The idea that the government of a major advanced country would default on its debt — that is, tell lenders that it won’t repay them all they’re owed — was, until recently, a preposterous proposition. Argentina and Russia have stiffed their creditors, but surely the likes of the United States, Japan or Britain wouldn’t. Well, it’s still a very, very long shot, but it’s no longer entirely unimaginable. Governments of rich countries are borrowing so much that it’s conceivable that one day the twin assumptions underlying their burgeoning debt (that lenders will continue to lend and that governments will continue to pay) might collapse. What happens then?
The question is so unfamiliar that the past provides few clues to the future. Psychology is crucial. To take a parallel example: the dollar. The fear is that foreigners (and Americans, too) will lose confidence in its value and dump it for yen, euros, gold or oil. If too many investors do that, a self-fulfilling stampede could trigger sell-offs in U.S. stocks and bonds. People have predicted such a crisis for decades. It hasn’t happened yet. The currency’s decline has been orderly, because the dollar retains a bedrock confidence based on America’s political stability, openness, wealth and low inflation. But something could shatter that confidence — tomorrow or 10 years from tomorrow.
The same logic applies to exploding government debt….
Of course we can. We are hopelessly addicted to spending more than we have. And we have any number of enablers who tell us that it is a fine and good thing that we spend more than we earn.
As I understand it, China now holds the USA’s mortgage. Never mind any military confrontation, if China forecloses the USA is done for.
Jon R.
If China sells US bonds, we will have hyperinflation, and they will either continue linking their yaun with or dollar and share in our hyperinflation, or else they will drop the dollar peg and have a deep depression. Either way, many chinese will starve, and their government will fall.
China will do what it is already doing: It will slow the purchase of US assets, try to stockpile commodities buying them with US treasuries (thus selling our junk promises to third world countries in exchange for resources like oil and aluminum) and it will try to stimulate its own domestic economy. It hopes to drop the dollar peg and to stop buying treasuries at the end of the process but this will likely take a few years, unless their is a run on the dollar.
My bet is on China. They will tolerate a mild inflationary depression in both China and the US (this is still mild, nobody has starved) for a few years, allowing China to restructure its economy. They will then drop the dollar peg and dump our junk bonds. This will be followed by hyperinflation in the us, and a continued mild inflationary depression in China. I think we have a minimum of two years, and a maximum of 10 years.
This is a good time to set up and improve your vegetable garden, to learn how to can food, to learn how to make your own clothes, and to improve the insulation of your home, and to invest in low gasololine use transportation ?scooters, or car pooling. These investments (together with making sure you and your kids have a useful education and are debt free) are much more likely to keep the family together than any investments you make in your 401k. Nobody will retire, but nobody needs to starve, either.
I would also reduce your reliance on energy, and to see about raising chickens and fish. I have found that tilapia (thought to be the fish that Jesus fed the thousands with) grow very rapidly, and could be raised in an apartment. We are setting up a grow room in our basement (grow lights, run by a solar panel on the wall outside) feeding the edible plants that clean the water of the tank. The fish are fed on worms out of our compost heap.
http://www.ft.com/cms/s/0/78e2eae4-c7af-11de-8ba8-00144feab49a.html?nclick_check=1
Here is someone who disagrees with me, and believes that China will choose hyperinflation rather than drink the chemotherapy of deflation.
[blockquote] “Well, it’s still a very, very long shot, but it’s no longer entirely unimaginable.”[/blockquote]
Actually, it’s quickly becoming a mathematical certainty.
Nations rarely default honestly. But they do default. The way nations typically default is by debasing their currency and monitizing their debt allowing the to pay off their debts with freshly printed money. This will of course lead to inflation. We are already seeing the first signs of the coming inflation with the violent rallies in the financial markets that are being fueled by newly printed/borrowed money.
I very strongly advise people to remain ultra-diversified in their investments. People should have significant exposure to non-US Dollar denominated securities (foreign stocks and bonds) as also natural resource stocks, and commodities such as oil, copper and precious metals (gold and silver).
For those who are retired or nearing retirement, diversified investments are an imperative as inflation will destroy savings and wipe out those dependent on fixed income. I recommend following [url=http://www.koamtv.com/Global/story.asp?S=11355575//www… ]the investment strategy of the late Harry Browne[/url].
Last month, at a meeting of the finance committee of a charitable foundation on which I’m a director, the foundation’s financial consultants advised taking a portion of our money out of American investments and to put them into European stocks and bonds, which they felt were a safer and more stable investment. The concern is what they believe to be the coming debasement and potential hyperinflation of the U.S. currency due to actions of the present president and Congress. There’s big concern out there. I don’t think we’ve seen anything yet.
