This is a golden oldie and thanks for bringing it to the forefront once again. You hit on the four key points that everyone needs to take a very hard look at going forward as the economic sins of the past catch up with us.

We would like to offer comments on all four points in reverse order.

Point number 4: Your Own Earning Power

This is a vitally important consideration going forward. It is much more important today than during the late 70s. Many retirees, in the late 70s, mistakenly believed they had enough to retire on and had to go back to work in the 80s. The problem was, however, their earning power had softened somewhat. Many were high income earners in their prime, but some of those high incomes were based more on tenure than merit. Once they returned to the work world they were shocked that they would be competing for jobs at much lower salaries or wages than before. Most, however, were appreciative they could find any work at all in an interest rate environment of 15-18%. This was tough on business, but inflation and even hyperinflation had threatened to take the dollar to a total collapse when gold peaked near $850 in 1980.

The raising of interest rates, even though Fed Chairman Volcker was given most of the accolades, was really a market phenomenon. Fed Chairmen have direct control over short-term rates, but the real driver of long-term rates is the currency markets. Then, just like now, the dollar was becoming increasingly suspect and fewer and fewer central banks were willing to pony up and buy our debt. Interest rates rose fast and furious. Locking in 30 year treasuries, at these high rates, would have made one look like a market genius, in retrospect. At the exact time interest rates peaked, many thought the dollar was toast.

We are confident that rapidly declining demand for U.S. debt will again lead to even higher interest rates than witnessed in the early 80s. The burning question is, however, will Johnny-come-lately high interest rates successfully mitigate the loss in the dollar con-fidence game?

The dollar is, essentially, the common stock of U.S.A. Inc. and looks terribly injured at the moment. Its safe haven status is markedly declining as witnessed most recently by the Dubai and Greece financial implosions. The dollar bounced a little only to be sold by Asian holders of U.S. debt. Smart move on their part. Selling the dollar into the bounces is good strategy when holding too many dollars. None of them want to start a run on the dollar until they have appropriately positioned themselves to advantage.

Some key comparative considerations are in order. In the late 70s and early 80s we still had a robust manufacturing sector and wages and salaries were more accurately aligned and increasing with the true inflation rate. Both of those conditions are now absent. The Consumer Price Index had considerably more integrity then than now. For a detailed look at how the Consumer Price Index has been manipulated to keep wages, pensions, and social security COLAs artificially low, see work by economist John Williams of http://www.shadowstats.com. Additionally, the dollar’s status as the reserve currency of the world was much less pronounced in the 70s and 80s than it is today. Central banksters are notorious for their ability to increase the money supply, but their Achilles heel is their lack of absolute control over demand. When foreigners decide to head for the dollar exits, in mass, there will be a tsunami tidal wave of cash hitting our shores that will make Helicopter Ben and his predecessor Easy Al, if he is still alive to witness the illegitimate monster he fathered, shake in fear.

The common stock of U.S.A. Inc. is not just invoking the wrath of its own citizens, but it is also invoking the wrath of the entire world as they witness the devastating effects of our loose monetary policy as it races around the world destroying everything in its path. A very burning and critical question going forward is whether 25-30% interest rates will be enough to save the dollar this time around? And, what do 25-30% interest rates portend for the recovery of real estate when there is already such a tremendous baby boomer overhang in residential and commercial real estate? It means much lower prices for real estate, much higher down payments, and a critical dependency upon a thriving job market. It is not likely the job market will be thriving in a 25-30% interest rate environment which means real estate will continue its downward spiral for years to come until all the excess is sopped up.

Yes, we agree that many will have to off-set the coming inflationary destruction and loss of purchasing power with continued employment in an era of ever increasing unemployment and underemployment.

Point 3: Treasury Inflated-Protected Securities

The fiction associated with TIPS is the Consumer Price Index calculations. The scoundrels in charge of the index juggle the components around repeatedly to favor low inflation numbers. This has represented a huge rip-off to those on fixed incomes along with wage earners who’ve also experienced a severe loss of purchasing power. This rip-off has been intentional and bi-partisan.

Point 2: Real Estate

We discussed real estate in point 4. The baby boomer overhang in real estate will be with us for years. The same may be true for stocks. Baby boomers will be looking to liquidate real estate and stocks to keep up with inflationary pressures, but who will they sell to in a jobless recovery? The newly rich in China are their only hope. 30 years ago the term “jobless recovery” didn’t even exist. It, too, is an Orwellian fiction like the Consumer Price Index. How can there be a jobless recovery in a consumer driven market? Where do these idiots come from? Another inhibitor to real estate is taxes. Practically every state in the union is struggling with declining tax receipts due to the decline in economic activity. They will go after the soft targets which are fixed and immobile. Many homes were seized during the Great Depression over back taxes. How many homes will the tax collectors seize this time around before they realize the on-going maintenance cost of these properties exceed their intrinsic value?

Point 1: Gold

Gold is morphing from its more recent role, as a commodity, to its more historical role as a safe haven currency in a financial world gone mad. Gold is wagging, via price, its wise and ancient fingers at central banksters around the world and saying, “I know what you gals are up to as I’ve witnessed, throughout the history of the world, skimpy skirt after skimpy skirt who thought they could out seduce all the other gals with their lipstick, perfume, batting eye-lashes and suggestive whispers. It’s the oldest story in the world and a close cousin to the oldest profession in the world. You’ve prostituted yourselves for so long that your former suitors (johns) are now leaving you. Yes, you may continue lathering on the lipstick and perfume; and you may continue whispering sweet nothings into the ears of drunken and wayward sailors and, in low light conditions, may be able to convince a desperate young sailor or two to part with his hard earned substance, but deep down inside you know your days are numbered. You are feeling your age and can see the wrinkles, sagging skin, and your own spiritual depravity every time you look in the mirror. Recently, the talk of the town is that the IMF will take all you down-on-your-luck-and-past-your-prime gals in and give you a place to stay as if the answer to financial whoredom is in the building of a larger whorehouse. Well, I’m not buying the malarkey. You can put fresh lipstick on a pig and fresh paint on the outhouse, but that type of beauty is only skin deep and the horrible stench never fails to betray your real essence and character.”

Conclusion:

We see a real arbitrage opportunity between gold and real estate. We see continued real estate deflation against a backdrop of rising commodity prices. Farmland could be the logical exception because of the associated commodity value. An interesting play might be to consider trading a portion of one’s gold for some real estate and 30 year treasuries in the vicinity of the inflationary top in commodities. If the dollar were to go bust, gold would logically be a good insurance policy against hyperinflation. If deflation ruled the day, 30 treasuries drawing 25-30% interest would give tremendous purchasing power.
.-= Steven and Debra´s last blog ..Are YOU a Hoarder? Are You Sure? (Part IV of a Four Part Series) =-.

I agree 25-30% returns on 30-year treasuries is enticing. Then again, if hyperinflation collapses the buck I don’t put it past our government to seize that opportunity to introduce the Amero and, presumably, wipe those 30 year treasuries off the books.

Oh, and after your portrayal above, I have to tell you I’ll never look at fiat currencies the same way again. LOL