The government’s finances not only are out of control, but the actual deficit is not containable. Put into perspective, if the government were to raise taxes so as to seize 100% of all wages, salaries and corporate profits, it still would be showing an annual deficit using GAAP accounting on a consistent basis. In like manner, given current revenues, if it stopped spending every penny (including defense and homeland security) other than for Social Security and Medicare obligations, the government still would be showing an annual deficit.The government currently estimates a ten year deficit of $9 trillion; don't expect that estimate to decrease either. Unfunded liabilities - Social Security and Medicare - add another $40 trillion.
Loss of U.S. Dollar Purchasing Power through March 2008
| —-Since January of —- | |||
| Versus: | 1914 | 1933 | 1970 |
| Swiss franc | -80.4% | -80.4% | -76.5% |
| CPI-U | -95.1% | -94.0% | -82.3% |
| Gold | -97.9% | -97.9% | -93.4% |
| SGS-Alternate CPI | -98.2% | -97.8% | -93.6% |
Inflation may take a while to kick in, and it looks like deflation is the current order of the day.
Here's Williams again:
While equities do provide something of an inflation hedge — revenues and profits get expressed in current dollars — they also reflect underlying economic and political fundamentals. I still look for U.S. stocks to take an ultimate 90% hit, peak-to-trough, net of inflation, during this period.Someone in my position, age mid 50s, simply can't afford to wait around for equities to recover - I may not live to see it. I've worked and saved and invested too hard to see everything evaporate, and I can't work and save all that much longer.
So how do you protect yourself and your assets? The short answer is precious metals. After an investing lifetime of dismissing the gold bugs as irrelevant hysterics, I am now ready to listen. Silver looks to be even better, as the gold/silver ratio is currently around 70, versus an historical ratio much lower, at times as low as 10. Commodities in general ought to perform well in a period of inflation.
I believe that there's a good chance that we have not yet seen the bottom in the stock market. As always, investing is about uncertainty, and diversification is in order; but U.S. equities and U.S. Treasury bonds don't look like a great place to put your money.
One might also consider living abroad as well, though you still don't want to hold dollars.
I've only touched on a tiny part of this vast subject. Those who want to survive and thrive in the coming crisis will have to keep their ears to the ground. But you can be sure that the government is not on your side, and if you want to keep your wealth, remain cognizant of that.
A depression is certainly possible.
ReplyDeleteHYPERinflation less so.
Despite all of the "printing" of money that is purportedly occurring, the amount of debt to be written off is staggering.
While the outcome might FEEL like inflation due to severe economic stresses, actual hyperinflation is unlikely.
While I personally have a bunch of my assets in gold you have remember the whole world is in trouble and a global crash will cause the worth of everything to go down(That includes gold and silver). I am willing to bet the people who come out best are those are very diversified or those who can pick the individual winners in of what's coming next.
ReplyDeleteSorry for the long comment that follows, but felt I had to address something here.
ReplyDeleteThe "debt" does not need to be monetized. It already is monetized. The dollar is a fiat currency. It's just a piece of paper backed by the USG. A T-Bill is just a piece of paper backed by the USG. A T-Bill is simply a dollar with a not-valid date.
Since T-Bill's pay interest, and dollars do not, most people who do not need dollars for an immediate transaction tend to hold on to T-Bills instead (directly or via a bank account or money market fund). There is no reason that the debt cannot be rolled over forever.
Think of it another way:
Imagine the Fed printed dollars and bought all the T-bills in the world at market prices. Would this cause inflation? No. No one's balance sheet has changed a bit (since the t-bills were bought at market prices). Since no private actors financial position has changed, they cannot increase spending and bid up the price of goods. So you get no inflation.
Note that this is not the result under a gold standard. If the U.S. was under a gold standard, its credit rating would be F-. Whenever it issued new bonds, it's credit rating would fall further, and the mark-to-market value of the bonds would fall far below face value. If the government somehow built an alchemy device, and "monetized" its debt, that result would cause enormous inflation. The market value of all its debts would zoom back up to face value, everyone's balance sheet would bulge, and people could afford to spend more and bid up the prices of goods.
