What Happens When We Enter a Debt Spiral
There are some things you can control, but do them now or watch your savings melt away.
In my last blog, I wrote about the crazy government spending over the last few years and the resulting $34 trillion deficit. Much of this spending was financed by simply printing more money and borrowing a bunch of it from ourselves. Neither of these things should be allowed IMO; if us citizens tried them, we’d quickly find ourselves in bankruptcy court or jail. You’d think the countries that hold our debt would get angry about this, as it lessens the value of the U.S. debt they hold due to inflation, but so far, they’ve gone along with it because the U.S. dollar is the world’s reserve currency. In fact, many just copied us and have done the same things with their own currency.
But if you’re not the world’s reserve currency like we are, you can only get away with it up to a point. Generally, what happens is the local government prints more pesos or bolivars or whatever and distributes it to the citizens. They go out and buy a bunch of stuff, pushing up prices, so the government must print more cash so citizens can keep buying the same amount of stuff, the prices go up even more, the government must print more… and there you have the classic debt spiral. This can result in hyperinflation, with some examples being:
- Argentina in 2001, inflation over 40% per year
- Venezuela in 2019, inflation of 9,586% and increasing since then.
- Zimbabwe in 2008, inflation over 1,000,000%
You might think that could never happen here, and I’d mostly agree. But remember our 8% inflation just a couple of years ago? That was pretty painful. What if we have a few more years like that? What would happen to your savings? Our government is projecting trillion-dollar deficits as far as the eye can see, and neither presidential candidate is saying anything about cutting spending.
So, what to do?
If you have your savings in cash, that’s a loser. Since 2020 the dollar has lost almost 20% of its purchasing power due to inflation. So, you need to move the cash to somewhere that at least keeps pace with inflation. The dollar had an average inflation rate of 4.48% per year between 2020 and today. There are money funds that can help. According to this summary at BankRate.com, the average rate available today is 4.62%, which would keep you about even with inflation.
The other main area to focus on are assets like real estate and commodities and equities. That’s because the value of assets is disconnected from the dollar, that is, they are worth what their utility is to people. For example, houses are valued because people need a place to live, raise a family, etc. They will always have value. The price will fluctuate but the value will remain steady. (I’ll write a future blog about not confusing price and value which is important to getting your investment strategy straight.)
Investing in assets that you think will hold their true value over time is a solid strategy. The same goes for company stocks. Investing in the ones that you know deliver true value on a multi-year basis will protect you from the ravages of inflation.
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Like this? Please “clap” to spread the word and encourage me to write more. And leave comments! I love the new ideas and debate. — Frank Kenna
