A letter to family and friends

I've been giving this a lot of attention and though in the past 2 years. I've been doing a ton of reading in the past couple of years trying to understand what has happened with the economy, why, and where we are headed. I read entire books, financial blogs, economic blogs and of course the daily financial news (the least informative of the four). I think my opinion is based on some solid information and analysis.

As a country we are in a debt crisis, and what now seems to be the beginnings of a recovery is merely the effects of stimulus actions by the government and the fed, and this recovery is untenable because there aren't really jobs being created, and our economy isn't really creating more products and services. So, I don't see the stock market moving much higher in the next several years based on fundamentals. Here's the problem: As a nation we have racked up so much debt, much of it prior to the stimulus began in Sept '08, and our ability to pay off that debt (through increased tax base due to increased Gross Domestic Product (GDP)) isn't improving, and yet we keep piling up more debt and doing it faster than ever before. The US is like the family that keeps refinancing their house and taking all the equity out, and then one day they wake up, and don't have the money to pay the mortgages and the bank takes the house back. The difference is that the US Government can always print cash to pay their monthly debt service, but printing money always leads to inflation.

By keeping the interest rates so low, and adding money into the money supply, without a real recovery based on fundamentals to increase Government revenue, we are setting the stage for inflation. Because our National debt is so very high, and getting higher faster than ever before, we have already set the stage for hyper-inflation. There is solid research that states that throughout recorded history, when sovereign debt gets to a certain point, serious inflation is always the result. We are past that point. The Government has been printing money (by selling government bonds) like it's the last night of the world to fund what it can't pay for in actual tax revenue, and our Government has been living beyond it's means for decades.

But there's more. As inflation takes hold, it becomes more and more expensive for our government to restructure it's debt. Today they issue bonds (T-bills) that they have to pay back in 2 years at 0.82% interest. In 2 years they will try get that money to pay this debt by selling more 2-year T-bills, but by then maybe they will have to offer 8% for anyone to want to buy them. And in 2 years from then, maybe 15% or 20%. At some point the market will just stop buying them, and that's the day everyone realizes that the emperor has no clothes.

What does this mean to you, the investor? It means that when the shit hits the fan, your cash will loose much of it's value. With hyper-inflation, if that occurs, your cash will essentially loose ALL it's value (think Wiemar Republic in the 1930's or Zimbabwe in the past 10 years). Your stocks will perform better than cash only in the sense that the stock prices are driven up by inflation, but because inflation is so bad for the economy, the companies won't really be doing well, and thus the share prices after adjusting to inflation will really be loosing money too. Any bonds that you hold will loose value as the interest rates increase (interest rates increase with inflation), so they are not safe. Real Estate value will raise as inflation takes hold, so that's good for homeowners, but will there be any buyers in a currency crisis?

Can a currency crises of this magnitude really happen to the United States of America, where the currency essentially becomes valueless?? Yes, I believe it can. Will it? I don't know. What I do know is that we have gone well past the point of fiscal responsibility with our National balance sheet and that if the US Government was a publicly traded company, it would be a terrible investment.

Here's what I really hope you consider, and not as an investment, but as insurance against a serious devaluation of the US Dollar, and/or high inflation. Buy gold and silver and put it in a safe and forget about it. Really...forget about it. This is not a short-term investment. Precious metals are notoriously volatile in the short run. No, this is an insurance policy against the devaluation of our currency, and in my opinion, our currency will continue to loose value over the next 1-10 years. This is your kids college education in 10 years. Even if doomsday doesn't occur, there is no way that given our ever increasing Deficit and our huge debt load, that a dollar in 2 years or in 10 years will buy anywhere near what a dollar buys today. But hopefully an ounce of gold will. A note of caution: buy the actual physical bullion and put it away. Don't buy futures or ETF's. There are reputable companies that will sell you physical bullion delivered to your door for about $25 or $30/ounce over spot price.

Also, be very careful about how much you put into stocks and bonds. I'm slowly decreasing my exposure in the stock market. Also, since I don't believe in the long-term viability of the US Currency (or US Government Bonds), I'm investigating other currencies to keep my cash in. (The Euro isn't one of them...they are in bad shape too.)

I don't expect you to take what I say as Gospel, and drink the Koolaid, as it were...but I do hope that you take some steps to protect yourself should this come to pass. What happened in the past couple of years has been awful, but I'm afraid there's much more to come.