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.
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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
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While I agree we continue to see high inflation I'm not sure we see hyperinflation. All those countries you listed are non-core economies (Germany was essentially a banana republic after WWI). If it happened here it would mean the US and the dollar would have to had fallen incredibly far (relative to other core economy countries - who appear to be making the same mistakes the US is).
As far as I understand, if the USD would go into hyperinflation, all other currencies would've already been deep in the shits, so there will be leading indication, i.e. time to react.
Furthermore, the FED is not really printing money, and their actions are not causing inflation as of now. It's just easy to blame them. Federal Reserve Credits are an interbanking only currency. They might be converted into USD by private banks lending out, though most banks nowadays are quite disciplined in keeping a profitable balance sheet (as required by law and ensured via the repo market).
Imho the main factor for rising prices is decades of underinvestment in value companies, which led to higher cost of capital, which in turn led to those companies investing less in their own business, which in turn led to outsourcing many aspects of manufacturing. Now due to COVID, consumption flowed out of particular sectors into others (leisure and services flowing into goods and ecommerce). The M2 did not need to change. All the available currency used to consume all available things is now just concentrated in less sectors than usual. In addition these sectors are not able to deal with the supply chain constraints, due to decades of underinvestment/outsourcing. Which leads to way more demand than supply (domestic or available), regardless of how much reserves the FED "printed".
I see this mainly a consequence of investors chasing growth, while value companies were underinvested. Might be a good opportunity for quality business in the small-cap value universe.