Continuing my posts about Lionel Shriver’s The Mandibles: A Family, 2029-2047…
The Mandibles posits a world in which the dollar is no longer a desirable reserve currency for non-U.S. governments and the domestic value has been seriously eroded by inflation. This scenario may sound far-fetched to an American, but it is familiar to a lot of folks in Latin America.
Traditional diversification didn’t protect the characters in the book because (1) anything denominated in dollars fell, (2) the U.S. government ran out of money to pay for entitlements and the salaries of workers and therefore adopted a dual strategy of printing money and taxing savings, and (3) the government simply confiscated hard assets, such as gold, that were held domestically. A character who had a box of gold in a safe place in Asia or Europe would have done okay. Here’s a speech from America’s first Latino president:
Using the powers vested in your president by the International Emergency Economic Powers Act of 1977, I am calling in all gold reserves held in private hands. Gold-mining operations within our borders will be required to sell ore exclusively to the United States Treasury. Gold stocks, exchange-traded funds, and bullion will likewise be transferred to the Treasury. In contrast to Franklin Delano Roosevelt’s gold nationalization of 1933, when FDR made his bold bid to rescue our suffering nation from the Great Depression, there will be no exceptions for jewelers or jewelry. All such patriotic forfeitures will be compensated by weight, albeit at a rate that does not reflect the hysterical inflation of gold stocks in the lead-up to this emergency. Hoarding will not be tolerated. Punitive fines of up to $250,000 will be levied on those who fail to comply. Retaining gold in any form beyond the deadline of November 30, 2029, will thenceforth be considered a criminal offense, punishable by no less than ten years in prison. All gold exports from our shores are henceforth prohibited. In retaliation for outside agitators’ attempts to fray the very fabric of our flag, all foreign gold reserves currently stored with the Federal Reserve are hereby confiscated, and become the property of the American government.
I have never liked gold as an investment because I don’t understand how (1) it can be sustainably worth more than the cost of mining (as with oil, at a high enough price there is a lot of additional gold to be found on Planet Earth), and (2) it can be worth as much as a productive asset such as a factory or a piece of real estate. Thus the purpose of today’s posting is to get ideas for what kind of investment strategy would protect an American citizen from a serious decline in our economy and the value of the dollar. Note that I personally don’t believe that we’re likely to have a crisis in the near-term. In my opinion Americans are biased towards thinking that our economy will either grow dramatically or shrink dramatically. Given our European-style welfare state and associated disincentives to work it seems to me that European-style stagnation is a plausible future. That said, a multi-decade stagnation would look like a serious decline when compared to dynamic economies elsewhere. And the whole point of diversification is to protect oneself against unlikely events, as long as the cost is not too high. (As noted above, I think storing bars of gold in a Swiss bank’s safe deposit box is too high a cost.)
Readers: What are your best ideas for keeping assets safe from (a) a decline in the dollar, and (b) sudden or gradual confiscation by the U.S. or a state government?
[One idea: Why not just own commercial real estate in three foreign countries? If these are leased out triple-net there is minimal management hassle involved. The return should be similar to the return on U.S. real estate, which in the long run might not be that different from other financial assets. Own the real estate either directly (name recorded officially as the owner) or as a shareholder in a small foreign company. If things fall apart in the U.S., just move out to where one of the properties is. Presumably there could be some paperwork hassles in declaring this foreign-sourced income every year to the IRS, but the actual taxes wouldn’t be different than they would on a U.S. commercial property, right? The paperwork hassles could be considered the price of insurance against being wiped out by a U.S. financial crisis.]
More: Read The Mandibles.