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Joe Biden and the new era of big government
Michael J. Kosares

They’ll print money until they run out of trees.”
Jim Rogers, investor and financial commentator

Bridgewater’s Dalio says stay clear of bonds, buy ‘stuff’

For many, the above headline accompanying a recent Financial Times “Big Read” will be welcome news. For others, it will serve as a warning. FT says the Biden administration’s economic program “echoes” Franklin Delano Roosevelt’s New Deal and Lyndon Johnson’s Great Society. “The passage of the [stimulus] bill in a deeply divided Congress…,” explains FT, “has a much broader significance. It cements a leftward shift in US politics and economics that has gained traction during the coronavirus crisis, affording government a far bigger role in solving problems in society than it has enjoyed in recent decades.” Part and parcel of that shift is a severe leftward tilt in Washington’s economic policy that poses a direct threat to the dollar’s longer-term value and stability in the bond market. 

Even Larry Summers, a top economic advisor to President Obama and former Secretary of the Treasury under Bill Clinton, lambasted the Biden $1.9 trillion stimulus package as “the least responsible macroeconomic policy in the last 40 years” – one, he said, that could lead to inflation and accelerate to stagflation. The Jerome Powell-Janet Yellen tandem will not take kindly to this very public warning on a policy both embraced wholeheartedly – Yellen saying it is time to “go big” and Powell pushing hard for the stimulus package from the get-go. Coming from the individual many in the Democratic party see as its principal economic guru, the criticism carries a bit more sting than if it had from elsewhere. Summers also sees serious “consequences for the dollar and financial stability.”

Bloomberg reports that major financial institutions from Goldman to JPMorgan are worried about inflation, citing it as an “invisible force rocking Wall Street.” In a recently posted LinkedIn piece, Bridgewater Associates’ Ray Dalio stated flatly that “the economics of investing in bonds (and most financial assets) has become stupid … [B]ecause you are trying to store buying power, you have to take into consideration inflation. In the US, you have to wait over 500 years, and you will never get your buying power back in Europe or Japan. In fact, if you buy bonds in these countries now, you will be guaranteed to have a lot less buying power in the future. Rather than get paid less than inflation, why not instead buy stuff – any stuff – that will equal inflation or better? We see a lot of investments that we expect to do significantly better than inflation.” Of course, the ultimate “stuff” – the ultimate stores of value – are gold and silver. Most of the inflation-proofing strategies outlined by analysts in the Bloomberg report include real assets, gold, commodities, et al. 

How to spot a bubble
‘Amount of leverage in U.S. equity markets now easily the highest in history.’

Cartoon courtesy of

“If you want my opinion,” writes Hussman Fund’s John P. Hussman in a recent analysis, “I suspect that a near-vertical market plunge on the order of 25-35% is coming, probably quite shortly, most likely out of the blue, as in 1987, driven by nothing more than the sudden concerted effort of overextended investors to sell, and the need for a large price adjustment in order to induce scarce buyers to take the other side. As usual, no forecasts are necessary. … This dysfunctional behavior isn’t about any particular video game retailer. I suspect it’s actually about some sort of fragility or segmentation in order-flow mechanisms, possibly coupled with poorly managed derivatives exposure. As I used to teach my students, show me a financial debacle, and I’ll show you someone who had a leveraged, mismatched position that they were suddenly forced to close into an illiquid market. Though my concerns run far beyond the amount of leverage in the system, it isn’t helpful that the amount of leverage in the U.S. equity markets is now easily the highest in history.”

These days spotting the bubble is about as difficult as finding it in the Ramirez cartoon above. Hussman attacks Wall Street’s new rationalization of buying into the bubble, i.e., extreme valuations are justified by low interest rates. Those who are all-in for fear of missing out – blindly walking on air – are obviously the most vulnerable. When investing becomes a matter of faith, that faith will be tested. A solid diversification, we will add, would blunt the downside. Though investor margin debt is small compared to the leverage funds and institutions deploy in the market, it does serve as a bellwether for analysts looking for what might trigger a market crash. SentimenTrader’s Jason Goepfert recently posted a warning to his readers that at $831 billion, we are fast approaching a “year-over-year growth rate in [margin] debt – on both an absolute scale and relative to the change in stock prices – will compare with some of the most egregious extremes in 90 years.”

When paper money dies, precious metals prevail.
The lessons learned from the nightmare German hyperinflation of 1923

Not many investors are seriously concerned about hyperinflation in the United States at this juncture. At USAGOLD, we, too, see it as an outlier – something that could happen but not a probability. But that’s the thing about hyperinflations. Rarely does the handwriting appear unmistakably on the wall. Not many were worried about hyperinflation in Germany in 1923 when it struck out of the clear blue. When disaster did strike, however, it came with a vengeance. Prices shot up in 1921. Then just as quickly – within the space of a year – they ran out of control. By 1923, an individual’s life savings could not purchase a cup of coffee. We ran into the following charts researching another matter at the GoldChartsRUs website. The one unsettling aspect they all have in common is their verticality – an indication of how quickly and conclusively the inflationary catastrophe swept through the German economy. 

The first and second charts reflect the severe debasement of the German mark at the time. The third and fourth show how gold and silver performed as a hedge. In effect, what could have been purchased with an ounce of gold or silver before the debacle, could have been purchased at any time as it worsened and finally when it ended a few years later. Few, as stated above, predict an inflationary disaster on the level of the Weimar Republic. Still, it is good to know that by preparing for the lesser version of inflation, one prepares for the nastier versions as well.

Charts courtesy of GoldChartsRUs 

Image (top): Paper German marks converted to notepad, 1920s Weimar Republic. Attribution/ Bundesarchiv, Bild 102-00193 / CC-BY-SA 3.0, CC BY-SA 3.0 DE <>, via Wikimedia Commons









Michael J. Kosares is the founder of USAGOLD, author of The ABCs of Gold Investing – How To Protect and Build Your Wealth With Gold [Three Editions], and the firm’s publications editor.ip.


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