This discussion was hosted by Glenn Diesen, a Norwegian political scientist and professor at the University of South-Eastern Norway. Peter Schiff is the CEO of EuroPacific Capital and was the economic advisor to Ron Paul's presidential campaign.
(note: the reason I do near-verbatim transcriptions of these videos is because they often delve into subjects I'm woefully ignorant about and I don't want to inadvertently misrepresent what the participants said)
GD: When the global financial crisis was unfolding around 2008 I think every expert on TV was arguing that the real estate market was strong and the US economy was strong. I even remember claims that high debt was an indication of the world's trust in the economy and the US dollar.
You were the only one arguing that we were entering a collapse of the housing market and if I'm not mistaken you were also warning about this since 2005 and wrote a book about it. Because of your predictions I've been more interested in the Austrian school of economics and more critical of Keynesian economics.
PS: My warnings about the bubble the Feds were inflating in the housing market actually started in about 2002 to 2003. By 2005 the bubble was really at its peak. I could see the monetary policy mistakes the Fed was making and the impact they were having on the housing and mortgage markets. So I knew it was only a matter of time and the longer it took to blow up, the
bigger the crash would be.
GD: I remember in 2006 my country sold off all its gold, they should have been listening to you. My first question is about the state of the US economy at the moment. Trade deficits, debt, inflation that's increasing. Do you think the Fed can get this under
PS: the problems that were concerning me back in 2002 through the 2008 financial crisis are much worse now. Yes, we don't have the specific subprime mortgage issue but the subprime market was really just the tip of the credit bubble. There was a lot going on besides that that was problematic, that was just the
most obvioius and it was the first chain in the link to crack.
The problem is the debt in the economy, which is much greater now than it was then, and the underlying structure of the US economy which is even more screwed up now. The trade deficits are larger today than they were then, which we have an even more dysfunctional economy. Because we rely on imports. We can't produce the things we consume, the economy is incapable of doing that, so we rely on the rest of the world to supply us with the goods we can't produce but we have no way of paying for those goods.
So the external liabilities continue to grow. The debt America owes the world continues to grow. And at some point the lenders aren't going to want to continue because they're going to realize that they're not going to get paid in real money. Inflation has reared its head in a very visible way in the last couple of years and this is evidence it's about to fall apart.
Because inflation is what breaks this deal. Once the dollar starts losing value, people want to start getting rid of their dollars. We need people to hold their dollars so we can keep importing. If we can't import, then our whole economy based on borrowing money to buy imports is going to collapse.
GD: is there a possibility this will go into hyper-inflation or do you think it can be managed at a more moderate level?
PS: It can't be managed at a moderate level. To avoid hyper-inflation a lot of bad stuff is going to have to happen, at least it's going to feel bad. From a macroeconomic perspective it's going to be good stuff, solutions to serious underlying economic problems.
But the politicians and central bankers really have no stomach for the kind of free market solutions that will actually work because before you get the gain, you get the pain. None of the politicians want the pain, they're afraid they won't get re-elected, they'd rather kick the can down the road.
What you're seeing right now is the Fed having reacted to inflation it claimed didn't exist or was transitory and it's now raised rates up to 4-1/2, 4-3/4 and it's projecting them to get just above 5% over the next few months. A lot of people think that's it, the inflation genie is back in the bottle, we just have to wait another few months and it will go back down to 2%, then the Fed can start lowering rates and everything will be great.
But that's not what's going to happen. I think the improvement we've seen in the inflation numbers is what's transitory, that the inflation numbers will be moving decisively higher by the end of the year. And it will be obvious the Fed is nowhere near its 2% goal
and will need much more substantial hikes than what's happened so far.
But I think by then you're going to see some kind of rollover in the labor market, notwithstanding the big jobs number we just saw. I've been looking at the nature of these jobs we've created and over the last 10 months we've actually destroyed full-time jobs, you have fewer people with full-time jobs than we had 10 months ago. The 500,000 jobs created in January are on balance part-time jobs and they're going to people who already have jobs.
