Bert Whitehead, M.B.A., J.D. © 2013
The market turmoil over the past month has again raised the specter of global economic disaster. Several clients have expressed concern about the volatility in the stock market, and the recent increase in interest rates and corresponding drop in bond values. This is a typical email I have received which succinctly addresses this concern, followed by my reply:
Bert:Given the fact that I am no longer eloquent on any topic (let me think that I once was) I thought it better to handle this topic by email.The crux of the thing is the size of the national debt; the fact that I can't find anyone that thinks it can be repaid; the pending loss of the reserve currency status (already Russia and China settle trade between their countries in the Yuan).Not all doomsayers are gold dealers.Are we expecting a period of hyper-inflation or the extinction of the dollar?Can you point me to other sources that you are looking at?Thanks, (from a long time client)
I’ve given this a lot of thought, and while it’s true that historically ‘fiat’ money (i.e., currency that a government has declared to be legal tender, despite the fact that it has no intrinsic value and isn’t backed by reserves such as gold) has never survived beyond a century. National leaders inevitably try to use the power to print money as a vehicle to change society to their liking, rather than controlling the money supply to reflect increased productivity. Eventually there’s too much money chasing too few goods, and hyperinflation renders the money worthless. The big question is, “How much longer can this last?” We don't know the 'tipping point' when too much government debt degrades the dollar.
When I evaluate the alternatives, I don’t find a real solution. The gold/silver/platinum markets are now dominated by speculators. There isn’t a credible institution that could guarantee a stable enough price of any metal that would be required if used to provide liquidity in a global market.
I don’t see any other currency deep enough to support global trade, including Japan. The Euro and Yuan would like to be the world reserve currency, but Europe is in worse shape than we are, and a totalitarian government like China would never be acceptable as the world’s banker – plus I think they will spin, crash and burn before we will.
The idea of a ‘basket of currencies’ is appealing to some, but I can’t see how stacking up inept economies and their leaders is going to magically become the global financial solution. The idea of Russia teaming up with China to bring about a strong worldwide economy is ludicrous – perhaps they’re sincere about making this a better world, but they’ve bungled it during the last hundred years.
This is not a given, but I don’t trust any other alternative I’ve studied. Financial markets seek balance by testing the extremes, particularly when there are sudden shifts in the economy. This is the norm, not the exception.
Stock prices in particular have always shown a remarkable resilience over the long term. The gravest error an investor can make is trying to time market shifts. There’s never been a system to 'beat the market' that works as well as buying and holding a well-diversified portfolio.
Prices of bonds can fluctuate unpredictably, rising suddenly when interest rates fall and then crashing when interest rates rise. The wisdom of owning Treasury Bonds is that you can be certain of getting your money back at maturity. Regularly laddering bonds over time enables an investor to protect a portfolio from loss and enables a steady long-term cash flow.
I’m still betting my money on the U.S., based on Darwin’s theory. It’s not about survival of the fittest (although arguably we may be the most fit), but rather survival of the most adaptable. And I think, as bad as things may be here, our political structure and relative freedom still allows us to be the most entrepreneurial and therefore the most adaptable nation in the world.
I appreciate the editorial review contributed by Chip Simon, CFP®, an ACA colleague of mine in Poughkeepsie, NY, and copyediting by Laura Webber.