But the U.S. is not under a gold standard. When USG issues new T-Bills, its credit rating does not drop, nor does the market value of existing t-bills drop. Since the U.S.G. can issue an arbitrary number of T-Bills without ruining its credit rating, the treasuries cause inflation at the time they are issued.
So deficits can indeed be a large problem. The deficit to GDP ratio is one component of the overall inflation rate. If that gets too high, bad things will happen. On the plus, side the government's budget is naturally counter-cyclical. So as inflation heats up, tax revenues rise and the deficit falls.
But the overall level of "debt" is not a problem. Once the "debt" is issued, it's water under the bridge. "Paying off the debt" would be deflationary, and as destructive as contracting the money supply sharply.
One final way to look at it:
Imagine the Federal Reserve stopped calling "the national debt" the national debt. They simply called it "T-Bills outstanding" and updated their statistics to show T-Bills as a component of the money supply, rather than as debt. All government publications were purged of the word "debt" and replaced by "T-Bill". T-Bills are interesting paying dollars, when they mature, the T-Bill disappears and you get a dollar. Or you can trade your dollar in for a another T-Bill.
If the Fed did this, absolutely nothing would change. This is already how the monetary function system functions. Thus with a simple change in nomenclature, the national debt disappears!
I would lean toward precious metals with higher intrinsic value, i.e., those that have an actual industrial function, like silver and platinum. Gold is pretty much a useless metal, as far as I know.
ReplyDeleteLithium is used in batteries. Lithium comes from Chile and Bolivia, this last one ruled by the Quechwa tribe, so no one is investing there.
ReplyDeleteOn the other hand, the USA may muddle through as Britain did it a generation ago. The Chinese need world peace and stability, maybe they will help out. I share Dennis's pessimism.
So your making an assumption that the strength of the dollar will fall and inflation will take over much like pre-WWII Germany. At least that was what I read.
ReplyDeleteYou are also assuming that some central government and financial infra structure would remain allowing trading and banks to deal in/with the currency that would be used ie. commodities and metals.
I would disagree as a collapse of which you speak would cause large scale food riots and mobs and I believe if some control did remain we would fall almost exclusively into a barter economy and metals would lose almost all value next to basic food stuffs and such. Also trading in metals would be next to impossible as banks would collapse and there would be few people trading a pumpkin for a silver spoon.
If total collapse of our current government structure is your fear then I would suggest real estate and as far from populations as possible. If the economy did bounce back land values would increase and you would be in the black again. If the government collapsed then property taxes wouldn't be an issue and if we retained some government the land itself would give you a means to create barter wealth.
Also and I am not speaking as a survivalist here but believe it or not firearms are a good investment. The value of firearms has already for lack of a better term exploded and has not decreased in decades. Not gold type collector guns but standard working guns and assault type rifles can be sold to small gun shops for two hundred percent returns or more in just 8 years of ownership. In a chaotic collapsed situation they would be worth more than gold to coin a phrase.
Your problem would be that as the economy collapsed the government isn't going to let those who have a surplus keep it so anything you have needs to be barterable and hideable or far enough removed that it won't be seized for the collective good or something you can produce so it is not there to take all at once.
So I guess this does sound like a survivalist wishlist but it would be a persons best hope in the case of a widespread economic collapse. The situation in Pre-WWII Germany turned the economy into a barter situation and those few who owned land fared better than even those who had been well off before the collapse.
Definitely: A house, a farm, physical gold, physical silver, shares in commodity extractors/producers.
ReplyDeleteMaybe: Shares in food producers. Canadian dollars.
The problem I have with survivalist notions of the future is, as I said in the post, investing is about uncertainty; survivalists seem to be a bit too certain. That doesn't mean that you shouldn't have insurance. But a complete breakdown of the financial system, a barter economy, roving gangs, etc., represent an extreme situation. Not saying it couldn't happen.
ReplyDeleteSame thing goes for precious metals. While I think that there's a very good case to be made for them, gold, e.g., has few uses and its value could stagnate, especially if the economy doesn't tank.
