Inflation-Proof Your Portfolio: How to Protect Your Money from the Coming Government Hyperinflation

Preface

Like you, I’m worried. In the midst of the worst economic crisis since the Great Depression, the politicos in Washington seem intent on driving the country toward bankruptcy. The current administration’s 2011 budget is 50 percent higher than it was just three years ago—and National Public Radio reports there will be at least $13 trillion in deficits in the next 10 years.¹, ²

When President Obama was elected to office in January 2009, the national debt totaled $10.626 trillion. Now, in August of 2011, the debt has exploded by another $4 trillion according to CBS News.³

On average, reports Zeke Miller of Businessinsider.com, the national debt increased $4.247 billion during each day Obama has been in office.⁴ By 2020, the nonpartisan Congressional Budget Office projects yet another $8.5 trillion in deficits—creating a national debt that amounts to 90 percent of the entire economy.⁵ Over the next decade, the government plans to borrow almost $80,000 for each U.S. household.⁶ For every household in America, the government is currently promising to pay future benefits amounting to $212,500 in Medicare, $183,400 in Social Security payments, and $31,200 in military pensions.⁷ In a few years, we will have reached the point where the interest on the national debt will be the largest part of the federal budget—larger than Medicare, larger than Social Security, larger than defense. Even under the rosiest predictions, the national debt will soon be over 100 percent of the country’s entire gross domestic product. When that point comes, kiss the American dollar goodbye; the end of all that overspending will be devastating inflation, and the middle class of America will (once again) take it on the chin (see Figure P.1.).

Figure P.1 Debt Held by the Public under the Two Different Social Security, Medicare, and Medicaid Projections

Source: GAO.

As Ronald Reagan remarked, The nine most terrifying words in the English language are: ‘I’m from the government and I’m here to help.’

Just by the fact that you’ve invested in a book like this, I know you share my concern and I hope that you will do all you can to oppose the crazy government taxing, borrowing, and spending patterns that are leading to the ruin of the dollar and the coming dollar hyperinflation.

But enough about politics.

What This Book Is (and Isn’t) About

This book is neither an economic treatise nor specific investment advice. It is intended as a resource to help empower you, the citizen, to take action and protect your money from the coming government-induced hyperinflation.

I contend hyperinflation is coming because creating and allowing inflation is the most likely strategy the politicians have for getting us out of the mess they have created. While there is broad agreement among economists that inflation pressures are growing, there is a wide variety of estimates as to what that inflation rate will be. Whether you are expecting a mild degree of inflation, like 5 to 10 percent, a return to 1970s-style inflation of 13 percent, or a total dollar meltdown with inflation running to hundreds or thousands of percent, there are strategies in this book for you to use.

If you are mildly concerned about inflation, for instance, you might consider shifting some of your dollars out of bank accounts and CDs into stocks and mutual funds (described later) that may prosper during an inflationary period. You can reduce your exposure to changing interest rates by gradually cutting up your credit cards and refinancing your house to a fixed rate, rather than a variable rate, loan.

If you are a little more wary about the future climate, you probably will also want to stock up on precious metals like gold and silver, and invest in timber, oil, or other resources that are likely to hold their value.

If you are really worried about the direction of the economy, you can start to plan now to weather a depression-like period. Buying land in the country, moving assets overseas, and stocking up on food and medical supplies all are reasonable moves if things get really bad.

The book is organized around four major principles that will help you protect your money:

Principle 1 states exchange dollars for real things. Here you’ll learn about tangible investments that hold their value when paper currencies fail. You’ve probably heard about gold, oil, and real estate—but what about timber? Diamonds? Stamps? Art?

Principle 2 tells us that future money is cheap money. In an inflationary environment, how should you handle your mortgage? Credit cards? Student debt?

Principle 3 suggests diversify out of dollars. The dollar used to be a house built of bricks; now it’s a house of straw. But is the euro any better? The yuan? And how can you protect government-regulated accounts like your IRA or 401(k)?

Finally, principle 4 encourages us to prepare for the worst, but expect the best. Taxes are almost certain to skyrocket in the coming decade, and in a world with a rapidly disintegrating dollar, it may be prudent to develop useful skills or stock up your country retreat.

