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Keep Your Wealth When The Last Bubble Blows

Don't want to read the whole article?-here it is in a nutshell: The major world governments will default on their bond debt. They will default on promised retirement and health benefits. We may also have hyper-inflation for several years if the politicians can get control of the central banks. When the defaults happen living standards around the world will plummet. Let this sink in. People will be poorer, including you, on the average about 40 to 50% in my estimate. You will find it difficult to maintain your wealth. To keep your savings you can try some or all of the following: have some local cash (deflation), strong foreign currencies (hyper-inflation), some junk silver (hyper-inflation), things you will need and have to buy such as food and health supplies and especially things that you could trade easily during inflationary times (deflation and hyper-inflation), TIPS (deflation-you get back your principal, and hyper-inflation), and rental real estate with no debt (deflation and inflation).

The story:

1. Sorry, you can borrow only as much as I have saved. Even governments can't escape this rule for long. If they could you and I could loan each other money and get rich!

2. Money supply? Others call it debt. Money supply goes up or down as the supply of good debt increases or decreases, and with the speed that debt circulates. The paper money in circulation is chump change in a capitalist economy.

3. Debt must be repaid, or lenders will cease to loan to the debtor

4. When debtors turn into dead beats, money supply shrinks.

5. When money supply shrinks, the world becomes poorer.

6. The US, Japan, Europe and possibly China ("the Big Borrowers") have borrowed more than they can pay back.

7. The Big Borrowers (most of them) have borrowed in the financial markets (that is, bonds). The Big Borrowers have also borrowed from tax-payers in a form of social borrowing, having collected some social benefit taxes and promised to pay out much, much more. This social borrowing is not only bad debt, but actually resembles a Ponzi scheme where party A (first retiree) loans money to the smart guy who pays it back to party A with an increase that comes from money from party B (later retiree). Party B never gets paid unless the smart guy can find a gullible party C and D and E, and on and on.

8. The Big Borrowers will default on their loans, both Financial and Social, because they do not have enough wealth income to pay either of these obligations.

9. On the way to default they may go through several years of hyper-inflation followed by a new currency. Defaults, with or without hyper-inflation, will result in greatly reduced living standards.

10. Governments will go after the wealth of private citizens, partly because they are desperate, and partly because they represent populations who are desperate.

11. Social unrest, nutty fringe politicians, and war are likely, but that's not part of this article. (even a doom doctor needs some rest)

Some more detail to this story:

"The task of a politician in a capitalist democracy is to do what the rich people want in a way that the public will accept." (I attribute this as paraphrased from memory to Benjamin Disraeli, although I have not found the exact quotation)

The big governments cannot pay their debts. Anyone who can do arithmetic knows this, if they bother to add up the numbers. The powers-that-be are praying for a reflated and recovered economy that will pay these debts. Forget it. It's not going to happen. So, how will they default? The banks (the biggest lenders) prefer deflation over hyperinflation; elected politicians (the biggest borrowers) prefer hyper-inflation over deflation. Do the Federal Reserve and the other central banks work for the commercial banks, or for the politicians? We will see in a few years, but in a way it does not matter. Because either way…

The government is going to need your wealth.

How will you keep it?

There is not enough wealth to pay the debts the U.S. government has. There is not enough to pay its bond debt. So it must either default on that debt, or inflate it away. There is not enough money to pay promised social benefits (retirement and medical). So, the government must either default on that debt, or inflate it away (after un-indexing it to inflation).

There is not enough money to run the government. So, the government must either cut expenses or increase taxes, or borrow. The problem with borrowing is-see prior paragraph-there is not enough money to pay back the money borrowed.

The government will continue to borrow. The central bank can either buy that debt, increasing the money supply, and possibly eventually leading to hyper-inflation, or it can let others buy that debt in the market. This will lead to rising interest rates. Higher interest rates leads to larger deficits. And on and on, until ultimate default on debts.