So why are so many people moonlighting? It's because inflation is so bad that it's destroying the value of their paychecks so they need another one. So you have a record number of people working 2 or 3 jobs, you have people who are retired being forced back into the workforce. So I think by the end of the year we're going to have to start to see a pronounced weakening in the labor market. The economic data is already weak, I think it's going to get weaker, and then the Fed is going to be in a real bind because it's going to be facing higher inflation and a weakening economy and a weakening labor market but rates are already going to be above 5% and it would have had no effect.
This economy wasn't even built for 5%. The phony economy the Fed built needs 0%, that's basically the highest we can afford. We have a $31.5 trillion national debt, but if rates stay at 5% for a few years, it's going to cost over a trillion dollars just to pay the interest on that national debt. And it's going to have to borrow that, which means the budget deficit could go to $3 trillion a
year. And how is the Fed going to fund those? It's going to have to go back to quantitative easing and that's the risk of hyper-inflation. Because they can't fight the inflation with an interest rate that's high enough to do the trick but that we can actually afford. More importantly, there's no way to fight inflation without the government cutting spending. But they're not doing that, they're increasing spending.
In fact, as the economy weakens, they're going to increase spending more. When consumers are struggling with higher prices they want to give them stimulus checks so they can pay the higher prices, which is just more inflation.
The hidden truth is that inflation has been the Federal Reserve's ace in the hole, it's how they've gotten us out of every problem. Quantitative easing is a euphemism for inflation. So the way the Fed got us out of the financial crisis and the Covid crisis was creating inflation. That's the Fed's solution to every problem.
Well, now inflation is the problem.
AM: Do you think the headline inflation rate that we're getting is close to reality? I ask because I saw a recent article of yours in which you said they're getting the (?) wrong, that some of the growth we're allegedly seeing isn't really growth at all because the public figure for inflation is being set too low. Can you enlarge on this, because I think it's an important point people don't understand.
PS: The government gives us these inflation numbers. They're basically a report card on the economy, the same as the GDP numbers. If we allowed our children to grade their own report cards, would we be surprised if they came home with straight As? Obviously, the government has a vested interest in telling the public the economy is better than it is, i.e., that there's less inflation, more economic growth, etc.
They're not fudging the numbers; the way they measure the numbers have been designed to fudge them automatically. So no one has to do anything. All you have to do is use the government formula and you're going to get these rigged numbers.
I did a little experiment back in 2013: looked at the price increases the government claimed compared to actual increases. One of the things I looked at was newspapers and magazines because that was easy. According to the government from 2003 to 2013, newspaper and magazine prices were up a total of 30%, about 3% a year. I found images of the most popular papers and magazines on the internet: US News and World Report, TIME, New York Times, Wall Street Journal and compared them to the prices in 2013. The actual increase over 10 years was 130%. How did a rise of 130% become 30%? I have no idea. That's the magic of the CPI, it makes inflation disappear.
AM: and it makes growth look higher than it actually is because you're counting as growth what is actually inflation.
PS: that's one of the reasons governments like inflation, it's their silent partner. It's how they tax the public without having to actually raise their taxes in a way the public knows they're being taxed. It also makes the numbers look better. The government can
create phony economic growth and then take credit for it by creating inflation.
AM: So in effect we've had deliberately inflationary policies for a long time. Why have we been doing this? Presumably people in government and in the central banks understand that this is what they're doing, Is it because they don't want to have recessions?
PS: why does a heroin addict take heroin? One of the dynamics of inflation is that it transfers wealth from creditors to debtors. People in debt benefit from inflation because the value of their debts are diminished. The lenders suffer because when they get paid back it's in money that has less value.
So, who's the biggest debtor in the world? The US government, so they have the most to gain from inflation. That being the case, it is going to pursue an inflationary policy, and that's what they're doing through the Federal Reserve.
AM: Do you think things have gotten worse over the past several years? I'm not an economist but when Biden came into office in early 2021 and announced his various programs, I said the spending he's projecting is so huge it's bound to feed inflation. Yet
this didn't seem to concern people. Do you sense that some boundary has been crossed, that now they're going to more extreme levels with this than they had previously?
