by
Gary North
Tea Party Economist

Recently
by Gary North: Bernanke’s
Pet Peeve: The Gold Standard

I have a Website
where subscribers can ask questions on various forums. The site
is actually called “Gary North’s
Specific Answers.” My answers are very specific. So are other
subscribers’ answers.

One of the
categories is “retirement.” There is a lot of interest in retirement
issues. One of them is what assets should go into an IRA.

I say “None.”
This is not a popular answer. I add, “especially gold.” This is
also unpopular.

Over the years,
I have published articles on my site explaining these answers. But
some subscribers do not use the search engine to locate these articles.
Others do not believe me. Still others talk it over with their accountants.
Their accountants offer rival views. Then they post a question that
reflects their accountants’ views.

I have no
objection to someone going to his CPA for advice. In fact, I recommend
it. That’s what CPAs are supposed to do: offer advice.

But there
is a problem. CPAs are inside the tax system. They give advice as
agents of the system. They are licensed by the profession, which
has been granted an occupational monopoly by agencies of government.

I used to
have an accountant who had been a CPA, but he resigned. He turned
in his CPA license. Here was his logic. “I take extreme positions
on interpreting the tax code, to enable my clients to pay minimal
taxes. At some point, I argue very strongly in tax court. I could
have been threatened by the IRS to have my CPA license revoked.
To remove this threat, I send back my license.” This man no longer
takes clients with less than $1,000,000 income per year. Note: he
is also a semi-pro poker player in Las Vegas. His moniker at the
table would tell all but a professional to stay out of the game.
He likes risk.

Most CPAs
don’t like risk.

I am always
looking for ways to get my ideas across. So, I have decided to get
across my position on gold in IRAs by creating a hypothetical document:
a letter from a CPA. In it, I set forth the accountants’ case for
IRAs. This case is detailed. It spells out the implications behind
the recommendation.

---

Dear Dr. North:

One of my
clients is a subscriber to your Website. He asked a question regarding
the wisdom of putting gold into his IRA. You replied that IRAs are
a bad idea. You also replied that gold should not be in an IRA,
assuming someone is unwise enough to set up an IRA.

I recommended
that he set up an IRA several years ago. While I have counseled
him not to buy gold, which is overpriced, I see no good reason not
to put gold into an IRA. It can be done under certain circumstances,
although it is not easy to do this with gold coins, which is what
you recommend.

I want to
spell out my reasons for using the IRA as a tax-reduction tool.

1. FREE
MONEY FROM CONGRESS

The members
of Congress have always had one overriding goal in life: to defend
the interests of the people of the United States. These people –
many of them are lawyers – have spent their careers finding
ways to enable the common man to escape the burdens of government.
Where these burdens have come from remains a long-term mystery,
but Congress is adamant that these burdens are too heavy. So, members
of Congress are constantly finding ways to enable their constituents
to get out from under these burdens.

One of the
most creative ways that Congress has come up with to lighten the
tax burden is the Individual Retirement Account. These come in two
forms: the standard IRA and the Roth IRA.

A Roth IRA
requires the taxpayer to pay income taxes on his salary. He can
then put some of this money into a Roth IRA. Any money taken out
of a Roth IRA at retirement will be income tax-free. Only if Congress
and the President were to change this law would any of this money
be taxable.

As an accountant
and a professional, I have assured my client that such a reversal
would be unthinkable, no matter what the situation. While the government
has the right to change existing laws at any time, I think we can
and should rely on Congress to keep its collective word.

A standard
IRA allows a taxpayer to deduct up to a specific limit allowed from
his gross income by placing this money into a specialized retirement
account. He pays no income tax on this money until he retires at
age 59 1/2 up to age 70. At age 70, he must draw down his account.

He will of
course be taxed on any money that he takes out of his account. While
it is conceivable that a future Congress will decide to raise taxes,
thereby taxing his income when he is most vulnerable – old
age – we in the CPA industry regard this as an extremely remote
possibility.

Why is this
possibility remote? Because this would be a breach of trust on the
part of Congress. It would be an announcement of deception on a
massive scale. “You put your money into your IRA to save taxes.
Suckers! Now that you are too old to do anything about it, we’re
going to tax you at a higher tax bracket rate than when you got
into this deal.”

Our industry
regards this as inconceivable. No matter what happens, no matter
how large the federal deficit gets, not matter how much pressure
Congress is feeling from workers who are still paying taxes, Congress
would not do such a thing. There is an honor code that governs Congress.
Congress will never raise taxes on retirees.

Congress has
wisely offered a way for taxpayers to defer taxes. I see no reason
not to take advantage of this. It is free money from Congress. There
are no strings attached. Well, hardly any.

