Inflationomics

Unwitting Speculators

In The Swaps That Swallowed Your Town, Gretchen Morgenson refers to the credit default swaps that hid Greece’s obligations, the costs to New York State to close out swaps in which Lehman Brothers was the counter-party, and swap-imperiled Jefferson County, Alabama, which is on the verge of bankruptcy.  Apparently, part of the problem lies with swap advisers, who have a vested interest in seeing to it that a swap is purchased.  Her conclusion:  we need transparency—sunlight is sorely needed.  Had some of these entities known about the potential risks associated with swaps, they would not have entered in to them.  Bottom line:  many of the swap purchasers were unwitting speculators.

In many ways this is just a replay of the sub-prime problem the world (and especially the United States) faced in 2007. Earlier, banks lent money to people who shouldn’t have received it. The banks, of course, had a vested interest in lending the money and earning as high a rate of return on the loans as possible. And, of course, the underlying reason for borrowing the money was that real estate prices were going to continue rising. Everyone was a land speculator, seemingly unaware that real estate prices can also go down. Were they unwitting speculators?

Unfortunately, the biggest cover-up (where the most sunlight is needed) involves the U.S. dollar, which has been gradually losing its value since 1914, when the Federal Reserve was put in charge of maintaining the dollar’s value. Of course, it didn’t help that every time there was a constraint on the Fed’s ability to expand the money supply, the federal government stepped in to help. There was FDR’s seizure of gold from U.S. citizens and the prohibition for U.S. citizens to own gold. There was President Nixon’s cancellation of the dollar’s convertibility into gold and the termination of the Bretton Woods Agreement in 1971. And more recently, there’s the Troubled Asset Relief Program. In short, the federal government, together with the U.S. Federal Reserve Bank, is working to diminish the value of the dollars the world uses. And as the U.S. government goes deeper into debt, its incentive to print more money (without backing) and keep interest rates low increases. Can you believe them when they blame others for the credit crisis? Will you believe them when they attribute the coming inflation to anyone but the Fed and the federal government’s wild spending?

Most people don’t realize it, but when they hold U.S. Dollars, they are speculating that the dollars will keep their purchasing power into the future. Whenever they put their money in the bank, they are expecting to get out as much purchasing power as they put in, plus interest. When they accumulate money in a retirement plan, pension plan, or life insurance policy, they are speculating that the dollars they receive later will be valuable enough to cover their retirement expenses and leave to their heirs.

Perhaps, if these folks knew about the potential risks associated with speculating in U.S. dollars and claims to U.S. dollars, they would not be so eager to hold them. But then, how many people are recommending that Americans invest in things other than dollars? Many Americans think it is unpatriotic to invest elsewhere (even if they could). So, what does that leave? Answer: tangible assets. Owning tangible assets is the best hedge against a deteriorating currency. Don’t be an unwitting speculator. Remember that an un-hedged position is a speculative position.

Hedge against the possibility that the U.S. dollar could continue its 96-year slide into oblivion—buy tangible assets now!

Robert Jackson Smith

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