Posts Tagged ‘Debt’

My Strategy for the Coming Wealth Redistribution Event

January 24, 2012 3 comments

Never mind the CPI number reported by the government (at around 3%), the real inflation rate is somewhere around 10% (using the SGS 1980-based methodology found at That’s high inflation. And it’s likely to go higher as the Federal Reserve accelerates its money printing in further attempts to kick start the U.S. economy and finance the ever increasing national debt—the national debt is growing exponentially and is now on the vertical side of the slope (going past the “knee” some time in 2008; see Be Financial Cycles Educated). Although a little dated (February, 2011), these economic charts illustrate the ongoing problem.

If history is any indication, a massive inflation spike or possibly a series of intense spikes is in our future. It will destroy the life savings of millions. But you don’t have to be one of them. There is, in fact, a way to benefit from it.

The Strategy

The idea is to implement an arbitrage by going short financial assets and going long tangible assets.

The short is to hold a fixed interest rate loan on real estate property with these characteristics:

  • Income-producing. The ideal property is income-producing (e.g. rental property) or with the potential to appreciate in an inflationary environment, such as farmland or land with mineral rights and a potential energy play (such as oil or gas). However, any real estate property will benefit from this strategy.
  • High LTV (loan-to-value). A recently purchased home or refinanced loan will work.
  • Longer term, fixed-rate loan. A 30-year fixed rate loan is the best.

The long is to hold a proportionate amount of tangible (i.e. non-paper) assets that will appreciate in nominal dollar terms (not adjusted for inflation) during the inflationary period. The two obvious candidates are petroleum and precious metals. However, for most people, obtaining petroleum assets of any significance is beyond their reach. When it comes to precious metals (i.e. gold and silver), they should be in your physical possession—if you don’t hold them, you don’t own them. Store them in a gun safe (bolted to the floor) or bury them two feet or more below the ground and do whatever you need to safeguard them. Having multiple storage locations is the best approach.

So here’s what happens with the arbitrage. Each year that the dollar devalues through rampant inflation, the value of your loan decreases, while the value of your gold and silver increases. Let’s take an example.

Suppose you get a 30-year, fixed rate loan of $200,000 on a $250,000 home (i.e. your down payment was $50,000). At the same time, you purchase $100,000 in gold and silver coins (American Eagles work the best). If the inflation rate is 15% and continues for the next five years, the value of the dollar will have dropped by about half (from $1.000 to $0.522 to be exact), and your gold and silver should have appreciated (in nominal terms) to double its original purchase price. Thus, after five years, two things will have happened:

  • The loan has lost half its value (in real dollars). You are paying the same monthly mortgage in nominal dollar terms, but in real dollar terms (i.e. inflation-adjusted dollars) you are only paying half the amount, since the value of the dollar has been cut in half.
  • Precious metals have doubled in value (in nominal dollars). At the same time, your gold and silver should have doubled in nominal dollars. You then have the luxury of paying off the loan, if you so chose, and have money left over.

You win on both assets through the inflation crisis, a kind of one-two punch.

Further insights into this approach can be found here: Deadly Dow 36,000 & The Secret History Of A 70% Market Loss.

Argentina is at it again

January 15, 2012 6 comments

The country of Argentina has been the poster child of what ultimately happens when a country takes on too much debt—i.e. economy collapse and social chaos. You can read about what happened 10 years ago from an Argentinean himself:

Well, wouldn’t you know it, Argentina is at it again! Read this from an article written on Tuesday, January 10, 2012:

“The economy [of Argentina] is rapidly deteriorating, and street-inflation has surpassed 25%. Naturally, the administration of President Cristina Fernandez insists that inflation is not a problem, despite the Argentine peso losing 25% of its value against the US dollar over the last three-years (and far more against gold). Meanwhile, [President] Fernandez has…imposed capital controls, raided pension funds, nationalized private property, and taken control of the media… all in a vain attempt to delay the endgame. A few weeks ago, the government passed a package of new laws, essentially criminalizing public protest under the auspices of combating terrorism. The legislation, snuck in at a midnight session during the holiday period, provides severe punishment for various crimes under a Very Broad Definition Of Terrorism.” (Excerpted from: simon-black-another-consequence-of-economic-decline)

We’re not that far behind. Our government is spending over 55% more than it receives in revenues. (i.e. U.S. Federal Spending is $3.626 trillion compared to Tax Revenues of $2.322 trillion; see: Our national debt is already over 100% of GDP. Almost as bad as some of the crisis countries in Europe. And who is the government borrowing all this money from? The Fed is printing most of it, of course. More than half of it is being printed out of thin air. That’s because Japan, China, and Europe are not buying U.S. debt. They have problems of their own to deal with, thank you very much.

I still believe we won’t see a U.S. financial crisis until the 2013-2014 timeframe. Nevertheless, whenever it is, it will come and it will not be pretty. I hope you’re preparing for the inevitable. If not, consider reading this guide for ideas: what-should-i-do

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