A Ticking Time Bomb

I’ve been extremely vocal over the past few years about the risk of the U.S. Dollar going into a hyperinflationary state. There is simply too much debt and reckless spending that isn’t stopping. Combine the former with ultralow interest rates and you have a dangerous cocktail brewing in the political big house.

But before we get into my rant about the Federal Government and the debt burden we all face, first a word from our sponsor…

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  • Contemporary art prices have appreciated 14% annually on average (1995-2020).

  • Wealthy collectors allocate 10–30% of their portfolios to art.

  • Lowest correlation to public equities of any major asset class, according to Citi.

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Hyperinflation - the end game

The U.S. National Debt now stands over $28 trillion. This equates to a debt burden of $86,000 per citizen or $228,000 per tax payer. This is a major financial obligation that is staring us directly in the eyes.

Despite the obligation, the probability of the debt ever getting paid off is zilch.

Raising the debt ceiling is not paying off your bills. It is effectively the process of rolling over your credit card debt into another credit card with a higher limit. If the United States paid off its bills we wouldn't have $28 trillion in outstanding debt and a currency that has lost over 99% of its value since inception.

A high debt burden is just something we are going to have to live with. And if you position your portfolio correctly there are ways we can benefit from an over-levered nation.

To be clear, I’m guessing tensions over the debt ceiling will be the main focus of the market for the months to come. That and the supply chain issues.

Market prices will ebb and flow to however the debt ceiling discussions are going. But the likelihood of the U.S. not raising the debt ceiling is very low.

I don’t really care if the debt ceiling is raised or not. Because at this point it doesn’t really matter. What is the difference between $28 trillion in debt and $35 trillion in debt? When you are dealing in large numbers like this the end game is only one outcome: hyperinflation.

Because there is no way the U.S. Government ever pays off this debt. How can you raise taxes on $28 trillion in debt without upsetting populace? It’s not possible. The only way out of this outcome is keeping interest rates as low as possible and hyperinflating all of this away.

If interest rates start to move real inflation will kick in. Discount rates will rise and asset prices will go crazy. Anyone who owns fiat currency will feel the punch and the individuals who own assets that benefit during a hyperinflationary environment will benefit.

Eventually all of this debt will come due and policy makers are likely well aware of that. I am sure they are all positioning their portfolios to take advantage of this.

I have spent a lot of time thinking about what could happen to the United States if we ever hyperinflate. It is a scary thought.

During the Weimar Republic era after World War I food prices went to sky high levels. Ladies sold their bodies for food. If you got paid you spent it all right away because the next day it would become even more worthless. Anything that with scarcity had value. Debt obligations went to zero as the currency rapidly expanded.

I have tried to position my portfolio and personal assets to withstand a potential hyperinflationary environment. I mainly own companies with real assets that should appreciate during a state of hyperinflation. I have also started to acquire hard currency such as gold and cryptocurrencies.

And finally, I am looking to layer on some 30-year debt at historically low interest rates. If we do hyperinflate, a $1,000-2,500/month mortgage becomes almost nothing overnight. $250-500k personal debt obligation will go to zero. Then you have the asset behind that which should continue to appreciate in value over time.

One of my favorite books is Gone With The Wind. It is an incredible story of riches to rags and back to riches. One part that really stood out to me in Gone With The Wind is when the rich southern farmers lose all of their money because they held their wealth in Confederate currency that underwent a hyperinflationary state during the war.

After the war the ones who owned gold became extremely wealthy and in some cases were hunted down by the government so they could confiscate their wealth.

"I've made enough money, and it's in English banks and in gold. None of this worthless paper for me." - Rhett Butler, Gone With The Wind

The end game is simple to me. The U.S. fiat currency will eventually collapse and you will want to be holding a real asset than can’t be diluted into oblivion.

As Kuppy from Adventures in Capitalism stated so beautifully,

It’s not really an investment per se—It’s an escape from government imprudence. You don’t own gold because you expect it to do remarkable things—you own it because you are scared of your government doing remarkable things. Think of gold like the credit rating of world governments. It’s the CDS you buy if you don’t trust the politicians and their stewardship of the currency. - Kuppy, Adventures In Capitalism

Short list of countries that have underwent hyperinflation (this list is not comprehensive)

  • France 1795-1796

  • Austria 1921-1922

  • Soviet Union 1921-1922

  • Germany Weimer Republic 1922-1923

  • Poland 1923, 1989-1990

  • Greece 1941-1944

  • Philippines 1944

  • Malaya 1942-1945

  • Hungary 1945-1946

  • China 1943-1949

  • Bolivia 1970-1987

  • Chile 1971-1981

  • Argentina 1975-1992

  • Brazil 1985-1994

  • Peru 1988-1991

  • Yugoslavia 1989-1994

  • Angola 1991 – 1999

  • Yugoslavia 1992-1995

  • Belarus 1994-2002

  • Zimbabwe 2000-2009

  • North Korea 2009-2011

  • Venezuela 2016