Well I wasn't speaking as a survivalist really.
ReplyDeleteI am just pointing out that land and guns are two things that increase in value in a collapse or severe economic downturn.
I actually do not adhere to a survivalist attitude as in a case of pure survival my opinion is that a person cannot do that on their own like being a recluse in the woods with a buttload of food and a gun. If it boiled down to a true collapse then it would turn into a 3rd world type place with ethnic cleansing and mobs and the only sure way to survive would be as communities for protection.
But falling into a barter economy happens and in a barter economy produce, surplus tools and such to trade could make a person wealthy by the new standards. I guess it would be a picture more like the old west than post WWIII survival.
"I still look for U.S. stocks to take an ultimate 90% hit, peak-to-trough, net of inflation, during this period."
ReplyDeleteIf you believe stocks are in for this much of a drop, you should short stocks. When people talk about asset allocation, often it's just from the long-only side. Why not be market-neutral or, if you are as bearish as the fellow quoted, net-short?
Why not be market-neutral or, if you are as bearish as the fellow quoted, net-short?
ReplyDeleteThe market can stay irrational longer than you can stay solvent, that's why. But I agree that shorts are looking attractive now, it's all in the timing.
After an investing lifetime of dismissing the gold bugs as irrelevant hysterics, I am now ready to listen. Silver looks to be even better, as the gold/silver ratio is currently around 70, versus an historical ratio much lower, at times as low as 10. Commodities in general ought to perform well in a period of inflation.
ReplyDeleteYou could be right, Dennis, and I'm not about to be dogmatic. But color me a gold skeptic, even though I own an ounce of the metal through an ETF.
Despite its mystique and emotional allure, gold is a commodity whose value rises and falls with supply and demand. It is worth what the market collectively is willing to pay for it.
If the economic system crashes about our ears, there are as likely to be as many people and institutions frantically selling gold to raise cash as there are buyers. What else is it good for? Jewelry, yes. There probably won't be too many gift givers or shoppers buying gold necklaces in Depression 2.0.
Silver has more practical uses than gold, but that too assumes manufacturing will be humming along normally; not likely if the economy goes pear-shaped.
Finally, I don't see why there must be a reversion to the mean in the ratio of gold to silver prices. They are connected only conceptually. The correlation may fall into a certain range in "normal" times, but what is to say that the usual correlation applies in very abnormal times?
This isn't meant to downplay your thesis that we could be in for a very rough patch of hyperinflation. It's probably a good idea for investors to spread their bets, including owning — maybe overweighting — commodities. But I wouldn't go whole hog for one particular hedge. As always, diversification is cost-effective insurance.
Money is just used as a medium of exchange for real goods and services. Yes, I know that you already know that.
ReplyDeleteHowever, we are in a situation where the next generation doesn't appear to have the ability to render the goods and services.
For example LA county in California renders 1.6 billion dollars a year in services to its illegal immigrant population. The problem is that this outlay is far greater than the total output in terms of goods and services that the same population generates. Simply put, even if they were legal and taxed, they wouldn't generate enough wealth to provide for their own needs, let alone enough wealth to create a tax base that would generate the level of revenue that would be sufficient to provide for their needs.
Citizens of LA county would have been better off just having one more of their own kids per family than leaving the door open to the world of illegal immigrants with a net negative productivity. Their incomes are so low that their contribution to the SS system and medicare will not support retirees and they don't buy stocks and bonds, so who will we sell ours to when we retire?
http://www.examiner.com/x-5919-Norfolk-Crime-Examiner~y2009m8d18-Proof-that-illegal-aliens-are-bankrupting-Los-Angeles
Dave in Hackensack,
ReplyDeleteShorting stocks is getting more difficult. Some firms loaning stocks for shorting have stopped loaning. More and more people are being forced to cover short positions. This is part of the recent uptick in stock prices. When you see a 50 cent stock suddenly jump to $10 for no apparent reason, people are covering short positions.
