Short the U.S.A.

"By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."

-- John Maynard Keynes

I am lucky. I have a lot of friends. But it's not merely the number of people I can count among their ranks that makes me lucky -- it's the sheer magnitude of their knowledge and experience that makes me so fortunate. And yet, at the same time, my friends, in the aggregate, exhibit such a wide array of beliefs and perspectives, that I take a lot of criticism from them for my own radical theories.

For instance, I have a lot of leftist friends who accuse me of being a Republican. They say things like, "All you care about is money and the stock market. You want to destroy the environment. You're a Republican."

Look, I don't want to destroy the environment. To be honest, I don't even really care about the environment. Don't get me wrong -- I like oxygen and trees and water just as much as the next guy -- but I think it's exceedingly arrogant for human beings to think we can destroy the environment. That's like suggesting we can permanently rid the world of Michael Jackson. Sure, he can die and all that. But we can't really get rid of him.

As for the rest of it, yes, I love money and I wish I had more of it. Toward that end I shall pursue its acquisition with great enthusiasm. Of course, in that regard, I'm no different than anyone else on this earth – including my leftist friends; I'm just not ashamed to be honest about it.

In any case – and despite my love of money -- I have a message for my leftist friends: I am no Republican. Quit calling me that.

On the other side of this confusing equation, I have a rather impressive number of conservative friends who think I am a Democrat. They say things like, "You think the pot should be legal, and you think the gays should be allowed to get married, and you think the Mexicans should be allowed to cross the border at will and overrun this country. You're a Democrat."

Just so you know, I'm rolling my eyes right now.

Yes, it's true -- I do believe in the plight of "the" pot-smoker, "the" gay, and even
"the" Mexican. And yet, despite my subscription to such seemingly "horrifying" -- not to mention stereotypical -- social constructs, I'm afraid I have some troubling news for my many right-leaning brothers and sisters: I'm no Democrat either. You're wrong. Please stop calling me that.

I think Barack Obama is a fine statesman, an eloquent speaker, a rather handsome man, and a gifted hand-shaker. But he is a horrible economist, and since the economy is the most important thing in the universe right now – with the possible exception of the demise of the King of Pop – I'm going to focus on that. Further, since we are talking about economics, I'm just going to lay it all out for you: Democrats are screwing things up. Bad. Of course, they're getting plenty of help from Republicans too.

For decades, the United States has been an arrogant and profligate nation, full of spoiled brats who borrowed as much as possible, fueling an insatiable collective desire to have more stuff. We have buried ourselves in designer clothes, new cars, houses, and boats. I admit much of the problem derived from a misdirected ethos for which we only have ourselves to blame. But every epistemological development has its roots, and it is not enough to say that the American people simply woke up one morning, got out their wallets, and suddenly found that they had become gluttonous consumers. No, there is always a catalyst, and in this case – as is so often true -- it was the government.

Washington D.C. is not full of people. It is full of politicians. Politicians need to be elected, and in order to do that, they must make their constituents happy. But in order to make those constituents happy, politicians must promise them stuff. And politicians have figured out that the most expedient way to make stuff accessible to their constituents is by manipulating the money supply. And so, the government makes money cheap, and the way it does that is by lowering interest rates and printing currency at an ever-increasing rate.

Think about it: what better way to become popular? You can't afford a home? Well we'll just monkey around with interests until you can! And then, we'll increase the money supply at a moderate rate – thus creating the illusion that otherwise relatively static asset-classes are actually increasing
in value – like, say, for instance… your house!

Hell, while we're at it, why not create programs that make tuition affordable for everyone? And if we're going to do that, why not just go ahead and create a national healthcare system everyone can afford? Are you worried about the cost? Don't! We'll just print more money and lower interest rates! That's how we do it!

Unfortunately, these "solutions" – which seem so elegant on the surface – actually form the very foundation of the enormous problem we're facing at this moment. When a government subsidizes any commodity, good, or service, it necessarily creates demand -- which in turn drives prices higher. But the prices aren't real – they're distorted constructs driven by false demand. Eventually the constant, steady increases sought by printing currency turn into explosive manias -- the bubbles with which we have become all too familiar.

Our government has perpetuated this terrible lie, creating artificial affordability and completely unrealistic valuations for almost every asset-class in the economy. But no Ponzi scheme can last forever, and the consequences of so many decades of financial mismanagement have descended upon us. Yet we haven't even come close to seeing the worst of it.