The real money supply in a capitalist economy is made up of debt-the paper currency and equivalents are mainly used in day-to-day minor consumer transactions, the underground economy, or for hoarding in socks. (I have friends who invest in the sock market, rather than the stock market.) Hyper-inflation will destroy lenders, and the U.S., and probably the world's, banking system. Hyper-inflation results in an eventual money supply (the real money supply) that declines radically, since no one will lend when they will be paid back in worthless currencies. This leaves only the nominal "paper" money supply which while the numbers increase the value of the money declines. If you replaced every U.S. Dollar with a piece of confetti would you say the money supply went up or down?

Economic activity is eventually reduced to barter. This leads to a staggering decline in living standards, and eventually the government is usually forced to issue a new currency that cannot be inflated as easily. Hyper-inflation would only occur in the US only if the Federal Reserve continued to buy US Debt, even after inflation began to accelerate. This would be obvious financial suicide from the point-of-view of every banker in the banks that make up the Fed. Since this would destroy the banks, the Fed would probably do this only under extreme political pressure. In fact, the Fed head would have to be a short term political hack who understood zero about how the economy and banking system function, or maybe someone who was desperate for a part-time job.

Because hyper-inflation wrecks the banking system and results in a barter economy, it cannot be sustained in a capitalistic economy. It can exist only for a short number of years, perhaps 2 or 3. Then, usually a new currency is brought in. Hyper-inflation, in a world dominated by the U.S. dollar, might not even be sustainable for a year because of global affects, such as a collapse in world trade, etc.

However, if hyper-inflation is then not available to pay the US debts, then how will they be paid?

They won't. Default becomes the main tool to deal with unpayable debt. This means that bond holders will not get paid in full, either through hyper-inflation or outright default. As soon as this risk becomes apparent, interest rates will increase faster, making payment even more unlikely. This fear feed-back loop results leads to the bond default. We often see this pattern in sovereign bond defaults.

Once it defaults then the government will be shut out of the capital markets for some time. If they default through hyper-inflation they will also be shut out of the capital markets. Without the ability to borrow its deficits, or buy its own debt, the government will become desperate to find wealth. Remember the government runs an endless deficit. Further, it has social debts to be paid (which are adjusted for inflation). Any borrowing in the bond market will require: 1) paying a portion of defaulted bonds, and 2) higher interest rates.

Confiscatory taxes and even seizure of wealth will become likely on the way to default and after it, but the decline in economic activity will produce even less taxes despite higher rates.

Stop fooling yourself. There will not be sufficient wealth to pay for the promised social programs. No one will loan the money, no one can pay the taxes-there is not enough wealth.

Retired persons will receive reduced payments on social security or Medicare that will result in a radical drop in their living standard. We can imagine a situation where many retired people will have to live in one room in order to have enough money for rent and food. A living standard similar to that of college students who paid their own way through school, but with medical expenses added. And not as many fun parties.

What does all this mean for investors?

Forget investing for the moment. Think about preserving wealth. There are several obstacles to your being able to do this.

1) On the average people will have less wealth to purchase necessities, during either hyperinflation or during deflation/depression. People assume that hyperinflation and deflation are opposites. They are not. They are simply periods of severe decline in living standard, resulting from a decline in the amount of debt-based money supply. Both involve increased unemployment. And both result in a form of barter economy due to the reduction in money supply. You do not want to be in a position to have to sell assets to buy necessities during either situation. The main difference between hyperinflation and deflation is that nominal prices go up in hyperinflation and down in deflation-when you use the local currency. However, if you look at what you would have to exchange to get the necessities of life you will discover that your living standard will have gone down in both cases. Also, if you look at prices in a non-hyper-inflating currency you may discover that deflation is occurring, that is, that foreigners can buy local assets for reduced prices using their stronger foreign currency. The other difference is that hyper-inflation lasts a short time but deflation can last a longer time. Some would argue that deflation is a natural by-product of the debt side of capitalism and is periodically needed. I agree with that argument. I also believe that market forces would quickly and brutally end deflationary periods, but that government intervention in the markets extends them.