Unfortunately, I think we will see a global debasement of currency. Not only is England, Japan and China printing money, but so is France and Spain. Germany is something of a hold out but even she (despite her chastisement by the Weimar hyperinflation) is now reluctantly starting to print money in order to keep her manufacturing base from going to those countries who do print money.
I personally think that the Euro is more unstable than the dollar. How long will Germany tolerate Spain? The EU is pretty darn young and it was not long ago that all these nations had their own currencies. It is not clear to me that the Euro will survive the next 10 years. Nor is China or Japan a “safe haven”. They too are printing money to keep from losing their export driven economies to the likes of us.
I would therefore favor rental houses, small businesses if you can get one that will not be taxed into the ground, investing in yourself/your children via education to some useful and marketable trade like plumbing etc.
Seriously.
Most of all, I would have no debt, I would insist that your children have no debt, and I would pay off all mortages using 401k funds if need be. After all, the debt is real, the “equity” is not. Then I would learn to live as frugally as you can, and to enjoy living frugally.
I plan to work indefinately. It may well not be in medicine, but I do lan to work indefinately. My mother is 80 and still works (as a college professor). My grandmother (a school teacher) worked until she was 90. I would not encourage anybody to “retire” short of disability or other incapacity. Not unless you plan to work at home in some off the books home business of your own.
Harry Browne’s Permanent Portfolio Fund Investing Strategy
Harry Browne’s original strategy was to invest equally – 25% in each category – into four investments: growth stocks, bonds, precious metals and cash (T-bills or money market funds).
Today, the Permanent Portfolio Fund has a similar mix:
The Investment strategy of Harry Browne is:
25% precious metals (20% gold bullion, 5% silver bullion);
10% Swiss franc bonds yielding less than 2%;
15% real estate and natural resource stocks, foreign and domestic;
15% aggressive growth stocks;
35% in government securities, including T-bills.
One caveat would be the emphasis on “stocks”. There is more silver “present” in ETF funds than was ever mined in the history of the world. Obviously there is fraud involved, since silver is degraded via a variety of commercial and industrial uses (cell phones, medications etc). When the bubble bursts, “precious metal investors” will be left holding paper promises.
Similarly, how well have real estate stocks worked? Did you get the triple A kind? Oh subprime was rated triple A too, wasn’t it. Instead of buying real estate stocks, I would buy rental housing. Instead of buying gold mining stocks I would buy physical gold (if you can get it). If you do go this route, I would not use a safe deposit box as, during the last Depression, and recently in England, valubles in safe deposit boxes were confiscated).
Clueless,
I think you are missing the point. The Permanent Portfolio is not designed to grow in all asset classes. It is designed for the various asset classes to counterweight each other. Real Estate has been murdered over the last couple of years as we all know. During the great panic of ’08 equities collapsed. But ultra-conservative bonds and cash held up extremely well.
This is reflected by the fact that in 2008 (the worst year in the financial markets since the early days of the Great Depression) PRPFX lost only a little over 8%. It beat the S&P 500 by around 30 pts and sustained relatively minor damage. It is also worth noting that 2008 was only the 4th down year in the roughly 28 years that the fund has existed.
A Permanent Portfolio is designed first and foremost to limit risk and secondly to capitalize on fluctuations in the value of various asset classes. Personally I think US Dollar denominated bonds are a terrible investment right now. But I own them because you have to be diversified in order to be safe from unexpected events and to be in a position to profit when eventually some level of stability returns.
Recall that people who bought Long Treasuries around 1980 for about 15% were being laughed at because of the brutal inflation and the widespread fear that it was going to get worse. But Paul Volker had just arrived at the Federal Reserve and he began to process (extremely painful) of breaking the great inflation of the 70’s -early 80’s. Those bonds turned out to be an excellent long term investment.
Disclosure: PRPFX currently constitutes more than half of my investments.
As a quick follow up to my # 11 I would also note in response to oft repeated (and unsubstantiated) claims of fraud on the part of metal ETFs, that PRPFX is not an ETF. It is a mutual fund subject to regular review and audits by independent firms. It also holds all of its metals physically in the form of bullion coins or bars.
#11. You misunderstand me. I don’t object to real estate. But only if it is REAL estate. Real estate stocks depend on paper growth of “value”. You buy a hovel in LA (or the REIT on many hovels in LA) for 40,000 in 1971 and sell for 1,000,000 in 2005. Your return soared. Of course if you bought at at 2006 and tried to sell today you would have lost almost as much. Same with buying Silver SVD in 1999 and selling in 2009, versus buying at the height of the Hunt bubble and selling 10 years ago.