At the very moment when governments should be cutting spending, raising interest rates, and pulling currency out of the economy, they are doing the exact opposite – and this is true of every major economic power in the world. The United States alone has committed to spending almost $13 trillion to battle this economic crisis alone. And where will the money come from? Unfortunately, most of it is coming from the printing presses, and that means hyperinflation is on the way. I know some of you have a hard time believing that, so I guess we'll just have to wait and see. But I stand firm with my conviction. It's just math.

In the meantime, if you want my advice, put on your crash helmets and short U.S. Treasuries; the ride is going to be fast, furious, and very profitable for those of us who have been prescient enough to realize that the United States we know today has almost none of the qualities endowed to the government of the same name created in 1789.

With that, I will return to the place where I started today, because I'm sure you're simply aching to know where I actually do stand, politically. I suppose I could disappoint you. I could simply tell you I have no convictions -- that I refuse to take any position at all. But you're too smart for that…

So I'll tell you. But you're probably not going to like it. I am a champion of free markets, human rights, social progress, and the growth of knowledge. And I actually do like Mexicans, homosexuals, and pot-smokers. If you absolutely insist on ascribing a label to me, I suppose I would best be described as a classical Jeffersonian liberal.

And Mr. Jefferson would be as appalled as I am at what has become of the Great Experiment.

Disclosures: Paco is long TBT, UGL, UCD, and DXO. He also holds U.S. dollars by necessity, pending the advent of private gold-backed currencies.

Comments

[TradingHelp...:]

Excellent article. Though-provoking, self righteous and well worth a comment.

You can not be labelled a "Democrat" or "Republican" as you are too much of an individualist. Your pursuit of the your interests steam-roller the interests of the group, of society.

You would short a stock to hell and back to make a few dollars irrelevant that it may destroy the wealth of others. A fan of zero-economic gain financial speculation who can't see beyond your own 401K.

You eloquently name economic problems, but only when they might damage your own personal wealth.

I see no solutions, just the venting of issues that prevent you from securing a bigger slice of society's wealth.

I quote: "I don't even care about the environment". You are against healthcare for all, despite it is arguably a basic human right, as you are worried about your own tax bill. You enthusuastically pursue material wealth and possessions but resent that others do it, as it creates inflation and asset price bubbles that damage your personal financial security.

You are happy for Mexicans, cheap labour, to move to the US so you can buy things cheaper but I bet you would change your mind if you own earnings suffered downward pressure because of the competition. You think it's OK to smoke pot, but I bet you would be less casual about it it that pot smoker became a crack-head that commited a crime against you.

I suspect that you secretly would love to be a Goldman Sachs banker. A professional economic manipulator who excels in the re-distribution of wealth from the tax-payer and society as a whole to the pay-checks and bonuses of the priviliged few.

I thoroughly enjoyed your article and hope you write many more.

Jul 18 06:21 AM

[hghodges:]

How best to short treasuries? I am a retired farmer, widow, some cash, some savvy. I lived the sanctified rural life (yes; my choice), which means my old-age financial future is bleak.

Jul 18 09:39 AM

[Riles:]

Paco, agree with your projections over the long term, but more so with Whippet and others questioning the "timing", especially with leveraged inverses like TBT, subject to downward pull of "the math". SGINSC's Leaps Calls of goldminers also merits consideration. Am FOR NOW, long Int. Term treasuries, yet also have UDN, and have sold GLD and SLV, and to buy the physical bullion, per other readings.
Also, regarding your personal "politics" find it of value, as too many financial bloggers' advice is opaquely influenced by their politics. And,take heart, there are LOTS of Socially liberal and fiscally conservatives out there!

Jul 18 11:31 AM

[Steve in Gr...:]

Dear Ms. Hodges,

I assume you are not a trader. I'm not either, but most people on this site are. Caveat lector. (Let the reader beware.)

For us non-traders, the main thing going forward is to avoid-like-the-plague anybody that is offering to translate your wealth into a fixed stream of USD (e.g. a fixed annuity, a Treasury bond, etc.). This is because we are facing double-digit inflation starting in the next 2-5 years. Ten years of 10% annual inflation makes $1000 worth less than $400. And that is what we are looking, not starting today, but starting soon (2-5 years).