PS: I just think the inflation is now so high and so obvious they can't pretend it doesn't exist, which is what they were doing for many years when the central banks were saying it wasn't high enough even though it was well above their target of 2% to justify the policies they wanted to pursue. The cat's out of the bag now that we're so far above 2%.
There's investors that are hopeful inflation will come back down but that's because they don't understand inflation. They think it's rising prices but it's the expansion of the money supply; the result of that is that prices go up but not always. Sometimes you can expand the money supply and instead of prices going down they remain the same or go down 2% instead of 10%. That difference is still inflation, it's a robbing of purchasing power.
Government spending has to be paid for. Nobody gets government for nothing. So if the US government is going to run these big deficits, how do we cover the costs? Either we'll pay for it directly with taxes, or pay for it indirectly through higher prices.
The government can either take our money and give it to someone else to spend, in which case I have less money to buy stuff, or the government just prints money and gives it to someone else to buy stuff and that makes prices go up, so now I can't buy as much stuff. Either way, I have to consume less because someone who got money from the government is consuming more. So as long as the government spends money like this, there's going to be inflation.
What the government tries to do is blame inflation on other factors, e.g., greedy businessmen gouging their customers or Putin's price hikes. What they don't say is we have inflation because we're spending all this money on these programs so this is how you're paying for it.
GD: I wanted to talk about the possibilities of alternatives. It's often been argued that although the US dollar has its problem it's the cleanest shirt in the hamper. After the global financial crisis not only was there an economic war with China which unraveled supply chains and made them a bit more apprehensive but then you had Covid with production collapsing with the lockdowns. Meanwhile the supply of money escalated dramatically and the combination is usually a recipe for high inflation as well. Now we're at war and at least in Europe this seems to have accelerated the industrial decline and the rise in debt. It doesn't seem like this can go on forever. Why aren't people fleeing the dollar?
PS: There's no clean shirts out there as far as a fiat currency is concerned, they're all dirty. Now I don't think the US dollar is the cleanest of the dirty shirts, I actually think it's the dirtiest. It's just that most people haven't realized that yet. And because of that misperception they're willing to buy dollars, invest them in US Treasuries and other dollar-denominated debt instruments, to recycle their trade surpluses into our financial assets. That has enabled us to take on more debt and build this phony bubble economy bigger and bigger.
But at some point the world is going to get a whiff of the US shirt and they're not going to want the dollar anymore. Now does that mean they're going to want the euro or the yen? No. What I think is they're going to realize if you want something clean you have to get out of the hamper and the only thing that's real money is
gold. So every central bank looking for a safe reserve asset to back up their currency is going to return to gold. People too, private parties that are looking for a safe monetary instrument, liquidity, that they can store their purchasing power.
Gold as an alternative not to stocks or bonds or real estate but gold as an alternative to dollars or euros. Because if you want to make an investment, you don't buy gold, it's not an investment, you buy real estate or stocks. But if you don't want to buy these because you think they're too expensive and want to wait till the
prices come down, now you need a monetary instrument, a place to keep your dry powder. So if your monetary instruments are losing value because of inflation you go to gold.
AM: what do you make of the arguments Zoltan Pozdar has been making that it's going to be all about currencies linked to commodities in some way replacing the fiat system. Is this a practical option?
PS: It's practical and viable and it works. But I don't think you need a basket of commodities, you're fine with just one. Gold works better as money than other commodities, that's why gold has been money. Governments have moved us away from gold because it doesn't serve governments well but it serves the public
Governments have a different motivation. Politicians just want to get elected, promise something for nothing and gold stands in the way of doing that so you have to get off the gold standard, you need paper money so you can run all this debt and get all this inflation. That's not good for the people, it undermines economic
growth and leads to a lower standard of living. Governments didn't choose gold, people chose it. When governments were formed, if they wanted to pay their soldiers and whatever, they needed gold because that's the money the soldiers and grocers and everyone wanted.