Dennis,
ReplyDeleteIf you're 100% short, you'd obviously be pretty vulnerable. But you could also be net 10% or 20% short, etc., and you could selectively short companies you determine are most likely headed for the toilet.
Anon,
I haven't heard of any short squeezes as dramatic as your example recently, but regarding your other point, from what I've heard, Interactive Brokers and Think or Swim or the two brokerages most amenable to shorting. For the stocks that have options traded on them, you could of course by puts on them instead.
Kevin, that is some really confused economic analysis. Bonds are not the same as dollars. You say that there is no reason that they cannot be rolled over forever, but there is a very substantial reason, called INFLATION, which was the whole point. The government is creating a hyperinflationary scenario by continually expanding and rolling over its debt.
ReplyDeleteYou say "the treasuries cause inflation at the time they are issued". That is contradictory to what you say later, "Once the debt is issued, it's water under the bridge." I guess, you mean, after the initial inflation appears, no more inflation results. Well, duh.
You seem to forget that interest payment on the debt sucks out a massive fraction of the federal budget. Do you really think wasting your paycheck on interest payments is good?
If the government issued debt-free money, rather than bonds, that interest payment would not be there. But it is, because DOLLARS ARE NOT BONDS.
Expanding the money supply with bonds is the worst of both worlds, because we get both inflation and increasing interest payments.
The out of control debt is a huge problem and could undermine our hegemonic position as world reserve currency. If that happens, the hyperinflation is nigh.
Once figures get up in to the multiple trillions, who is still counting? Likely some Jewish accountants or something.
ReplyDeleteAll this goes to show that money isn't 'real,' it's just a stand in for labor. In short, money is just a "social construct," and the sooner humanity does away with it the better. Whites are by far the most advanced race on Earth, and thus they should be the racial group which abandons money first in favor of something better.
I came up with the idea recently that a large portion of this economic crisis is simply the result of Baby Boomers who are finally beginning to pay off their mortgage in large numbers after 30+ years of paying on them - thus there is much less of a revenue stream flowing in to the banks since so many Boomers now own their homes outright, and the moronic banks tried to make up for it all by loaning money to a bunch of irresponsible NAMs who aren't conscientious enough to pay it back.
ReplyDeleteThroughout all this not many people stop to ask - WHO IS THE U.S. GOVERNMENT PAYING ALL OF THIS 'INTEREST' TO? In other words: why is the U.S. government paying all this interest to the Federal Reserve and its associated semi-public/semi-private entities? Why can't a nation like the USA just create its own money supply instead of having to 'contract' it out to this shady entity who the government and thus its citizens will forever remain mired in debt-slavery to?
ReplyDeleteThis comment thread is starting to loose its moorings from reality. Moving on...
ReplyDeleteJustin,
ReplyDeleteYou’re thinking in terms of a hard currency world.
Under the fiat currency regime we live under, for all practical purposes Treasury bonds are dollars with not-valid-until dates printed on them. Guess what, if you hold T-Bills, the gov't will pay you back - by electronically crediting your account with dollars, handing you actual paper dollars, etc. It doesn't scrounge around looking for gold, or tax people to make sure claims for gold (dollar bills under a gold standard) outstanding are reduced so that it can pay you back with claims for gold (dollars) without running the risk of there being too many claims outstanding in excess of gov't gold reserves.
I never said inflation isn't or can't be a problem. This is what I actually said: "So deficits can indeed be a large problem. The deficit to GDP ratio is one component of the overall inflation rate. If that gets too high, bad things will happen."
USG does not need your dollars. What do you think happens when you mail in your income taxes? That it goes into a giant vault with all the other collected taxes, and that the government then draws upon this vault to pay for stuff? It tears up the hard earned tax dollars you mail in and throws them right out. It can print its own without any trouble at all. It taxes you simply because otherwise, everyone would be too rich, and prices would go up i.e. inflation. In other words, the purpose of taxation (along with issuing and monetizing bonds) under a fiat-currency regime is not to finance government expenditures, but to minimize monetary dilution and thus manage inflation.
