We make choices in our thinking, lifestyle, savings, and investments. We can look reality squarely in the face and swallow the red pill (from the movie – “The Matrix”). Or, we can swallow the blue pill with a healthy slug of whisky, continue riding the roller coaster of mass delusion, and go back to watching “Reality TV” and the evening news. Either way we will experience the consequences of our actions and our thinking.
The Blue Pill Delusion
US Government Budget: Congress, in their wisdom, will pass a budget that continues spending as usual, borrowing to cover the revenue shortfall, and increasing the official debt a $Trillion or so per year. The debt is still rated AAA because it will be rolled over well into the next century, and all is good. Individual equivalent: spend until credit cards are maxed out and then apply for more credit cards. What could go wrong?
US Government Debt: It can increase forever. Deficits don’t matter and debt is just something that happens in our modern times. Unfunded liabilities are somewhere between $100 and $200 Trillion, but – no problem. Individual equivalent: Keep spending on the credit cards! Let’s party.
Interest Rate Risk: Interest rates are at multi-generational lows. Hence the borrowing costs for already insolvent governments are exceptionally low. If interest rates do NOT stay this low FOREVER, borrowing costs will greatly increase, deficits will expand even more rapidly, and the spiral of insolvency accelerates. But, it’s all good and really, why can’t interest rates stay low for another 50 or 100 years? Individual equivalent: I borrow on credit card A to make the minimum payment on credit card B. Now I need to apply for another credit card with a higher limit and lower interest rate.
The Red Pill Reality
Gold: It has held its value for 5,000 years. Gold is respected everywhere in the world and immediately recognizable. By contrast, all paper money systems have eventually failed. Many paper currencies have disappeared in the past 100 years due to excessive creation of those unbacked paper currency units. It will happen again. Remember: if the intrinsic value of the currency is zero, it is not money – it is only a currency unit.
Dollar as the reserve currency: Many countries around the world, such as China, Russia, India, Brazil, and South Africa, have initiated “swap agreements” whereby they trade with each other in currencies other than the U.S. Dollar. Clearly those countries see an advantage in bypassing the dollar in their international transactions. Similarly, countries are increasingly selling oil in Euros, Yuan, and gold, rather than the U.S. Dollar. Using swaps instead of the dollar will cause decreased demand for the dollar, which means it will be valued lower in the future against other currencies, commodities, and gold. The dollar is not likely to be replaced as the global reserve currency within a year, but what about within ten years? It is time to admit that the era of the U.S. Dollar as undisputed global reserve currency is drawing to a close. When the dollar declines, so will the value of assets denominated in dollars. What will unbacked debt-based paper dollars buy a decade from now?
Source Deviant Investors