That's where taxes came from. Governments needed taxes because they didn't have gold mines. They needed gold from the public to spend it. Once they moved off the gold standard, they all print money so they don't need to tax us. They do, but they can just print more money. It results in much lower living standards than would have been the case had we stayed on the gold standard and had a much larger economy and smaller government.
GD: since 2006 at least the two main countries hoarding a lot of gold - Russia and China, who besides their economic interests have political interests - what do you think of China, the most interesting competitor to the US, there's talk of dumping US debt or getting out of the US dollar. Do you see this having any
PS: I think it's already started and will build momentum over time. I think the Chinese already recognize they have too many dollars and they want to divest and they're doing that. They know they need more gold and they're buying gold. In fact, China is the largest producer of gold which makes it easier to acquire since it's produced within its borders. But they're also importing it. Russia, too, has already bought a lot of gold and will buy more.
Not only is it a bad idea for all these countries to accumulate paper dollars that are just going to lose value due to inflation, but they're also risking losing those dollars due to sanctions if the US doesn't like some of their policies. I don't think any sovereign nation wants to be beholden to a foreign power like that. China saw what happened to Russia and doesn't want the same so I think they want a reserve asset that the US doesn't control or have any influence over and that would be gold.
I also think the Chinese economy has suffered from its trade relationships with the US. They've got these large trade surpluses with the US but all they've got to show for them is a big pile of dollars and that isn't helping them. What China needs are products, not the ones it produces but what other countries produce; what they should be doing is using their exports to pay
for their imports. That would give the Chinese people a higher standard of living. They've been exporting to the US and getting paper in return, so they're going to have to get rid of that paper and buy something they can use, and I think that's what they're going to do.
AM: Back to your earlier point, there are times I feel that we're going back to the period of the late 1960s that led to the decision in 1971 to break the link with gold. We had a massive spending program in the 1960s, the Great Society in the US and the funding for the Vietnam War, the moon program, the arms race
with the Soviets; we had all kinds of things going on at the same time.
So the US government was very visibly overspending at that time. The Europeans said they didn't want dollars, they wanted gold instead, and that was what IMO led to the decision by the US government to pay in dollars instead of gold and that's what got us into the position that we're in. So where does quantitative easing come into all of this? You said it's money printing but it's a very strange form of money printing.
PS: The Fed has been printing money for a long time, they didn't start in 2001 when they launched quantitative easing, they just started printing a lot of money. Quantitative easing is just extra inflation, fast inflation - they'd been inflating for decades but they just sped up the pace. They did it again with QE2 and QE3
and then QE4 is what happened after Covid came around. That's why the balance sheet got up near $9 trillion, because the Fed had printed up so much money and bought all kinds of debt instruments with it.They've now reduced the balance sheet down to about $8.5 trillion but it's still enormous.
The reason the Fed came up with the term quantitative easing - I think the Fed came up with it, I don't know - but what if Ben Bernanke called it inflation when they launched it? What if he'd said, we're going to monetize government debt and cause inflation and that's what's going to get us out of this financial crisis? We're going to bail out the banks and bail out the debtors by creating lots of inflation. Had they said it like that, there would have been a public backlash. So it was a branding issue. But it doesn't matter what they call it, it's inflation.
AM: What about interest rate policy? Because that seems to have gone hand-in-hand with this, keeping interest rates as low as possible whatever happens, whether growth rises or falls. Then after 2008 we have negative interest rates.
PS: That's why you don't want a central bank setting interest rates, because they're going to be motivated by politics, not economics. In fact, even if they were trying to get the right interest rate they'd get it wrong; central planning doesn't work, we know that. We don't have a Fed, a group of people, that sits
around a table and decides the price of milk or wheat or oil, we allow the market to discover that price even though most people would prefer a lower price for food and energy.
But when it comes to interest rates, we've decided the market doesn't work. We're not going to be a free market, a group of individuals is going to decide what the rate should be. These individuals aren't geniuses who can figure out the right rate, they're politicians or working at the behest of politicians and they count votes.
