We live in interesting financial times. That’s a kind way of saying that the global monetary authorities are in the process of trashing the U.S. dollar (along with every other fiat currency out there). Over the past decade plus our central bankers have imposed just about every form of financial repression/money printing known to man (and a few additional types they just developed especially for the occasion).
What’s the upshot of this rant? There is an impending global monetary reset coming, and it will change all the existing rules about saving, investing and wealth.
What is a monetary reset? Simply put, it is the long-overdue realignment of the value of fiat currency in our financial system vis-a-vis gold, silver and other tangible assets.
The first indicator that we are careening towards a monetary reset is the rapidly deteriorating U.S. budget deficit. Now I would like to state upfront that I’m not a fiscal hardliner. I don’t believe that a country must run budget surpluses in order to enjoy a stable and sustainable fiscal position (although it does help). No, all a country needs to do in order not to blow itself up, fiscally speaking, is to grow its economy at a faster rate than it grows its outstanding sovereign debt.
Unfortunately, the United States (along with nearly every other developed nation in the world) hasn’t been able to do this. Instead, U.S. spending has spiraled out of control over the past decade. At first this overspending was in response to the Great Financial Crisis of 2008-2009. But a funny thing happened as that financial crisis faded into the rear view mirror – the U.S. government kept on spending!
Indeed, the economy has needed an almost never ending parade of stimulus measures in order to keep its head above water. Most recently, the 2017 Trump tax cut goosed the economy by slashing income tax rates for corporations and many households. But it did so at the cost of a ballooning budget deficit, which surpassed -$1 trillion in both 2018 and 2019.
Surprisingly, I am not terribly concerned by our current fiscal profligacy. Instead, I am much more worried about what comes afterwards in the 2020s.
Social Security is one of our most obvious impending fiscal disasters, but one that will only fully unfold over the next decade. This bedrock U.S. entitlement program will devolve from a relatively modest -$80 billion negative annual cashflow position in 2019 to a staggering -$400 billion annual deficit by the early 2030s. Of course, this Social Security-specific deficit will end up being rolled into the general budget, putting even greater pressure on U.S. government finances.
But the real coup de grâce will come when the economy next enters recession. You see, it has been more than 12 years since the last recession hit and we are overdue for another one. When it finally arrives, all the negative trends currently in place will be supercharged into a perfect financial storm.
A recession would cause tax revenue to plummet at the same time that government expenditures explode. In fact, it is probable that government deficits will blow out to -$2 or -$3 trillion dollars per annum in such a scenario. At that point, deficits of only -$1 trillion a year like we have today will seem like a sweet, distant dream.
That would be bad enough by itself, but there will be other ugly economic dynamics at work as well. For instance, the market value of stocks and bonds will plunge during a recession, revealing most corporate, state and local government pension funds to be woefully underfunded. Many of these pensions will subsequently fail, with their obligations absorbed by the Pension Benefit Guaranty Corporation. As you might have already guessed, the U.S. taxpayer will ultimately be on the hook for making good on these unrealistic promises.
But perhaps the greatest contributor to a future monetary reset will be the eradication of the profitless prosperity sector in the next recession. Uber, Netflix, WeWork and Tesla are just a handful of well known profitless prosperity mega-companies. Most of these corporations don’t make any profits, while the few that do only possess the illusion of profitability.
This is because a decade of Fed-driven easy money policies has fundamentally reordered our economy into a bubble-addled monster. It only works as long as investors – speculators, really – are willing to throw nearly unlimited amounts of free money into capital-burning ventures. The moment they stop, however, the wheels will come off the magic school bus we call an economy.
But the governments and central banks of the world will not stand idly by while the financial world burns down around them. Instead, they will crank up the printing press and spew trillions of new dollars, yen, pounds and euros into the world in an ill-fated attempt to avoid the natural consequences of earlier bad policy decisions.
In other words they will print a lot of money, devaluing the currency in the process.
In fact, they’ve already started. The Federal Reserve recently announced that it will purchase $60 billion of Treasury bills every month until Q2 2020. They have also assured the markets that this does not represent quantitative easing (aka money printing), even though the operations look to be more or less identical. How much do you want to bet that when the time comes to wind down the operation in 2020, they will find an improbable reason to just keep going? That has been their modus operandi so far and it is unlikely to change now.
In any case, it is pretty obvious that a monetary reset is coming. This means the economy will be rocked by widespread debt defaults, a universal debt jubilee or oodles of helicopter money thrown to the masses – and possibly even all three!
This is bad because in our financial system one person’s debt is another person’s asset. If you want to erase a bunch of debt, which our overleveraged economy desperately needs, then it also means writing down a lot of assets to zero. Printing money and handing it out to people so that they can pay their debts might preserve the nominal value of many assets, but only does so at the cost of widespread inflation that will destroy the real value of those same assets. To paraphrase former President Franklin D. Roosevelt, this generation has a date with monetary destiny.
The real question is what should you do about this impending disaster?
I think that answer is pretty easy: buy bullion, antiques, gemstones and fine art. In a monetary reset scenario, conventional assets like stocks and bonds won’t perform very well. If you are really concerned with protecting your wealth, it will be necessary to diversify into hard assets that can’t be printed by incompetent central bankers.
I have a soft spot for U.S. 90% junk silver coins because they are readily available, highly liquid and also sell for low premiums over spot. But of course, there are many other hard assets that would do wonders for your portfolio as well. For example, antiques such as vintage mechanical wristwatches, antique sterling silverware and fine estate jewelry would all effectively inoculate you against the coming monetary reset. Plan accordingly.
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