of funding into spurring greater progress towards thymic regeneration, and this year one of the young researchers in the undergraduate program will be working on this project, established in partnership with the Wake Forest Institute for Regeneration Medicine:

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## A Weekly Dose of Hazlitt: Resumption of Inflation

Resumption of Inflation” is the title of Henry Hazlitt’s Newsweek column from December 14, 1953. Here we see the same nonsense about a fear of deflation to justify perpetual inflation. We can also see the same nonsense of utilizing inflation to fight recessions. Six decades later, despite theoretical and empirical evidence of the harms of inflation, nothing has been learned by mainstream economists or politicians.

The Eisenhower Administration, which so bravely
abolished price controls and made such a promising
effort to halt inflation when it first came into office, has
reversed its direction. It seems to have embraced almost
the whole economic philosophy of the New Deal, and
above all its policy of continuous inflation. And it has
resumed this policy under the old New Deal-Fair Deal
pretense of “fighting deflation.”

The turnabout first became apparent in mid-May,
when the Federal Reserve System began purchasing
Treasury bills in the open market. Then on June 24
came the much stronger inflationary step of reducing
the reserve requirements of member banks. This action
was taken to release $1,156,000,000 of reserves in order to give the country’s banks another$5,780,000,000 in
lending power. This was frankly done in anticipation
of Treasury needs of some $6,000,000,000 of “new money.” The action had the hoped-for results. In the month of July alone the total loans and investments of the nation’s banks were increased by$4,700,000,000. The country’s
money supply (total bank deposits plus currency outside
of banks) increased by about the same amount. At the
end of September the nation’s money supply stood at
the record high level of \$204,900,000,000. This was
three times the money supply at the end of 1939.

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## Bitcoin Banking by David Howden

David Howden provides a preliminary post mortem of Mt. Gox.

A currency is only as safe as the bank that stores it. Nowhere is this more apparent than in the recent turmoil in the bitcoin community.

On 7 February of this year, Mt. Gox – a bitcoin exchange which essentially functioned as a depository (i.e., bank) for bitcoins – halted all withdrawals in the crypotcurrency. At the time I wrote two articles making a pretty clear case for Mt. Gox operating like a run-of-the-mill fractional-reserve bank (here and here).

Fractional-reserve banks that existed before the advent of deposit insurance were constrained by some real pressures as they decreased their reserves. As depositors became less sure that they would be able to access their deposits on demand, they would start demanding the fractional-reserve bank’s services at a discount to its competitors. As depositors started withdrawing their funds and endangered the liquidity and eventual solvency of the bank, the bank would react by either halting withdrawals outright (as Mt. Gox did on February 7), or temporarily delaying them while remunerating the client with an interest payment (i.e., enact a “option clause”, something Mt. Gox effectively did by charging clients an extra fee if they wanted their withdrawals expedited.)

The claim that Mt. Gox was operating with fractional reserves came as shocking to some. After all, the exchange functioned by providing a shared wallet for depositors. Each time a deposit was made in bitcoin, the proceeds were moved to the shared wallet. This wallet was safely stored offline (“cold storage”) so that hackers could not gain access to them. In addition, a very high percentage of bitcoin was supposedly stored in this way – up to 98% by some claims – with only a small amount held online to facilitate withdrawals and other transactions.

In theory, since almost all of the bitcoin were held safely offline by Mt. Gox, the “bitcoin bank” should have been behaving like any standard full-reserve bank. The evidence over the past months proved this to be anything but the reality of the situation.

Mt. Gox believes “there is a high possibility that the Bitcoins were stolen.” As far as I am concerned, it doesn´t matter too much if the bitcoins were stolen by a third party, or used in some way by Mt. Gox as would be the case with most other fractional-reserve banks. The fact of the matter is that the bitcoins are not in the vault, and that has created the difficulties the exchange´s clients currently find themselves embroiled in.

The last paragraph above is key to Howden’s line of reasoning. Mt. Gox has been intimating that its demise was a result of theft. If claims about cold storage of bitcoins are true, then Mt. Gox’s explanation is invalid and they are embezzlers, the same as any other fractional reserve bank.

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## Political Economy Quote of the Week for 20140310

“Value is therefore nothing inherent in goods, no property of them, but merely the importance that we first attribute to the satisfaction of our needs, that is, to our lives and well-being, and in consequence carry over to economic goods as the exclusive causes of the satisfaction of our needs.” – Carl Menger, Principles of Economics

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## The Importance of Nuclear Weapons

In an anarcho-capitalist/voluntaryist/Hoppean private law world, nuclear weapons would not exists as they would have no purpose. In such a world, there are no political units, only competing firms offering various levels of protection services. Such firms would not have a geographically concentrated client base that would be the equivalent of a city. Rather, their client base would be much smaller and/or dispersed. Thus, there would exist no targets large enough to require the use of nuclear weapons to destroy them.

Unfortunately, we live in a world infested with states in which nuclear weapons are exceedingly useful. Let us analyze the Russian response to US saber rattling over the Ukraine. The US has responded as usual with a combination of official threats of sanctions coupled with unofficial threats of military intervention. Russia has threatened to dump US treasuries, expand non-dollar denominated trade, pointed out that it does not have enough trade with the US to be seriously incommoded directly by sanctions, and threatened to turn off the flow of natural gas to Europe. All of this is in response to the threat of US trade sanctions. What is interesting is that Russia has not even deigned to respond to threats of US military action. The reason is obvious: the existence of a large Russian strategic nuclear arsenal.

The Hungarian uprising of 1956 provides a useful analogy. Despite various excuses for US inaction, the obvious reason was to avoid a possible nuclear war with the USSR.

In the aftermath of the First Gulf War, I recall reading an interesting quote from a general in the Indian Army. He was asked his opinion of the military conclusions to be drawn from the performance of the US military. His response (this is a paraphrase) was, “never face the US without nuclear weapons.” Subsequent events over the past two decades have shown the wisdom of this conclusion.

Another interesting aspect of the situation in the Ukraine is that in the aftermath of the breakup of the USSR, the Ukraine eliminated its nuclear arsenal. Given the chaotic conditions in the Ukraine at that time, the world breathed a sigh of relief. However, the current crisis in the Ukraine would have played out very differently if that nation had retained a functioning nuclear arsenal. Russia and the US would have been forced to not even consider military action and proceed with more caution to diffuse the current crisis.

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## Character vs. Chemistry by Tom Naughton

Tom Naughton recently concluded a series of 6 articles titled “Character vs. Chemistry”. Naughton notes that obesity is a problem of biochemistry and metabolism, not will power. The articles are well written, informative, and of course feature some witticisms.

Part One

Part Two

Part Three

Part Four

Part Five

Part Six

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