In most countries - let's take the US, for example - the average voter is loaded up with debt - credit cards, auto loans, student loans, a big mortgage - there are some creditors but the vast majority of voters are in debt. How do you get those people to vote for you? You give them lower interest rates, that's what they need to keep paying their debt. To some extent the creditors need the low interest rates so the debtors can pay their debt and don't end up defaulting.
So you have all this political pressure to keep the interest rates low, and that's what they do. Plus you have the US government with all its debt that it can't service if interest rates are high. The government can sell Treasury bills at 25 or 50 basis points but it's going to be difficult now that it's 500 basis points. Who knows where the interest rates would be if the free market was setting them? Whenever you have the government setting a price, it's going to create a problem, either a shortage or a surplus, because the price is going to be wrong. The market will find a price where everything is efficient but the government is going to pick a price that's too high or too low.
With interest rates it's obvious they're picking a price that's too low. So you're going to get a shortage of savings, which is what we've got, a record low savings rate because people are being punished for saving because interest rates are below the inflation rate. This is a big problem because savings are the lifeblood of a
capitalist economy, it leads to economic growth because it finances capital investment. And when interest rates are too low, everyone wants to borrow, so it's not surprising that we have these low interest rates and record amounts of debt with the government, the corporations and individuals. It's already creating an economic disaster and it's going to lead to a crisis.The fact we've been able to avoid that crisis for as many years as we've had despite the bumps we've had along the way like the '08 financial crisis, all we've done is allow the problem to get much bigger. So when we eventually have the real crash, it's going to be so much worse.
GD: there doesn't seem to be many places to go. If you raise rates, the economy will collapse but if you keep it low....
PS: if it's kept low, the debt gets bigger. It has to collapse eventually. They're afraid to let the bubble pop so their solution is to allow it to get bigger.
GD: Alexander mentioned Nixon taking the US off the gold standard but this was replaced by the petrodollar, with Saudi Arabia and other Gulf states selling oil in dollars so this becomes the main currency of international trade and also the reserve currency. But Saudi Arabia is now talking about trading in other
currencies, they're meeting with China. Also Russia, a key energy exporter, is now insisting on taking local currency or at least not the US dollar for its energy. How important do you think this will be, or is it too early to say whether this could mean the demise of the petrodollar? I'm surprised this doesn't get more media attention.
PS: remember that most people in media don't understand this so they're not going to pay much attention to it. But yeah, I think it's very significant, that the petrodollar was key to maintaining the dollar's reserve status, especially in the aftermath of Nixon's default. Which is what it was; we owed gold, that's what Federal Reserve notes were, promises to pay gold. So people who claim we've never defaulted, yes we did.
What we did to try and give value to the dollar - which had been backed by gold and was now backed by nothing - is to convince Saudi Arabia to start pricing oil in gold (sic?) and tell the world, we're not going to give you any gold but you can use our dollars to buy oil from Saudi Arabia. That created some demand for dollars; you could take the dollars you got from your exports and buy oil.
But what's happening right now and it's pretty obvious is that a lot of the oil-exporting countries are trying to get out from under this and pushing back against the idea of selling their oil in US dollars. It's just beginning but I think that trend will continue and that ultimately no one will be selling oil in US dollars. Maybe they'll accept dollars but they'll also accept lots of alternatives, whether that's gold or other currencies or a crypto currency backed by gold, who knows. But I do think these exporting countries are going to want to wean themselves off their dependence on the dollar for global trade and you can already see that's happening. (42:48)
AM: I think a lot of people don't realize that before 1971, oil was priced in gold.
PS: But if it was priced in gold then it was de facto priced in dollars because the dollar was set, it was $35 equals one ounce of gold. So 1/10th of an ounce of gold was about $3.50, and that's about what oil was trading at, I think $2 to $3 a barrel before 1971. When we went off the gold standard and the dollar crashed,
oil went up to like $30 a barrel, but in terms of gold the price actually went down.
AM: That's exactly the point. The OPEC countries were trying to protect the price of their product because against gold, the price actually fell.