I am talking about something else. Something that does not depend on your assets increasing or decreasing. If you have a paid off house, you can live in it. You can also rent it out. Your ability to live in it does not change between 1980 and 2006. Similarly, physical assets can be traded for goods.
From Jeff Clark:
Time of Christ: Under the Roman Empire, an ounce of gold purchased a Roman citizen his toga (suit), a leather belt, and a pair of sandals.
Today, one ounce of gold will still buy a man a suit, a leather belt, and a pair of shoes.
400 BC: Some scholars report that during the reign of King Nebuchadnezzar, an ounce of gold bought 350 loaves of bread.
Today, an ounce of gold still buys about 350 loaves ($950 divided by 350 = $2.73/loaf).
1000 BC: King Solomon was known to have purchased many horses for his army. Historical records show he bought them in Egypt for 150 shekels of silver each. 150 shekels was about 55 troy ounces of silver.
Today, you can still buy a riding horse for 55 troy ounces of silver ($800).
The purpose of physical assets is that they hold their value. Physical assets will not make anybody rich. That is not their purpose. Their purpose is to keep people from being financially destroyed.
However, since I anticipate that precious metals will be confiscated by the government (as they were in 1933 under Rosevelt) other physical assets, preferably directed toward eating regularly and sleeping warm would be my “investement of choice”.
“It also holds all of its metals physically in the form of bullion coins or bars. ”
If true then it can be easily accessed for confiscation (as happened in London last year. The largest gold depository was broken into by the police who reportedly told the press that there was a lot of people holding precious metals there who were involved in drugs.
In a crisis, I would not trust governments. Rosevelt confiscated gold during the Great Depression, and he is considered a democratic saint in the US.
Actually, Japan owns more US treasuries than China. And neither is about to just start selling them.
The one investment axiom I learned long ago, is that if everyone knows something is going to happen ( ie: curriencies fall, dollar falls to zero, China and Japan sell bonds, America goes belly up ) then it is not going to happen.
The markets “Do” the thing that catches the most people by surprise. It really does pay to be somewhat a contrarian.
You heard it here.
bl
Everybody “knows the dollar is going to fall?” Would that that were true. I can think of a hundred acquaintences who have the majority of their assets in “home equity” and in 401ks while having large debts including mortgage and student loan. I can think of 3 who have no debt and hold only physical assets.
When the majority of people (or at least 30%) have abandoned their 401ks for physical assets, then I will worry about whether I am just “part of the herd” and will consider buying stocks again. Right now, I anticipate that the stock market will do another bear market rally, before eventually falling to about 300-500 (in inflated dollars) over the next 10 years or sooner if there is a crash. The value of the dollar will never fall to zero, but I would be happy if it falls only another 50%. (It has already fallen 93% since Rosevelt took us off the Gold standard the first time).
Oddly enough, I too consider myself a “contrarian”. After I paid off all my student loans early in 1985, I started buying EE savings bonds, while others bought stocks. After the 1987 crash, I bought stocks from 1987 until 1999 and then switched entirely to Treasuries and Real Estate funds until 2004. At that point, I completely cashed in my 401ks (taking the penalty) and used the money to pay off all housing. Currently I am in physical assets and savings accounts/CDs only and have no debt.
Currently, my goal is not to make money. My goals are to:
1. Educate and provide for my two children
2. Provide for my extended family and certain very close friends.
3. Continue to tithe.
4. Avoid long term financial entanglements including partnerships, or medically related businesses (such as nursing homes or patient care) where one can be sued as an individual, or where patients can acuse one of “abandonment” if one decides to go out of business rather than continue to see them at a loss.
5. Build up small 1-man businesses that can be worked by myself or by my children if my current career becomes economically unfeasible
6. Avoid losing money.
The people who will be doing “really, really well” this next 10 years will be the ones who lose the least, and emerge with intact families, friends and community. I hope to be one of them. My lifestyle is far more modest that that of my subordinates, I have every intention of working until I die, either in my current trade or in a small business of my devising. I certainly have no desire for material accumulation let alone the trappings of wealth. Not only will I not be able to “take it with me when I die” but I doubt I will even be able to pass it on to my children, given the estate tax structure that will be likely at that time. Therefore, I intend to bequeath lack of debt, (including lack of mortgage and student loan debt) an excellent education, good health, and a relationship with Jesus to my children.
If I can do that, I will die “rich” indeed.
Clueless,
Those who are heavily in debt may be among the very few who will benefit (at least briefly) during the coming inflation. They will be able to pay off their debts with debased paper money much more easily. Creditors on the other hand are in deeeep trouble.
As for your 6 goals I think they are admirable. In deference to Warren Buffett’s first rule of investing I would however move your # 6 up to #1.
“The first rule of investing… Don’t loose money.”
-Warren Buffett
In ICXC
John