By Jared Dillian
The Green New Deal is silly and not worth our attention. It implies we can have anything we want if the Federal Reserve extends credit.
Let me blow your hair back for a second.
The two biggest US stock market rallies (in the 1920s and in 1990) occurred when the budget deficit was disappearing or had disappeared.
Calvin Coolidge led the US through most of the Roaring Twenties. And he is perhaps the second-least well-understood president of the 20th century (behind only Warren Harding).
Long story short: Coolidge was perhaps the biggest saver known to mankind. He ran the country like he ran a household budget. Talk about austerity—wow.
In the 1990s, I worked for the government under the Clinton administration. Clinton was not well-liked by government employees. He kept telling people to “do more with less.” No money for trips, no money for projects, no money for boondoggles.
Go look at the budget figures from the 1990s. The government size remained pretty constant, which is something. It was the closest thing we’ve had to austerity in nearly 70 years.
Today the opposite is happening.
9/11 kicked off the drunken spending spree funding new government bureaucracies and multiple wars. Dick Cheney said that deficits didn’t matter, but at least he was constrained by the bond market.
I suppose that if Modern Monetary Theory (MMT) were implemented, foreign exchange markets would have their say about it (provided we still had floating exchange rates).
Do you think it is a coincidence that the two biggest bull markets correspond with government austerity? I do not.
No matter how much money the Fed prints, or what they do with their balance sheet, you can’t spend more money than you make.
You can make up a shortfall with debt (just like the government), but after a while, your creditors get sick of you and the jig is up.
It is kind of hard to tell people to mind their personal finances while the government is going bananas. But that is what we do.
We tell people to eliminate debt and manage risk. And part of the reason we tell people that is because people have to manage the stupidity of governments.
Governments have always found the temptation to borrow, overspend, and mess with the value of their currency.
If you happen to be a resident of one of those countries, then you will get mowed over as an innocent bystander.
The way you protect yourself from plans to demolish every house and kill all the cows is… gold.
Other hard assets, too. Base metals, timber, diamonds, stuff like that.
Interestingly enough, in 2009–2011, people thought it was really important to own that stuff (because of QE). I was one of those people. It didn’t cause inflation, unless you think it works with a really long lag.
The stuff people are talking about now is way more radical than what was going on during the financial crisis.
I own a lot of gold, most of it from before the financial crisis. I have never been sorry about my decision. I was a little stressed out when the drawdown got to 45% or so, though. You own it specifically for times like these. Crazy town.
Should I Own Physical Gold?
Don’t bother if you don’t have any assets to protect in the first place. The point is not to punt it around.
I think that’s where people went wrong in the last big bull market—it was a punt, rather than a hedge.
And I don’t mean that it’s a hedge in the portfolio sense, as in gold goes up when other stuff goes down.
I mean, physical gold is a hedge on your life. You have a tube of Eagles on your nightstand that you can put in your pocket and run to the airport with if things start getting kinky.
There are a lot of people who buy gold. They do so for a reason.
Some people say that gold doesn’t track inflation very well. But one thing it does well over time is maintain purchasing power, with some minor variations along the way.
I bet Venezuelans wish they had some gold. And guns!
That’s the most depressing thought in the world—that one day, we might need gold and guns in this country, like in some right-wing dystopian fiction.
I hope not! Things usually work out for the best. But sometimes they don’t.
It’s dumb to have 100% of your portfolio in gold, but it’s also dumb to have 0% of your portfolio in gold.
This isn’t a market call on gold (though I am a bit bullish). It’s responsible to have a good chunk of bonds, and it’s responsible to have a little bit in gold. It’s irresponsible to have it all in the QQQ.
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