I wish you the best,
S

On Jul 18 09:39 AM hghodges wrote:

> How best to short treasuries? I am a retired farmer, widow, some
> cash, some savvy. I lived the sanctified rural life (yes; my choice), which means my old-age financial future is bleak.

Jul 18 12:29 PM

[popey:]

Yeah Paco, you may well need your crash helmet if you short US Treasuries, as you may get your head thumped against the cement. If the US economy double dips, and enters into another crisis mode, then Treasuries could rally yet again strongly with the dollar. Also there are strong geo-political risks to shorting treasuries, because Iran and North Korea, or even Pakistan, or even a flu pandemic could instigate fear trades, such as long bond trades.

While I agree in the directionality of your bond call over time, the coming volatility will hack many participants to death.

Jul 18 12:42 PM

[MarkitWacha:]

Put options on TLT are slightly more effective than buying TBT.

If you look at the movements of the long bond, they don't *exactly* match up with movements in TBT, either. I think it's much easier to rebalance on the long side than the short side, hence the TLT options.

Those that sit on the sidelines are partly right--you need to hedge against the next bear market rally turning south.

For that, you can use out-of-the money SPY put options. If the market does start to fall, the volatility premium will skyrocket, leaving you with a really effective hedge.

And, if the long bond *doesn't* go up, it's because the Fed is reflating the economy. To hedge against the risk that the Fed will keep buying the long bond to keep the interest rates down, you can buy long-range call options on DBC. That will reflect any artificial inflation, all other things being equal. I keep my finger on the pulse of the energy commodities, and they look to be somewhat in equilibrium. Should the price of oil collapse by 15%, sell the DBC options. If SPY goes down 10%, I'll convert everything to cash.

Full disclosure: long DBC, TBT;

will be short SPY soon after oil hits $100/bbl again.
I pay attention to the treasury auctions and BoJ auctions. There's nothing but supply coming. If SPY just stays in equilibrium, TBT will go way up.

Jul 18 12:46 PM

[MarkitWacha:]

The easiest way for a retail investor is just to open an account at any of the retail discount brokerages, and buy what you can of TBT. You are already invested in land, if you're a farmer. You're already invested in agriculture too. That, in my opinion, has a great future, so keep it going. Keep 3-6 months worth of cash in the bank for your expenses.

Shorting treasuries is attractive now, because there is a limit to how high they'll go, and we're near that historical limit.


On Jul 18 09:39 AM hghodges wrote:

> How best to short treasuries? I am a retired farmer, widow, some
> cash, some savvy. I lived the sanctified rural life (yes; my choice),
> which means my old-age financial future is bleak.

Jul 18 12:54 PM

[Jimbo:]

I believe the most appropriate label for Mr. Alghren is Libertarian. With regard to the recovering confessors who voted for Mr. Obama, it used to be said of Richard Nixon: "Don't listen to what he says, watch what he does." I have concluded that this, with very few exceptions, applies to all persons seeking office. I believe you have to be something of a narcissist to run for office. Bush 41 told us to listen to his lips, NO MORE TAXES. He then signed a very large tax increase. It probably cost him an election. Mr. Obama told the Pope that he wanted abortions to decline but every action by his administration promotes abortion. Mr. Obama castigated McCain during the election for advocating taxing upper income persons to fund a health insurance system. But this is now a serious option for all Democrats in Washington. Mr. Obama has stated several times that he does not want to run the auto industry. Based on my observations so far, I predict the government will be much more deeply involved in the auto industry in the coming years. Don't listen to what Mr. Obama says, watch what he does.

Jul 18 01:11 PM

[Jimbo:]

Permit me a coda: Initially, Mr. Obama agreed with John McCain to accept only public funds for his campaign. When he saw how much private money was flowing into his campaign, he abruptly decided to change his operation and dropped public funds in place of private. Watch what he does, not what he says.

Jul 18 01:15 PM

[Whitslack:]

I can't believe you got through that whole article without once writing the word "libertarian." That's what you are. It's what I am too. It may have a stigma attached to it (for what reason I don't know), but it's not as bad as "Jeffersonian liberal," a term which many (most?) people will misinterpret.

Jul 18 03:21 PM

[Manifestor:]

Of late I have come to realize that what really defines a person is not just where one stands on various social, political and economic opinions, but more importantly on how one acts under various circumstances.

For example, how far will one take Love of Money seriously? If there is a pot of money that doesn't belong to anybody and the choice is to say share with others or keep it to yourself, which one would one choose?