Time to Take Action

I’m afraid that the outlook for our country is very gloomy indeed, but that doesn’t mean we need to throw in the towel. In this book, I’ve tried to gather into one place all the different ways a person can begin to inflation-proof his or her life savings. No one needs to be a victim of misguided government policies; you can take action now to hold on to what you have and protect your assets from what is almost sure to be a prolonged bout of severe inflation.

Here are just a few of the things you’ll discover in this book:

Why you are late to the gold party

Why silver is undervalued

What coins to have on hand

Is now the time to make your housing move?

Is the world running out of oil?

How to profit from the oil supply chain

Why you should stay away from palladium

How to get money to grow on trees

Why fixed-rate mortgages are your friend

What to do if your house is in foreclosure

Why credit cards aren’t worth the plastic they’re printed on

What currencies should you invest in?

How to become a foreign farmer

The threat to your IRA wealth

When not to convert to a Roth IRA

How to turn a $700,000 tax bill into $10 million tax-free gift

The warning signs of an imminent currency collapse

Is the United States the next Greece?

The lesson of the Russian grandmothers

Why whisky and pot are your depression friends

The health care bomb: Why you’d better have that surgery now

How to maintain your privacy in a Facebook world

Notes

1. Kerri Shannon, Federal Budget Deficit Climbing Dangerously Higher on Continued 2011 Government Spending, MoneyMorning.com, January 27, 2012, http://moneymorning.com/2011/01/27/federal-budget-deficit-climbing-dangerously-higher-on-continued-2011-government-spending/ (accessed April 3, 2012).

2. Jacob Goldstein, $13 Trillion: The Projected 10-Year Deficit, NPR.org, July 14, 2011, http://www.npr.org/blogs/money/2011/07/15/137845220/-13-trillion-the-projected-10-year-deficit (accessed November 11, 2011).

3. Mark Knoller, National Debt Has Increased $4 Trillion under Obama, CBSNews.com, August 22, 2011, http://www.cbsnews.com/8301-503544_162-20095704-503544.html (accessed November 11, 2011).

4. Zeke Miller, National Debt Increased Under Obama Faster Than Any Other President, Businessinsider.com, August 23, 2011, http://articles.businessinsider.com/2011-08-23/politics/30018770_1_national-debt-bush-tax-cuts-president-barack-obama (accessed November 11, 2011).

5. Lori Montgomery, National Debt to Be Higher than White House Forecast, CBO Says, Washingtonpost.com, March 6, 2010, http://www.washingtonpost.com/wp-dyn/content/article/2010/03/05/AR2010030502974.html (accessed November 11, 2011).

6. Brian Riedl, Obama Budget Adds $80,000 per Household to National Debt, The Foundry, March 23, 2011, http://blog.heritage.org/2011/03/23/obama-budget-adds-80000-per-household-to-national-debt/ (accessed November 25, 2011).

7. Dennis Cauchon, Government’s Mountain of Debt, USATODAY.com, June 7, 2011, http://www.usatoday.com/news/washington/2011-06-06-us-debt-chart-medicare-social-security_n.htm (accessed November 25, 2011).

CHAPTER 1

The Dollar’s Shrinking Value

As the U.S. government racks up a national debt approaching the size of the entire economy, something’s got to give. When the public debt of approximately $15 trillion is added to the $50 trillion guaranteed for Medicare, Medicaid, Social Security, and other guarantees related to the 2008–2009 bailouts, the government is on the hook for as much as $100 trillion.¹ Increased taxes and budget cutting just won’t make a dent in obligations of this size. When the bill comes due, expect massive inflation.

Why Governments Love Inflation

Inflation occurs when a government coins money faster than society creates wealth. The government, with its insiders and elites, is both the cause of and the primary beneficiary of inflation.

To see why, consider the past, when money was linked to metal coins made out of gold or silver. In ancient Rome, a denarius was at first almost 100 percent pure silver. Gradually, the Roman government reduced the amount of silver in the denarius until it contained only 5 percent silver. The hyperinflation induced by the currency manipulation made it impossible for the government to collect taxes in a timely fashion and led to this familiar scenario:

At first, the government could raise additional revenue from the sale of state property. Later, more unscrupulous emperors like Domitian (81–96 a.d.) would use trumped-up charges to confiscate the assets of the wealthy. They would also invent excuses to demand tribute from the provinces and the wealthy.²

By debasing the currency, the Roman emperors were able to pay off government debts by forcing their citizens to accept coins that had less and less precious metal content. The debased coins were worth less, forcing citizens to spend more and more denarii to buy basic goods. In other words, debasing the currency caused inflation.

