Act Now to Inflation-Proof Your Wealth
Emma’s Note: Emma Walsh here, managing editor of the Diary.
Bill has been warning Diary readers about inflation for some time now. And earlier this month, his prediction came to pass. Annual consumer price inflation is officially at 5%.
Many people believe the Federal Reserve, America’s central bank, will step in and stop it.
But our colleague, Tom Dyson, believes the Fed’s actions (or lack of) speak far louder than its words. In fact, he says it’s in the Fed’s best interests to keep inflation running high.
Read on below for Tom’s take on the inflation situation… and some great advice for what you can do to protect the dollars you work hard to earn, save, and invest.
Last week, the Federal Reserve hinted it is becoming concerned with inflation.
This surprised many traders, who had been thinking the Fed wasn’t concerned at all about inflation. There were some dramatic moves in the currency, gold, and interest rate markets as a result.
What do I think?
As regular Diary readers know, the U.S. government is broke. It plans to soft-default on its debt by pushing inflation up while keeping interest rates down.
The technical term for this is “negative real interest rates.” Here’s what that means for the debt…
A negative 3% real interest rate reduces the real value of the government debt by 46% over 20 years. At negative 5%, the real value of the government debt gets reduced by 64% over 20 years. (This is thanks to the power of compounding, but I won’t bore you with the details.)
The slang term for this condition is “financial repression.” It means the government is sneakily stealing from bond investors, on an inflation-adjusted basis, by about 3% to 5% a year.
Here’s the thing…
The Fed and the Treasury cannot admit they’re doing this. The announcement would trigger a revolt in the sovereign debt market.
So they must pretend to be tough on inflation once in a while, to placate bond investors.
Nothing Has Changed
This is what we saw last week – the Fed pretending to be concerned about inflation to placate its investors and buy some more time.
But long term, nothing has changed. The government has $28.5 trillion in debt and plans to keep spending money it doesn’t have – to the tune of more than a trillion per year.
That’s why it must soft-default through inflation.
That means it will pay down its debt… but with massively watered-down dollars. It’s the only way the government can default on its debt without admitting it’s defaulting.
The bond market will eventually figure out what we already know and revolt anyway.
We’ll see yield curve control (capping interest rates) and a massive expansion of the Fed’s balance sheet…
And the paper currency system will be the release valve.
We call this a “synchronized global currency devaluation.” (I’ve explained yield curve control and the synchronized global currency devaluation in more detail to my Postcards From the Fringe readers here and here, respectively.)
In the meantime, markets will move in waves of sentiment as traders position themselves – and over-position themselves – in one direction or the other.
Higher Gold Prices Ahead
My sense is, after a year of positioning themselves for “more inflation,” traders had become overinvested in inflation hedges.
Even though the Fed is only pretending to be concerned about inflation, it was enough to trigger a bigger-than-normal reaction in the markets.
Nothing to worry about, though. With $28.5 trillion in debt and more debt coming, the long-term trend of higher inflation, lower real interest rates, and much higher gold prices is assured…
That’s why, in my Tom’s Portfolio advisory, I’ve recommended a portfolio of gold and other hard currencies. If you haven’t inflation-proofed your portfolio yet, now is the time to do it.
I put together a special report to help you build the ideal portfolio of gold and other inflation-fighting assets – including a detailed allocation strategy and the best ways to buy physical gold and silver. To learn more, watch this.
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