Secondly, armchair critics are literally dime a dozen. It is easy to judge actions on paper. Real world, given the complexity of a global economy and the day-to-day lives of millions, and real action is quite different. People who take action to jump into a problem and be willing to do something to solve it are a rarity.

With all their shortcomings and whatever their ulterior motives, politicians must be given credit for at least trying to do something about the problems facing the country.

Jul 18 04:00 PM

[realold:]

I would add that politicians like people to need them. If you make people dependent on everything from permits to hike a trail to national healthcare, then they need you. If they need you, they will be afraid to vote you out. The worse off they are, the more they need you. When I was raised sixty plus years ago, I was taught self reliance. That, today, is called anti-social behavior, anachronistic, racist, and a variety of other things. We are being taught to be dependents and it is working!


On Jul 17 11:20 AM User 353732 wrote:

> Your thesis that national profligacy leads to the ruin of a currency
> and a Nation and cultural bankruptcy is precedes financial bankruptcy
> is shared by a majority of ordinary Americans but by virtually none
> of political , financial and media bosses. The people agree; the
> rulers don't. We and our rulers exist in the same geography but occupy
> two different moral and mental worlds.
> For the rulers, profligacy with debt and taxes leads to more not
> less wealth, power and status for themselves and those selected to
> live on their plantation. The fact that everyone else is hurt is
> of little interest to them.They seem to believe that their fate and
> that of the Nation they rule is separate and desrevedly so since
> they are simply better: a view of the world entirely understood by
> King George III and totally rejected by Jefferson.
> After two and a quarter centuries the colonial occupiers are back
> because the majority of American adults forgot that the Constitution
> cannot protect the People, if the People do not defend the Constituion.
>
> For the rulers, moreover, the disconnect between culture and the
> economy is almost complete; They fail to see or perhaps reject the
> notion that trust, loyalty, integrity, frugality, discipline and
> diligence have anything to do with a growing, competitive and continually
> renewing economy.
> Tens of millions of ordinary Americans still have a deep belief that
> the pathologically self serving, self obsessed , self gratifying
> and self admiring individual is not the basis of either a sane society
> or a prosperous econmy or a secure nation.They undertand what preceding
> generations always knew: there can be no taking without giving and
> that first comes the sacrifice and then the celebration. Our rulers
> find this belief not only quaint but incomprehensible and alien.

Jul 18 08:39 PM

[realold:]

Excellent comment. Right on.


On Jul 17 05:39 PM Steve in Greensboro wrote:

> Thanks, Mr. Ahlgren, for the clear article. The U.S. government is
> rapidly metastasizing into every area of the U.S. economy, expanding
> the dead, non-productive and poisonous sectors.
>
> It's too bad we have to discuss politics on a site like this, but
> who invests these days without agonizing about what our destructive
> government will do to destroy our returns?
>
> Invest in U.S. pharma or U.S. healthcare generally? Sorry, socialized
> medicine hangs over our heads. Invest in U.S. banks? Sorry, but the
> government already has its list of winners and losers and they aren't
> showing it to you. Invest in U.S. automakers? Sorry, but the government
> owns the majority position and they can destroy the one remaining
> participant whenever they want via more strict CAFE standards. Invest
> in transports, utilities, steelmaking, etc.? Not going to happen
> with carbon taxation waiting in the wings.
>
> Cash and precious metals are the only havens until the U.S. country
> risk abates.

Jul 18 08:48 PM

[Grizzly-Red...:]

Paco, good article. As opposed to some of the comments, I do appreciate hearing your personal viewpoint. "I am a champion of free markets, human rights, social progress, and the growth of knowledge." And what could be wrong with any of that? Just don't get mired in the twisted Progressive view of it. I have never seen Democrats have such a hatred of Business, as the current crop. They'll never get Unemployment back to single digits until they realize who creates jobs and quit penalizing them as the Great Evil and exploiter of Labor.

Jul 18 08:49 PM

[marctacoma:]

Paco
Wow struck a nerve there! So while you say you are niether a d or r which would you most identify with? You got these guys all wrong though. They are either incompitent or they know what theyre doing. I would submit they know what theyre doing. Their view of America is radically different from yours and mine i fear. And they want to radically change America into something that history has proven can never ever be. Never has worked and it surely never will. Unfortunantly they, like all before them, believe they are the ones who will make it work. But it wont. We know this instictivley of course but they dont and now its too late. I fear if someone does not stand up to this madness and find a way to reach peoples hearts the great experiment will end. I totally agree with your ascertion of gov meddling causing so much of our woes. Its true!