2. EMOTIONALLY
LOCKED IN

You have argued
that Congress has baited up a lobster trap with the promise of temporarily
deferred income taxes. You say this: Because IRA owners know that
they will be taxed on this IRA money if they withdraw the money
before reaching age 59 1/2, they will never withdraw it to buy assets
that they prefer to buy in a more private way – assets that
are not regulated by agencies of the U.S. government. You have said
that this tax threat, plus a 10% withdrawal penalty, will keep people
from getting out while they still can.

This is silly.
Every taxpayer knows that he will have to pay taxes on a non-Roth
IRA. You are saying that taxpayers are so present-oriented that
they have emotionally suppressed the obvious fact that they will
eventually have to pay the income taxes on their money. You say
that they are so sensitive to paying taxes now that they will refuse
to cash in an IRA for any reason, just to save on taxes to be paid
immediately. I cannot imagine any taxpayer who could not see through
this arrangement. At any time, a taxpayer could think this:

I will have
to pay the tax at some point. Better now than later. I know what
I am facing now. It could be worse later. Knowing Congress, it will
be worse later. I will cash out the IRA, pay the tax, pay the penalty,
and do whatever I want with my money, without being limited by whatever
my retirement fund lets me buy.

I want to
make my position clear. I regard such a view as paranoid. I have
counseled my client as follows:

You will have
to pay the tax at some point. Better later than now. You know what
you are facing now: a guaranteed payment. It could be much better
later. Knowing Congress, it will be better. Do not cash out the
IRA, do not pay the tax, do not pay the penalty, and stick with
whatever your retirement fund lets you buy.

This is the
safe and secure way to think about investing for retirement. This
is what accountants recommend. They follow their own advice.

3. PRICE
INFLATION

You warned
my client about the possibility of price inflation in the future.
I understand it, you do not trust the Federal Reserve System to
maintain the purchasing power of the dollar.

Let me remind
you that the Federal Reserve is legally bound to pursue two policies:
(1) full employment and (2) stable prices. While it is true that
the law does not specify a numeric standard for either of these
goals, the Federal Reserve has been careful to balance these two
goals.

Today, “full
employment” is defined by the Federal Reserve as “no more than 8.3%
unemployment.” In 2009, it was defined as “no more than 9% unemployment.”
The Federal Reserve’s policy-makers remain flexible. Surely, we
do not want a narrow-minded ideology to govern the nation’s most
important policy-making economic institution.

As for price
inflation, the Federal Reserve has kept it in the range of 2%. Chairman
Bernanke has stated that 2% price inflation meets the law’s definition
of stable money.

According
to the so-called “law of 70,” we divide 70 by a constant rate of
increase in order to discover the doubling date. So, at 2% per year,
consumer prices will double every 35 years, which is certainly within
the range of “stable prices” in my book.

The fact that
a person sets up an IRA at the age of 30 and will pay twice as much
for everything he buys when he retires at age 65 seems reasonable
to members of my profession. I do not understand your objection.

Yes, in theory
it is possible that price inflation could rise to 12% per year.
It did in the late 1970s. But this was an anomaly. The Federal Reserve
reversed course in August of 1979. It reduced the rate of monetary
inflation. That reduced price inflation by 1985.

True, there
was the unpleasant side effect of a recession in 1980, which cost
President Carter his re-election bid, followed by the worst recession
from 1940 until 2008 under President Reagan. But members of my profession
think that the Federal Reserve will never again adopt policies that
could produce price inflation as high as 12% a year.

It is true
that the increase of the monetary base from late 2008 to mid-2011
took the base from $900 billion to $2.9 trillion. Technically speaking,
this was a tripling of the monetary base. While it is technically
possible for this increase to be translated into a tripling of prices,
this would take the willingness of the nation’s commercial bankers
to start making loans to the public again.

We think this
is highly unlikely. Commercial banks are sitting on top of $1.7
trillion in excess reserves at the Federal Reserve. These earn a
safe 0.25% per annum. While it is true that this rate of return
does not cover the costs of keeping the banks’ doors open, we see
no reason for the bankers to start lending to the public again.
The risk of lending to anyone in this economy, or any foreseeable
economy, is far too great.

If, under
some hypothesis of a wild thirst for income from loans sufficient
to enable banks to pay interest to depositors, bankers actually
do start lending, the Federal Reserve has a plan to exit from its
portfolio of government IOUs, including Fannie Mae and Freddie Mac
bonds. The Federal Reserve will sell these assets to the general
public.

There is a
huge appetite from investors to purchase Fannie Mae and Freddy Mac
bonds, since they are issued by two agencies that were nationalized
by the government in September 2008. There is virtually no risk
that the sale of these highly desirable assets to the public will
be at prices less than face value. The Federal Reserve will therefore
not suffer massive losses in its portfolio.

Even if massive
losses should be imposed, the Federal Reserve will suffer no loss.
According to new rules issued by the Federal Reserve on its own
authority, the Federal Reserve will compensate itself by writing
a check to itself to cover this loss. It will get this money out
of the funds that it would otherwise have turned over to the Treasury
at the end of the fiscal year.

