Inflation Disaster: How Elites Are Hedging
In fairy tales, there’s always a silver lining in storm clouds and a pot of gold at the end of the rainbow.
It’s certainly no fairy tale, but the same is true with the global crisis we’re living through.
The supply of silver is lower than gold because silver is a consumable, industrial precious metal used in cell phones, computers, light switches and as a reflector in mirrors. While gold is being hoarded, silver is being used up. To me, gold and silver are the best and brightest opportunities for most people during this crisis.
I predict the public will soon lose faith in the government manipulation of our money and awaken to the reasons to hold gold and silver as a hedge against inflation.
When the public wakes up, the next bubble of greed and fear will be on. Gold may go above $3,000 an ounce, and silver may someday be the same price as gold because it is an industrial precious metal in short supply — but those are only my predictions.
It was back in 1972 during my second tour of duty in Vietnam that I received a very discerning prediction from my rich dad. He wrote: “President Nixon took the dollar off the gold standard. Watch out, the world is about to change.”
I was intrigued though confused. Shortly thereafter, I read an article in The Wall Street Journal that discussed gold. At the time, the price of gold was fluctuating from $35 an ounce to $40 to $60 an ounce.
What sparked my rich dad to pen that letter?
When Nixon took the dollar off the gold standard earlier in 1971, the dollar instantly became fake money. No longer was the dollar backed by sound money: i.e. gold. The U.S. dollar was now a big IOU.
For over a century, the value of the dollar compared to gold has dropped significantly. But the inverse relationship doesn‘t only exist between the U.S. dollar and gold. The value of all currencies has dropped compared to that of gold.
But that’s just the end of the beginning of this story…
Inflation or Recession?
As you know, low demand and high supply mean a drop in the value of anything, including the dollar. When our troubles started with the Great Recession, the then-new Fed Chairman, Ben Bernanke, had a tough choice to make: If he printed more money to bolster the dollar, inflation would increase and the dollar might collapse.
If he raised interest rates to slow inflation, the economy might go into recession.
The Fed for decades has been in a bind, a fool’s choice: do I choose this kind of recession or that kind?
Let me explain.
The Great Depression was caused by governments trying to cheat on the gold standard. Heavy debts were incurred during World War I. Governments had a hard time paying off those debts because their currencies were pegged to gold. Gold made it so only so much money could be printed. If you had a million ounces of gold and you could only print three dollars for every ounce, you could only print three million dollars.
But governments tried their best to find a way around the gold standard.
As debt mounted and defaults rose, banks failed and millions of people lost their life’s savings. There was no FDIC, so if a bank failed you lost everything. As people began losing money, they spent less, which caused prices to crash.
Unemployment rose quickly, which caused even less spending and even more deflation. It was a devastating spiral that led to the worst economic crash in US history. Because the US was on the gold standard, they couldn’t print their way out of the crash.
In Germany it was different. The German government decided to abandon the gold standard and began printing currency as quickly as the presses could handle. The result was massive hyperinflation. From 1919 to 1923, Germany’s currency supply increased from 29.2 billion marks to 497 quadrillion marks — a multiplication of 17 billion.
There’s an old joke about a woman who left her wheelbarrow full of German marks outside while going into a store to buy a loaf of bread. When she came back out, her wheelbarrow was stolen but the money was left behind. That is the devastating effect of hyperinflation. The currency becomes essentially worth nothing because so much is being printed so quickly.
As we know, the Fed went the way of printing trillions of dollars. It would seem we’ve made our choice and we’re setting the groundwork for a German-style depression in the future.
When? I don’t know, but now is the time to prepare…
Impending Financial Disaster
The primary reason why I keep my dollars moving is that I’m bearish on the greenback. We have all heard the saying, “The U.S. dollar is backed by the full faith and confidence of the U.S. government.”
Unfortunately, faith and confidence in the U.S. government are eroding. I don’t believe Americans have the stomach to make the changes that are required to run a fiscally responsible government and save the dollar.
When President George W. Bush attempted to reform Social Security, that proposal was more unpopular with Americans than the Iraq war. People love their entitlements. When Bush pushed the Prescription Drug Benefit plan through, I decided the U.S. dollar is toast. To me, all hope of avoiding financial disaster was gone. The American people voted.
Rather than put my faith in “the full faith and confidence of the U.S. government,” I decided long ago to put my faith in the ancient form of money, gold, and silver.
The funny thing is some people don’t think gold and silver are money or at least not money worth saving.
Here’s why they’re wrong.
Living on Borrowed Time
Throughout monetary history, all fiat currencies — currencies that are given value solely based on an authority’s claim of value — have fallen to zero. And throughout history, societies have always resorted back to gold as money. This has gone on for 6,000 years.
That’s a hell of a track record.
The reality is the dollar is living on borrowed time, and it’s borrowed that time from gold.
It’s no secret, the U.S. is under a mountain debt. For many years, it was a reasonable percentage of our Gross Domestic Product, bumping around 50 to 60% of our GDP. But since 2007 it’s gone up dramatically, currently, our debt is 127% of our GDP. It’s expected to rise to 277% by 2029.
That’s right, we owe more than we make. It doesn’t take a genius to know that if you continually take on more debt than you have the income to pay for, you’re going to implode at some point. If the US defaults on its debt, the dollar will be toast, and savers will be losers.
Anyone who hasn’t will wish they saved some of the money known as gold. Because just like has happened many times over the last 6,000 years, people will turn to it as the repository of value again.
My concern is that very soon, citizens of the world will tire of America’s gross fiscal mismanagement and hesitate to take U.S. dollars. To keep the world interested in the greenback, interest rates must rise. When that happens, U.S. assets, especially paper assets such as stocks, bonds, mutual funds, and savings will drop in value. Some real estate prices will increase because replacement costs are high, but overvalued real estate will drop.
At the risk of sounding like a politician who flip-flops, there will still be paper assets and real estate that will rise in value. The secret to surviving in paper assets and real estate is to be very careful and very selective. People who diversify will lose. People who focus will win.
Invest in Commodities to Hedge Against Borrowed Time
The secret to surviving the next few years is keeping your wealth in real money, not in the U.S. dollar. Buy things that hold their value and are exchangeable all over the world. Commodities such as gold and silver have a world market that transcends national borders, politics, religions, and race. A person may not like someone else’s religion, but he’ll accept his gold.
The important thing to remember about depressions is that wealth doesn’t disappear — it’s simply transferred.
I believe that soon the biggest transfer of wealth in modern history will come. You have the choice to be on the receiving end — or to lose it all. The dividing line will be those who are financially intelligent and those who aren’t.
One of the reasons why I’m bullish on gold and silver is because the American public is still sound asleep to this asset class. Most Americans have no idea how or where to buy physical gold and silver. The outlets that sell gold and silver I have visited are already low on inventory.
Today, very few people realize that Warren Buffett reportedly holds one of the largest caches of physical silver in America. He purchased silver in the late 1990s when it was cheap—and while others were criticizing him for not investing in tech stocks.
So, what’s going to happen? I don’t have a crystal ball…
But I do know that the dollar is in trouble. The rich understand that savers are losers, and they’re continually looking for assets into which to move their money.
Editor, Rich Dad Poor Dad Daily