Smart People Have Dumb Ideas

It’s hard for many people to think of the government stimulus package as anything but a $1,200 check that will only go so far.

But you should know the big picture consequences, how they will hit you personally, and what you can do right now to protect yourself as the spending ramps up.

Let’s start with where we stand—

Congress passed a $2.2 trillion stimulus package in late March. For perspective, the US takes in about $3.5 trillion in tax revenue each year, so the stimulus equals roughly two-thirds of that. The money went toward those pathetic $1,200 checks, the corporate bailouts, etc.

Then President Trump hopped on Twitter and said he wants to spend another $2 trillion on infrastructure, meaning roads and bridges, that sort of thing.

Okay, the infrastructure in the United States is bad. It’s arguably worse than any other developed country, and we do need to fix it. But we just spent $2.2 trillion!

I’ll tell you what’s coming next—

People will say, “Well, if we’re spending $2.2 trillion on stimulus and $2 trillion on infrastructure, then we can spend $1.6 trillion to forgive student loans.” Then there will be more stimulus. And on and on it goes.

At this point, any sensible person is wondering: How are we going to pay for all this? Because the federal government could tax 100% of everybody’s income, and it still wouldn’t cover it. That’s just simple math.

The Math No Longer Matters

This is how it will work—

The federal government will borrow an unlimited amount of money. Now, ordinarily when the government borrows a lot of money, it puts pressure on the bond market and interest rates go up.

Except this time, the government doesn’t want interest rates to go up. So Trump will ask the Federal Reserve to print money to buy Treasury bonds—aka government debt—to keep interest rates down.

In other words, the Federal Reserve will use the bond market as a conduit to directly finance the federal government. This is called “direct monetization of the debt.”

And it’s a bad thing.

Speeding down the Wrong Path

This has happened three or four other times throughout history:

• Weimar Germany

• Zimbabwe

• Venezuela

• Argentina, though to a lesser extent

All of these places did what we’re going to do now. And all of these places experienced absurd levels of inflation or hyperinflation as a consequence. Prices shot up, and the buying power of the local currency plummeted.

In the early 1920s in Weimar Germany, for example, it was not uncommon to pay workers twice a day... because by dinnertime, the price of things like eggs or bread might skyrocket so high that your morning pay would be virtually worthless.

That won’t happen to us today or tomorrow. And it probably won’t happen next year, or even five years from now. But 20 years down the road? Maybe.

It takes a long time for this stuff to fester, but that is the path we are on, and I don’t see us getting off it.

“Backward Monetary Theory”

There’s a name for all this. It’s called modern monetary theory, or MMT. Though it should be called “Backward Monetary Theory.”

Yes, there are some really smart economists who favor this approach. But you know what happens when you put really smart people in charge? They come up with dumb ideas.

Have you ever heard the term “smidiot?” I love this term—it stands for “smart idiot.” These are the people who make up stuff like MMT.

If I were in charge, this would not be happening. But I’m not in charge, and the harsh reality is neither are you. All you can do is play the cards you’ve been dealt.

What does that mean in practical terms? To start, it means owning some gold, which has a long track record of holding its value during periods of high inflation. Obviously, you can’t print gold, and the world isn’t mining much of it these days.

But gold is only one piece of the puzzle. The ideal investment portfolio right now, and in the inflationary era I see ahead, should have:

• 20% stocks

• 20% bonds

• 20% gold

• 20% real estate

• 20% cash

I call it the Awesome portfolio, and I think it will provide stable returns for years to come.

Jared Dillian is an investment strategist at Mauldin Economics and a former head of ETF trading at Lehman Brothers. Subscribe to his weekly investment newsletter, The 10^th Man, and listen to his daily radio program, The Jared Dillian Show. And follow Jared on Twitter @dailydirtnap.