Avoid These Assets as the Inflation Crisis Spirals

I’m torn on how best to introduce today’s dispatch. Two options occurred to me: 

1. There are rocks and there are hard places…and then there’s the stone-crushing machine in which Uncle Sam now finds himself. 

2. Damned if you do. Damned if you don’t. Damn! What do I do now?  

Here’s the reason I am torn… 

For a while now, I’ve been writing to you about the idea that the Federal Reserve cannot pretend it’s the Fed of the 1970s…meaning it cannot raise interest rates high enough to successfully quash inflation.  

In the 1970s, the Fed pushed rates to 20%, well above inflation that was in the low- to mid-teens. That ’70s Fed could do so because debt was not much of an issue in American society. Neither consumers nor Corporate America nor government itself relied on debt to live aspirationally, as all of them do now. 

When it comes to the inflation crisis of today, the Fed has two paths it can pursue: 

1. Stop raising rates soon and concede that inflation will have to run hotter than the preferred 2% rate. 

2. Ignore the reality of modern debt levels and keep on trucking with the interest rate hikes until rates are significantly higher than inflation. 

Option 1 is “the rock,” for Uncle Sam. 

Allowing inflation to run hot comes at a cost. 

Higher inflation means investors who buy U.S. debt would obviously demand interest rates that keep pace to some degree with inflation. So, interest rates on Treasury paper will climb higher from here, likely toward the 6% to 7% range. (Right now, they’re in the 3.5% to 4.5% range.) 

If America wasn’t already history’s most heavily indebted nation, higher interest payments might not be so horrible. But when debt payments alone are $475 billion annually and rising, higher interest rates are a troubling matter. As they rise, they necessarily displace spending that could grow the economy. Debt payments, however, actually slow the economy. 

Like I said, that’s the rock. 

The hard place? 

Well, that’s Option 2 for the Fed: Keep on raising interest rates so that they climb above the rate of inflation. 

That would see Uncle Sam’s borrowing costs rise even more significantly, since we’re talking about terminal interest rates at 10% or more to get inflation in check. Such a rate would be debilitating for a government that is already excessively indebted.  

The government would be in a situation where it is piling on more and more debt—at huge interest rates—simply to cover interest payments on existing debt. Early on, that wouldn’t seem so horrible because we’d be paying off older bonds carrying interest rates as low as the mid-1% and 2% range (bonds issued in previous years when the Fed kept rates unnaturally low). 

Soon enough, however, the average interest rate the government is paying jumps to 5%, 6%, 7%, even 9%, and Uncle Sam would face the likelihood of a crushing debt spiral. The dollar would collapse as global markets feared for the ability of America to manage such an extreme situation. Inflation would surge even more in America because the cost of imported goods would leap higher. 

And the Fed would have to raise rates more to attack higher inflation. 

You can see now the damned if you do, damned if you don’t dilemma: Whichever path the Fed chooses, Uncle Sam takes a body blow to the wallet! 

Though, to be clear, this column isn’t about what option the Fed will likely choose (probably Option 1—stop raising rates and accept that inflation will be persistently higher than its preferred 2% rate). 

More important than the outcome is realizing that either option is a disaster waiting to happen, and that the only real path forward—for us—is owning non-dollar assets. 

This is why I’ve been adding to my pile of silver bullion coins recently. It’s why I’m adding more bitcoin to my crypto wallet. And why I’ll be adding gold to my IRA when I make my deposit for the 2022 tax season.  

We are in an unprecedented moment where all options are bad, some are just worse than others. I don’t trust Western governments, least of all the U.S. government because of the rancor and division that defines our modern political parties.  

We are quickly approaching an event horizon, beyond which there is no turning back to the way things used to be—the way things are now.  

It’s going to be a painful period for those who own the wrong assets—paper assets.  

For those who own hard assets like gold, silver, bitcoin, and exposure to commodities, the period will be less painful, probably highly profitable. At the very least, you’ll have the assets necessary to keep your current lifestyle intact. 

We’re days away from 2023…which means we’re one year closer to the reckoning that has to happen this decade in order to repair decades of governmental financial mismanagement. 

Prepare accordingly.