PS: Looking at the 1970s, a lot of people say the Arabs gouged us by raising prices because that's how it was framed in the US - no, they didn't, we tried to gouge them by paying them in depreciated dollars. They were just trying to stay even by increasing their prices; we were destroying the value of the money we were paying them in.
GD: Interesting to look at inflation. In 1971 it was $35 per ounce of gold and it's now above $1900 an ounce and moving towards $2000.
PS: It was. Gold was down $50 today, it was down $30 yesterday so I think we're around $1860 or $1870. The last couple of days notwithstanding we're clearly headed higher.
GD: curious how you see the European economy. Here in Europe we tend to think the US economy might be in bad shape but at least they're doing better than us. Over the past year people are getting more pessimistic, rightly so especially since cutting ourselves off from energy; you can't have competitive
industries without cheap energy. All that energy is now being sold at a discount to Asia which will make it very difficult for our industries to survive.
PS: Certainly the European economies have suffered more due to the Russia-Ukraine conflict. And the US economy maybe got a boost because we supplied all the war materiel and got the capital flows that were leaving Europe.
But big picture, I would say the US as a whole, the 50 states and the federal government, are in worse shape than the countries sharing the euro collectively. One of the reasons is because we've been able to go even deeper in debt. I think Europe, collectively, runs a trade surplus - some countries have a deficit, some a surplus but overall trade is relatively balanced. We have enormous deficits that ar completely unsustainable. We have a larger debt to GDP compared to Europe but the US also has larger unfunded liabilities in terms of all the commitments the US has made that it can't keep but is obligated to pay.
The nature of our economy, given how much of it is service sector and how little of it is underlying manufacturing and goods production and wealth creation; and we have an army of people looking to retire with no real savings to support that; and a young population of very ignorant, unskilled people who spent a lot of time in government schools but don't have any marketable skills, nor did they acquire any trade. We're in a lot of trouble as a society, even moreso than in Europe - not to say that Europe doesn't have problems, but I think our serious problems are even more serious than theirs.
AM: In Britain where I live the problems are probably more similar in ways to the US. I think in Britain and in Europe we've had very bad interest rate policies. I was reading an article this morning about what's happened with car buying. Because interest
rates have been so low for so many years, people were encouraged to buy extremey expensive cars. They've been buying them on credit; the cars were imported; interest tes have been creeping up and a lot of these people are now severely under water. But up to now it's worked because nobody expected the
debts ever to be repaid, people were taking out debts they couldn't afford, trading up their cars all the time and be able to renew their debts. Everybody was happy. Of course all that was happening is that we were importing more and more cars into Britain and that's just one example, and it was a direct result of
very bad interest rate policies.
PS: Not only do you have a problem of a credit bubble and auto loans that are going to go bad and lenders that are going to lose money, but you have to look at the damage that was done to the economy when people were buying cars they couldn't afford; and borrowing money to buy cars meant money was not
available to fund more productive investments. If you run a transportation business like a cab company then buying cars is an investment. If I buy a car for myself to get to work, I don't need a fancy new car, an old beat up car works just as well.
When people borrow money because of cheap interest rates to buy a new car when they had a used one that was perfectly good, they're screwing up the economy because now that money isn't there to fund capital investments. So instead of building more factories and other stuff, we just produce more luxury cars that people don't need so the whole economy suffers because we're not getting the allocation of resources and the savings and consumption we'd get in a free market. Because if the free market let interest rates get higher and it became more expensive to take out a loan for a new car, people would have managed with the car they had. What would they have done with the money they didn't spend; they would have done something with it and it would have been more productive for the economy.
Not only were people able to buy new cars for no interest but a lot of them were doing it with no down payments. So they basically walked into a car dealership with no money and left with a new car.
AM: that's exactly what happened. So what should we do? The way you describe it we're going to have to go through this crash, realistically I can't see how we can change it. Are we going to have to go through this Great Recession or Depression?
PS: The first rule of holes: when you're in one, stop digging, so that's what we have to do. But somebody has to deliver the bad news and no one wants to do it because people have a tendency to shoot the messenger.