Jul 21 01:43 AM

[marctacoma:]

I personally would much prefer if they would do nothing at all and just let us alone. I like to think i am still capable of wiping my own butt and tucking my own self in at night. Sorry dude sometimes your just wrong!

On Jul 18 04:00 PM Manifestor wrote:

> Of late I have come to realize that what really defines a person
> is not just where one stands on various social, political and economic
> opinions, but more importantly on how one acts under various circumstances.
>
>
> For example, how far will one take Love of Money seriously? If there
> is a pot of money that doesn't belong to anybody and the choice is
> to say share with others or keep it to yourself, which one would
> one choose?
>
> Secondly, armchair critics are literally dime a dozen. It is easy
> to judge actions on paper. Real world, given the complexity of a
> global economy and the day-to-day lives of millions, and real action
> is quite different. People who take action to jump into a problem
> and be willing to do something to solve it are a rarity.
>
> With all their shortcomings and whatever their ulterior motives,
> politicians must be given credit for at least trying to do something
> about the problems facing the country.

Jul 21 01:48 AM

[Hot Richard:]

Hot Richard reads this author primarily for the raving lunatic comments Paco attracts. Oh, he has some well-worded stuff but even he would admit that he's beating the same drum now for about a year.

But holy Mary on a half shell and call me Betty! SA has no other author that brings out the loonies (and I'm not talking about Canadian currency). I can't peg why, because Paco isn't writing anything very controversial...really.

Money is a means to an end. It is not the end. No one sane believes it is. Love of money by sane people is a love of the ability of money to attain an end. Personally, I love money because I have lots of things I want to do that require some money.

Some of you people simply would cease to exist (blinking out of existence with a "poof" and a wisp of smoke) if the State collapsed. How washed in the think box you is! Why do I mention this? Because you assign far too much to government. What drugs can I take? Create some jobs! Raise my kids! Print some currency! Jeesh. Man up. Read some Hoppe, Leeson, or Rothbard. Not saying you have to join the team, but at least experiment with another view.

To do anything other than short USA-everything is to speculate (and I've posted before that I refuse to speculate). I have experienced that Congress/Exec have minted more new anarchists in the last 10 years than maybe the previous 100 years. For many, it has been proven that the state cannot be controlled. I count many Austrians, libertarians, classical liberals, conservatives, and Constitutionalists among the converts. But no socialist-Keynesian-New Dealer-Democrats.

To close, as an Austrian I disagree with most everything governments are doing today regarding the global market. So, I invest to take advantage of policies that I see as doomed to fail. I don't consider this speculation.

For the author I would suggest to stop writing about how often you suffer the arrows of critics. We get it.

PS: One should always spell "incompitent" correctly, Marc Tacoma!

Jul 23 10:42 AM

[Hot Richard:]

Little note...I called up Peter Schiff's investment company and had a difficult "Who's on first" conversation with one of their agents. He kept talking about delivering ROI based on US$. I said I didn't give a flip about US$ or really several other currencies, but he kept going back to it as a performance measure. Great. I'll give you 1million Hot Richard dollars for 500 JJ Walker dollars...millionaire!

I know Peter understands the issue. He's one of the biggest gold fans out there and he is darn good at currency trading as well. It must be hard to train everyone in the company, though.

Finally, I said "Hey brother, I'll just buy gold." He appreciated me calling him "brother" as an improvement over previous "buddy" and "ace" labels.

I bring this up to draw attention to "real vs. nominal" returns. Paco and others have written about it. The shell game will fool almost everyone into feeling good. That has to get someone elected, right?

Jul 23 10:51 AM

[Hot Richard:]

I am not above quoting myself...

"The best way for me to defeat your misguided patriotism and damaging economic policies is to profit mercilessly from them."
--Hot Richard, at a party in Los Angeles 2007

Jul 23 10:57 AM

[I am rage:]

I just now got around to reading this, but dang, there's some rabble in this thread.

Good work, Paco. If you're pissing people off, you're probably on the right track.

When is your next writing? My coworkers and I enjoy your commentary, whether we agree or not. For one, I agree.

Oct 01 12:53 PM