Your income tax dollars aren’t dumped into a giant pot in the basement of the Treasury building, and then drawn out sometime later to pay for say, Predator drones that will be used to bomb Afghani peasants and tear them to pieces. And the government can and does print its own scrip. It’s not physically constrained by anything like say a limited stock of gold or something.
Kevin, your analysis is nice, except for your equating bonds and cash. The same "for all practical purposes" you say, except for the very practical issue of interest payments.
ReplyDeleteTheoretically, the government could just issue cash for expenditures, in lieu of collecting taxation, but it doesn't. Our current operating practice is recycling existing money to avoid inflation.
Keep in mind, we would not actually be richer if government did that. We would hold more dollars in nominal terms, but they would be continually diluted by gov't expendutures. Our real wealth level would remain the same.
I agree with Eman. With our knoweldge, we should practice a better system. But, surprise, the banking interests (you know who) are enriched by this sytem, so they will fight all the way.
"WHO IS THE U.S. GOVERNMENT PAYING ALL OF THIS 'INTEREST' TO? In other words: why is the U.S. government paying all this interest to the Federal Reserve and its associated semi-public/semi-private entities? Why can't a nation like the USA just create its own money supply instead of having to 'contract' it out to this shady entity who the government and thus its citizens will forever remain mired in debt-slavery to?"
ReplyDeleteBecause the gov't wants to HIDE the fact that it prints money out of thin air and wants to maintain the fiction that it's borrowing it all from actual citizens' bank accounts, citizens who've actually worked to save that money? Because the gov't knows that if the citizenry caught on to the reality of gov't money-printing, which devalues the dollars the citizens worked and sweated for -- that is,that the gov't is in fact committing counterfeiting -- there'd be revolution before morning?
"It taxes you simply because otherwise, everyone would be too rich, and prices would go up i.e. inflation
the purpose of taxation (along with issuing and monetizing bonds) under a fiat-currency regime is not to finance government expenditures, but to minimize monetary dilution and thus manage inflation."
You seem to be operating under some kind of delusion that money comes from, I dunno, trees, or some other kind of organic, mysterious process. No. Money is created by the government. Rising prices are not inflation. Rising prices are the symptom. The inflation is the gov't money-printing that inflates the money supply. Therefore, you end up with more dollars to chase the same number of goods.
Gov't gets its printed money into circulation by paying gov't employees, sending welfare checks and making payments to gov't contractors.
If the gov't didn't print money and get it into circulation (through the politically expedient method of buying votes by promising voters gov't spending dollars) the money would not be in citizens' hands to be ABLE to pay more. So there would BE no rising prices.
Justin,
ReplyDelete"The same "for all practical purposes" you say, except for the very practical issue of interest payments."
A dollar today is worth more than a dollar tomorrow, next week, next month, one year from now, etc. (I don't think I have to explain this)
So N dollars now is equal to (N + X) dollars in the future. X consists of interest payments.
"Theoretically, the government could just issue cash for expenditures, in lieu of collecting taxation, but it doesn't. Our current operating practice is recycling existing money to avoid inflation.
Keep in mind, we would not actually be richer if government did that. We would hold more dollars in nominal terms, but they would be continually diluted by gov't expendutures. Our real wealth level would remain the same."
You're just repeating what I already said earlier.
The dollar is going to be shortly tossed off the status of being the world's reserve currency and is already being replaced as the ONLY acceptable monetary unit for buying petroleum and its products on the world market.
ReplyDeleteEither a basket of currencies or the Euro will end up as the replacement, but the consequences will not be pretty, as the UK learned when the pound sterling was replaced by the US dollar way back in the last century.
Now the Brits are begging for petro-deals by releasing terrorists etc, etc. The Dems don't give a hoot about fiscal and monetary policy [anymore, they used to] and by the time the latest loon finishes, we'll pine for the days when Jimmy Carter was giving away the Panama Canal.
Modest proposal: buy assets that will generate useful goods and services whether or not a collapse happens.
ReplyDeleteMost obvious: upgrades to your house that cut your utility bills. Insulate, put on solar panels, install a ground sink heat pump.
You could also build a green house.