It is true
that the federal debt would rise by this amount of money, but as
we CPAs say, federal deficits don’t matter. Private deficits do
matter, of course, but not federal deficits.

It is true
that Chairman Bernanke has not revealed exactly what the Federal
Reserve will do to exit from its tripled monetary base if commercial
banks ever start lending their excess reserves, but he has assured
the public and Congress on numerous occasions that there is such
a plan, and it will work.

So, I regard
as poor advice any suggestion that the purchasing power of money
invested in an IRA will depreciate at anything over 50% after 35
years, and therefore it is unwise to stick with an IRA. It is relatively
easy to earn 2% per year in an IRA account.

It is true
that the Standard Poor’s 500 index was over 1500 in the year 2000,
and that it is 1400 today. It is also true that the dollar’s purchasing
power has fallen by 30% since 2000. Nevertheless, I regard this
as a 12-year temporary anomaly.

It is also
true that putting the money in a bank account today does not return
2% per annum. This is another anomaly.

He can buy
corporate bonds. Of course, if long-term rates rise, the market
value of these bonds will fall. But I do not expect long-term rates
to rise. Yes, under price inflation, long-term rates rise and bond
prices fall, but as I have made clear, there is no good reason to
expect price inflation above a mild 2% per year, which the Federal
Reserve and the accounting profession believe constitutes stable
prices.

4. PRIVACY

You have raised
the issue of privacy. You have argued that the government finds
it far easier to monitor whatever assets people own when these assets
are in a special tax-deferred retirement account. You argue that
the taxpayer must send this information to the Internal Revenue
Service every year. All this is true, but it is irrelevant.

The fact that
the U.S. government and the IRS know where all this money is should
be no cause of alarm.

The fact that
the government sets rules regarding what may or may not be purchased
as eligible assets is also of minor concern.

The government
is committed to making available a safe, reasonably secure retirement
investment program for all Americans. The various agencies charged
by Congress to monitor capital markets have a responsibility of
assessing the safety of various classes of investment-grade assets.
Your suggestion that the officials employed by these agencies are
not capable of making such an assessment with any degree of accuracy
is simply unacceptable.

Furthermore,
you point to the failure of regulation prior to the meltdown of
2008 and 2009 as an example of their incompetence. I say this is
cherry-picking data. One brief interlude of confusion on the part
of the regulators does not constitute a valid indictment of the
regulatory system as a whole. The federal government has assured
us that steps have been taken to see to it that nothing like this
ever happens again.

Your suggestion
that it is better to buy gold coins, which leave few records implies
that the United States government poses a threat to the capital
of Americans. It suggests that privacy in a digital age requires
secrecy.

Those of us
in the accounting profession take a dim view of secrecy. We believe
that full disclosure is always best. Congress sets the example here.
So does the President. So does the Federal Reserve, which is committed
to transparency, except in Fort Knox, Kentucky, which does not really
count.

5. A
FREEZE ON IRA ACCOUNTS

Suggesting
that the President of the United States might issue an executive
order, without warning, freezing all retirement accounts because
of a national emergency, I regard as fear-mongering. Yes, the President
in theory could do this. I assume that everyone knows this. Therefore,
raising this issue publicly makes little sense. Why harp on this?

Such a scenario
makes little sense, apart from some wild-eyed scenario, such as
an international banking crisis or a biological weapon attack on
some Western city or cities. I mean, what are the odds of this?
Infinitesimal.

6. GOLD
IN AN IRA

You have written
that anyone investing in gold should begin by purchasing bullion
gold coins, preferably American eagle coins.

This is very
difficult to do in an IRA, as you know. A person must set up an
independently managed IRA. He must then find a firm that will take
responsibility for overseeing the investments. Most trustee firms
do not have ways of monitoring the whereabouts of gold coins.

I think that
gold is overpriced today, just as I did when it was $257 an ounce.
I told those few clients who were interested in buying gold in 2001
that gold is a volatile investment that does not belong in any retirement
account, or any account at all. I still believe this.

A
person’s IRA trustee can buy gold mining stocks. He can also buy
ETFs, although they own no gold, but merely own unsecured promises
from third parties to pay paper money equal to the price of gold.
That is as good as gold in my book.

The fact that
it is difficult to buy gold for an IRA is one of the great advantages
of owning an IRA. The IRA benefits from the good judgment of asset
managers who have graduated from accredited universities, accredited
business schools, and especially accredited law schools. These people
are familiar with basic economics, especially the economics taught
in Ben Bernanke’s textbook.

CONCLUSION

I hope I have
made my position clear. I think my views are representative of the
vast majority of Certified Public Accountants.

May
5, 2012

Gary
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible.

Copyright ©
2012 Gary North

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