Emma’s Note: Emma Walsh here, managing editor of the Diary. This weekend’s guest essay comes from colleague Tom Dyson.
Regular Diary readers will be familiar with Tom’s story. For the last couple of years, he has traveled the world with his wife Kate and their three kids. Right now, they’re spending the winter in Idaho learning to ski.
Tom’s overall investing philosophy is very similar to Bill’s. And he’s just as worried as Bill about the future of the American economy and the U.S. dollar.
Tom says the U.S. government is in the most stretched financial position of any entity in history. The only way it can service its existing debt is by adding more and more new debt. This situation is unsustainable.
So, he asks, who will bail out the U.S. government?
In 1998, Wall Street bailed out a hedge fund.
In 2008-2009, the government bailed out Wall Street.
In 2020-2021, who bails out the government?
This is the easiest way to understand what’s happening…
In 1998, a big hedge fund called LTCM blew up. It had borrowed such extraordinary amounts of money from various banks, its collapse threatened to bring down the whole banking system.
So a cabal of Wall Street banks clubbed together and bailed out LTCM. They averted the crisis.
In 2008, Wall Street blew up. Bear Stearns, Lehman Brothers, and a bunch of other big banks collapsed when their bets on subprime loans went wrong. It threatened to bring down the whole banking system.
So the government stepped in. Acting in concert with the Federal Reserve, it bailed out the whole of Wall Street. This averted the crisis.
In early 2020, the government was $23 trillion in debt and was running a trillion-dollar budget deficit. Plus, it had a $100 trillion pile of bills (off-balance-sheet entitlements) to pay, stretching into the future.
A recession arrived (fueled by the COVID-19 pandemic), impairing the government’s tax revenues, while also triggering a series of fresh trillion-dollar bailouts…
The Treasury is now in the most stretched financial position of any entity in history… And it’s entering the exponential stage of the bankruptcy process, where it can only service its existing debt by adding more and more new debt.
So who bails out the Treasury?
The Only Way Out
There is only one way to rescue the government. That’s devaluation of the dollar.
Devaluation is a way to reduce the real value of the government’s debt (and everyone else’s, too). It’s the only remaining way to bail out the system.
Devalue or die.
I know currency devaluations only happen in undeveloped countries, and no one believes it could happen here.
I know U.S. government borrowing costs are still near their lowest levels in history, and no one seriously entertains the idea that the U.S. government could be broke.
I know everyone’s focused on lockdowns, small business failures, and the deteriorating unemployment situation.
So I know this sounds crazy. But I’m certain about this…
Devaluation is the ONLY path left to bail out the government from bankruptcy. And they’ve already decided to pursue this path…
You can see this in the price of the U.S. dollar over the last nine months.
And you can see the first signs of this in the stock market, commodities markets, real estate markets, and cryptocurrency markets, as prices start to “pop” like popcorn.
Protect Your Wealth Against Devaluation
This is just the beginning.
When the market fully absorbs what’s happening, I predict a thunderous stampede of capital will leave the currency and bond markets and charge into the stock markets and other real assets.
The next indicator to flash will be rising consumer prices. It’s not flashing yet, but it will soon…
We’ll see stagflation because the currency devaluation won’t produce real economic growth. It will only devalue the dollar, other currencies, and things that are claims on currencies (loans) relative to anything backed by real assets.
What to do about all this?
U.S. dollars and bonds are the worst things you can hold. They’re effectively guaranteed to lose purchasing power.
Stocks are harder to predict. Some stocks should do okay, as they’re claims on real, hard assets.
I prefer industrial or commodity businesses, and I like international stocks. That’s because they’re much cheaper than U.S. stocks and pay better dividends. I’m staying away from U.S. stocks… especially the most popular ones.
Finally, I like gold and silver for maintaining the purchasing power of our savings during the devaluation…
Tom Dyson, Editor, Postcards From the Fringe
P.S. No one is saying the U.S. government is bankrupt. But it is. If the Federal Reserve hadn’t monetized its debt last year (and continued this year), the government would have defaulted on its obligations. It’s in a position where the only way it survives is through bailouts. That’s a blow-up.
I saw something like this coming back in 2018. So I moved to the sidelines in gold and silver – to protect and grow my family’s nest egg over the next decade.
And it’s not too late yet for anyone who wants to do the same. I’ve put together a model portfolio, including percentage allocations for the ideal precious metals portfolio… as well as the 11 gold stocks I recommend today. Learn more here.
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