A reader of my blog sent me the following email.

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“I invest in the Permanent Portfolio and have for a few years. I chose it principally because I agree with the Austrian economic philosophy that you cannot predict the future with billions of individuals making billions of daily decisions. So you should have money in all 4 assets to be prepared for most circumstances. 

“However, there is a subset of Libertarians who believe that the total collapse of the US markets, financial system and the dollar is inevitable. I am talking about people like Peter Schiff, Jim Rickards or Jim Rogers. I will admit that as unpredictable as life can be, it is difficult to see how a citizenry with an appetite for “free” stuff combined with a political class willing to give it to them could ever not turn out in disaster.  

“If their prognosticators are correct then physical gold is the only asset you would want to own because if the dollar collapses then every paper asset like Treasuries or US stocks would go under as well. 

“I would love to hear your take on these doomer Libertarians. Are they on to something?  Or [are] they as crazy as mainstream financial pundits paint them?”

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First, I will address the investment aspect here.  I advocate a permanent portfolio, or at least some kind of modified version of it, for the majority of financial assets for most people.

There may be special circumstances where, say, someone owns a business and it might make more sense to invest money in that business so that it can prosper.  There are also scenarios where maybe someone is young, with no dependents, who wants to take a chance on an investment or business that has a good chance of taking off.

With that said, for most people, I recommend a permanent portfolio approach to invest money that you cannot easily afford to lose.  It is a strategy of wealth protection.  You can still speculate with other money, but I recommend that it be a small percentage of your net worth.

We don’t know if there will be a total collapse of the U.S. markets, the financial system, and the dollar.  While these three things are highly related, they also aren’t the same thing.  You could have a major meltdown in one category without necessarily having a major meltdown in everything else.

I can’t really define “total collapse”, but you could certainly have a scenario where stocks go down by 90% while the dollar remains somewhat stable.  You could have a meltdown in the financial markets where banks are insolvent, yet not see a total collapse of the dollar.  We already saw something similar to this in 2008/ 2009.  The banks were bailed out, but the dollar didn’t collapse.  In fact, we never got anywhere near 10% annual price inflation.

As the reader says, you cannot predict the future with billions of individuals making billions of daily decisions.  So, for investment purposes, it isn’t a question of whether a collapse in these categories is inevitable, but whether it is possible.

I don’t think there is a high likelihood of a total collapse, but I think the odds are higher now than they were two months ago.

The key is that there is a possibility, so that is why the permanent portfolio is important. Diversification is important.

The permanent portfolio is designed to hold up in any economic environment.  Of course, I have to add that there are even exceptions here.  It won’t protect you from an asteroid hitting the planet.  It won’t protect you in a complete breakdown in the division of labor.  But nothing will protect you except living out in the country with a farm, and even that isn’t a sure thing.

We have seen how fragile our system is over the last two months.  There is a shortage of toilet paper.  There is a shortage of certain kinds of food.

Almost all of the population is dependent on our high division of labor society.  We depend on trucks delivering goods to the grocery stores.  If this doesn’t happen, even a lot of the preppers will be in major trouble after a few months.  We depend on electricity and running water.

I am talking about worst-case scenarios here.

From an investment standpoint, there are other risks to the permanent portfolio.  If the government declares an outright default on all of its debt, then there goes the bond portion.  If the government declares that holding gold is illegal, then your gold portion is in major trouble.

And while it’s good to consider all of the possibilities, we can’t be completely immobilized due to fear.  There is a very low probability that the U.S. government will outright default on all of its debt. It is unlikely that gold will be made illegal.  We are in a different situation than in 1933 when the dollar was still tied to gold.

So I think that the permanent portfolio is the best that I can come up with in terms of wealth protection.  This includes a collapse of the financial markets and the dollar.

Inevitability

There were three people mentioned in the email.  They are Peter Schiff, Jim Rickards, and Jim Rogers.  I am most familiar with Schiff out of these three.

By the way, I wouldn’t refer to them as Libertarians (large L), as I don’t think they are members of the Libertarian Party.  I am not even sure if they consider themselves small L libertarians. All three are definitely sympathetic to the free market though.

I don’t know if any of them have actually used the terms “inevitable” and “total collapse” together.  They are certainly known for their doom and gloom outlooks.

I have to say that there is little in this world that is inevitable, especially when it comes to economics and politics.  Things can change quickly.  How many people saw the coming downfall of the Soviet Union in 1991 five years before?  How many people saw it one year before, even with the fall of the Berlin Wall?

How many people predicted the election of Donald Trump in 2016?  There were a few, but not many.

With all of the lockdowns across the country in response to a virus, how do we know how many people have withdrawn their consent to the state?  If there are a lot more than we know, then it could change things significantly down the road.

We also don’t know what will happen economically.  State and local governments are going to run out of money.  They probably won’t be able to keep promises that were made, especially in regard to generous pensions.  If there are defaults across the country, we may see a radical shift in public opinion.  At the very least, some people will not be so trusting of the government next time.

We may hit a scenario where price inflation does start to go up by 10% or more per year.  The Fed may be faced with a choice of hyperinflation or a pullback.  When the Fed is essentially forced to stop creating money and buying up U.S. government debt, then Congress will be forced to drastically reduce spending. It will be forced to modify its previous promises, especially to retirees.

It’s possible that the dollar could collapse, but it isn’t likely.  We aren’t Venezuela, and I don’t think we are going to become Venezuela.  There are much deeper roots for liberty in the United States.  I don’t think the middle class will give everything up that easily.

The dollar may lose its status as the world’s reserve currency.  But there won’t be a defining moment when this happens. It is already gradually happening. When the Chinese or Russians trade without using U.S. dollars, this is part of the process.  With the low price of oil, countries like Saudi Arabia become less significant.  Countries don’t really need to use dollars to trade for oil.

If price inflation hits double digits, I think this will provide enough vindication for Peter Schiff and others without having a complete collapse of the dollar. While the popularity of gold has certainly increased over the last two months, most people are not talking about double-digit price inflation across the board.  But I think this is a good possibility in the next few years. It’s also possible that the fear will cancel out the massive monetary inflation and general prices won’t go up significantly.  Again, this is why it is important to diversify.  Nobody really knows.

If we get double-digit price inflation similar to the 1970s without a collapse of the dollar, I think this will be good enough to point a finger at the Fed.  I have already been pointing a finger at the Fed for many years, but most people don’t pay attention because they don’t see the impact it has on them.  If prices are rising quickly, then they may be more prone to notice.

In conclusion, I don’t think anything is inevitable at this point in U.S. markets.  I don’t think the dollar has to collapse. However, we should prepare for these types of scenarios, which is why gold is a major component of the permanent portfolio.