It Can’t Happen Here—or Can It?

Today a similar debasing process is going on with American money. Once a U.S. dime was 90 percent silver; now it is 0 percent silver. Until 1934, a U.S. dollar bought an ounce of gold for the fixed rate of $20.67. Now it costs over $1,500 to buy an ounce of gold.³

Taxes: Your Money or Your Life

To actually finance the President’s current spending plans, taxes would have to rise 20 percent across the board over the next decade and 60 percent over the next 25 years.

The U.S. dollar is almost certain to have a sustained run of extremely high inflation over the next decade because of continued huge government deficits and unfunded liabilities like the recent health care reform. To actually finance the President’s current spending plans, taxes would have to rise 20 percent across the board over the next decade and 60 percent over the next 25 years.⁴ Even before the health care makeover, the Petersen-Pew Commission on Budget Reform warned that in 2009 alone, the national debt shot up from 41 to 53 percent of the gross domestic product (GDP). The Commission expects the debt to reach 100 percent of the GDP by 2022 and 200 percent by 2038.⁵

In other words, in just a few years our nation will owe twice as much as it produces. We’ve run up the credit card to owe double what we earn in a year. Since no conceivable level of taxes and borrowing will enable the United States to service such an enormous debt, the cowardly political way to deal with the situation will be to allow inflation to run rampant.

How Low Can It Go?

What will happen is that more and more dollars will be pumped into the economy—far more money growth than the underlying economic growth rate would justify. The newly printed money will gradually be worth less and less. But legally, holders of U.S. obligations are forced to accept the devalued dollars. This is exactly the same trick the Roman emperors used.

It’s a trick that works really well as long as inflation is so slow—a few percent per year—that people don’t really notice. But if the supply of money grows too quickly, the inflation rate can become very high very fast. (It would be hard not to notice the 25.8 percent loss of purchasing power consumers are experiencing in Venezuela this year, for instance.⁶) And if citizens completely lose faith in the value of a currency, the inflation rate can shoot up to hundreds or even thousands of percent per month, effectively making paper currency worthless.

This happened in Germany in 1923, where paper money became so worthless that people burned it in furnaces instead of firewood, stuffed it in their clothing for insulation, and used it to paper their walls (see Figure 1.1).

Figure 1.1 Paper-Hanging in Weimar Germany

Source: Deutsches Bundesarchiv (German Federal Archive), Bild 102–00104.

My father was a lawyer, and he had taken out an insurance policy in 1903, said German oil consultant Walter Levy. Every month he had made the payments faithfully. It was a 20-year policy, and when it came due, he cashed it in and bought a single loaf of bread.⁷

In Zimbabwe in 2008, inflation ran so far out of control (over 79 million percent per month at one point) that at its height, the government was printing $100 trillion bills—which couldn’t buy a bus ticket in the capital of Harare, reports the Wall Street Journal.⁸, ⁹

What You Don’t Notice Won’t Upset You

The dollar is already shrinking, but so slowly most of us don’t notice. The loss in dollar purchasing power only becomes obvious over long stretches of time.

Have you ever been in a gift shop and seen one of those little nostalgia booklets with quaint ads from, say, 25 years ago? They usually contain a section showing the wacky prices we paid for common items way back when. Table 1.1 offers a look back at 1986.

Table 1.1 25-Year Change in Cost

Sources: boxofficemojo.com, foodtimeline.org, eia.doe.gov, thepeoplehistory.gov.

The Consumer Price Index is the government’s indicator of the dollar’s declining worth over time. The Bureau of Labor Statistics keeps track of the value of a basket of goods and services purchased by urban households. While the figures may not be entirely reliable, they have the value of being consistently kept since 1913. Table 1.2 shows what it costs to buy what a dollar bought in 1913.

Table 1.2 Erosion of Dollar Purchasing Power, 1913–2011

Source: Bureau of Labor Statistics, http://stats.bls.gov/.