It's not that the news is all bad if you understand how to deliver it. Because capitalism is a very dynamic system, and it works wonders when governments leave it alone. You can see how well it worked in the 19th century, you can look back and see the tremendous increase in standards of living. You can even look at how quickly Germany and Japan were able to rebuild after WWII.
If capitalism worked so well in the 19th century when we had no computers, no internet or phones or any of this modern technology, imagine how much better it would work now that we have all these tools and infrastructure. If we start doing the right thing we will see positive results very quickly; not immediately, we're gonna have some pain, but there's an enormous amount of gain out there.
Someone has to deliver the message with a spoonful of sugar, let people know "the government caused all these problems and now the economy is all screwed up; solving these problems will involve recognizing long overdue pain but going forward you're going to be free from government - go to work, you don't have to pay income or payroll taxes anymore, just some minimal tax to cover the cost of the roads and defense, etc." But no one has to spend all this money, it's all going for transfer payments, we need to get rid of or at least significantly reduce all these Ponzi schemes the government is running.
If we have a real free market economy, if we go back to real money instead of government funny money, we could see a big increase in our standard of living. But before it goes up, it's going to come down, there's no way around it. But if we don't do the right thing, the standard of living is going to collapse and it's never
going to come back.
GD: so countries should accept the medicine and take the pain now and adjust. How about the average person, what can they do to prepare and safeguard themselves?
PS: The governments aren't likely to do the right thing. They're not going to cut spending or tell voters expecting checks from the government that they're not going to get them or will get smaller ones.
So what's going to happen is the government will pay all the money they've committed to pay, it's just not going to have much value when the recipient gets it because of inflation. So paper money is going to lose the majority of its purchasing power.
What that means is that if you have a lot of this paper money, you need to get rid of it. What I want to do is take that paper and acquire real assets while I can. So what I've been doing for myself and clients is buying good dividend-paying stocks, companies with real asset, products, plant equipment, resources, and are selling products and services that people need and will buy even if the price goes up to stay even with or ahead of inflation. They'll stop buying other things to buy these products and services because that's what they need.
I also want to own a lot of the resources, the commodities and the raw materials that the government can't print that will be a lot more valuable in the future.
I also recognize that in a post-US dollar world where the dollar crashes, I think the biggest winners will be a lot of the emerging market economies that have been held back by the dollar. I think they'll thrive and want to have investments that benefit from that. So invest in companies in these emerging markets or in companies in developed markets that have a lot of customers in the emerging markets. As America imports less, so the goods Americans used to buy are going to be bought by someone so I think a lot of the emerging market consumers will be stepping up and getting what Americans can no longer afford. So the businesses with better pipelines into those markets is what you want to own.
The government can only tax my dollars with inflation, they can't tax my gold or stocks so I minimize the number of dollars I have. We're managing money for people all over the world and two of my strategies - my dividend-payer strategy and my value strategy - I've replicated in mutual funds that I've made available to Americans; they're not available to an international audience but they're based on my separately managed accounts that are available to people all over the world. There's a few sanctioned countries we can't work with but most people we can manage money for them.
If you look at the relative performance of my funds, the US News & World Report I think a week or two ago had a survey of the top 60 funds in large (cap?) value based on a review of 350 funds. They narrowed it down to the top 60 and looked at them over the last year, 3 years and 5 years and ranked them. My dividend-payer fund was ranked #1 and my value fund was ranked #3.
The reason they've done so well is because of the stock selection; we're buying good companies, real value; and the sector allocation - we're allocating correctly, we're not anywhere near the benchmark which is why we're able to outperform the benchmark
by so much. But my strategy is really designed for a weak dollar so we were able to outperform even with a strong dollar; but if I'm right and the dollar turns south, and it looks like it started to in the 4th quarter of last year so if we do get a persistently weak dollar which I think we're going to have, I think it's going to hit a record low, then my strategy should do even better not just on a relative basis compared to its peers but on an absolute basis.
(there was a discussion at the end, a reminder that there are no risk-free assets, it's a matter of which risks you want to avoid and which you're willing to take).