The main thing that you want to avoid in either hyperinflation or deflation is being forced to sell your assets to buy necessities. You will get crushed. If you have the wealth you would want to buy assets that others are forced to sell during those times, but at least avoid having to sell into such a weak market.

You need cash--local cash in a deflation and strong foreign cash in hyperinflation. Further, you would like to already own whatever you will need during the crisis. It's true that in deflation in theory you would be able to buy these items for less, but that discount is a small price to pay for the insurance of not having to sell things during hyper-inflation. Also, you might not have a job in which case deflated prices won't help you much.

So, what to do and what to have? Some local currency (in case of deflation and loss of your job), some stronger foreign currency, several years of goods that you would usually buy-toothpaste, medicine, toilet paper, clothes, shoes, food, a car that gets good gas mileage and won't need a lot of repairs, ink cartridges, paper-look at what you spent money on over the last few years and will need to buy during the next 2 years and have 2 years supply of that. Maybe add some junk silver, just in case you need to buy something.

And? Expect financial repression and much heavier taxation. This will include: restrictions on the flow of currencies, restrictions on investments overseas, freezing of accounts above a certain amount, more reporting requirements on accounts, attempts to stomp out, restrict or heavily tax barter transactions, increased taxes on consumer sales and services and on asset sales, possibly at the Federal level. Heavy taxes on any gains, or even on any transactions, in the stock market. An attack on "speculators" and "price-gougers," broadly defined. Price, wage and rent freezes.

That's fine, you say, I'm already set, but I want to protect larger amounts of money through investing.

Well, if we could predict the nature and extent of interest rate changes, economic conditions, prices, inflation/deflation, and the actions of governments-we would all be rich. Since we do not know when or whether we will have hyper-inflation or deflation, both or neither, you should consider preparing for both extreme events.

I offer only two humble investments that might work to preserve wealth during both high inflation or deflation times:

1) Rental real estate with no debt. The amounts of rent will go up with inflation and down with deflation, although not in a perfect linkage. We are talking no debt here. If you have debt, watch out. Even in Inflationary times you may not be able to pay the mortgage if the rent does not rise fast enough, and the tenants (and/or you) spent all their money on food and gas. In deflation the rents go down but the mortgage (if fixed) stays the same. Ouch. So rental property with no debt. Expect government regulation of rents, such as rent control, during high inflation periods.

2) TIPS. If there is inflation the value should go up. If there is deflation the value will go down, but you get back your principal at the end. If there has been deflation, the principal might be worth more than what you invested. You will have saved your wealth and gotten some benefit. Note that TIPS can be taxes in very unpleasant ways outside of retirement accounts. Also, they are bonds and subject to default risk.

Further reading. For more detailed information on how to prepare for the double threats of deflation and inflation, and a discussion of hyper-inflation, check out some of the writings of John T. Reed,, and a response by Gary North,


Some serious caveats. I do not know the future, and am guessing just like everyone else. No one knows the future, as it does not exist yet. How can anyone know what they will think or do next week, or what millions of other people will think or do next week or month or year? We could have war, or perhaps an acute flu that kills all people of retirement age. Europe of Japan may suffer severe problems earlier than the US, making US bonds and the dollar a relatively attractive investment. Someone might develop an internet currency, perhaps based on barter, that replaces the national currencies (don't be surprised if governments make such a system illegal if it works).

Besides that, I make no promises that anything that I say will result in success for you. The value of any investment can go up or down in wildly unpredicted ways. This article is intended for educational purposes only, and I give no advice to you about what you should or should not do, other than that you should learn as much as you can and be as careful as you can. I do not know your situation, so make your own educated guess about the future, and consult some financial experts to help you implement your strategies in a way that works for you and keeps your fees and risk low. Thanks. Bill


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have an interest in a TIPS bond fund.