THE UNCERTAIN FUTURE
H. Lawrence
Donald Rumsfeld, former US Sec. of Defense, used these phrases in a 2002 press conference. He was warning of the vastly under-appreciated dangers associated with the latter category. The above chart is a tongue-in-cheek effort to debunk the common belief that we possess sufficient information to know what is coming in our social, political and financial futures. The truth is we are all feeling our way forward in a dark room hoping to avoid falling into an open pit.
Many think that because they read newspapers, watch the "news" on TV, subscribe to a financial publication or two, and have read an investment or political treatise they are well prepared for what is to come. However, we learn on a daily basis that much of that information is unreliable (e.g., employment and CPI data) and some is utterly false. There is no source of information that tells us with any level of certitude what will happen in the future, when it will happen, and what its consequences will be.
Consider a few events that might completely upend your personal and financial well-being. What happens if China invades Taiwan? Will your nation get involved militarily? Would that invasion tank the world's stock markets? Would it abruptly shut off the supply of Chinese made goods - many of which are essential (drug components and rare earth metals)? How long would such disruptions last and at what monetary cost and hardship to you, your family, your employer and your country? Might it mean a job loss for you?
What happens when interest obligations on your government's soaring debt become too great to pay? Will the government print vast sums of money that further debase your currency, reduce your wages, trash your savings and shrink your pension? Will it dramatically raise taxes in a desperate effort to cover its soaring expenses? What effect will those taxes have on your employer and your well-being? Might you be forced to keep all of your investment, pension and retirement cash in government bonds paying less than the real rate of inflation, and for how long? Where is the tipping point when the number of people receiving government benefits exceeds those paying taxes to support them?
Will your government become more authoritarian? Which of your shrinking personal rights and freedoms might be "temporarily" suspended? Recall that in 1971 Nixon "temporarily suspended" the convertibility of US dollars into gold. That suspension continues to this day - fifty-four years later. From the mid-1960's until 1974 the US imposed capital controls on US citizens restricting them from sending money out of the country. Such controls are the favored way governments lock their citizens into the rapidly declining local currency. This prevents them from implementing defensive strategies such as putting money into foreign accounts holding foreign currencies and investing in foreign assets. This action is highly likely during the next financial crisis. That makes funding a foreign account while you still can, a high priority.
We do not predict that any or all of these events will occur. Nevertheless, a thoughtful person must concede that each is possible. We will benefit from acknowledging that the future is largely unknowable and globalization puts nations at risk today in ways that did not exist when each was more self-sufficient. Tarik Cyril Amar writes, "The problem with the future is that it is both unpredictable and inescapable."
Anticipating and preparing for future crises are crucial actions to take to help ensure one's future personal and financial well-being. Examples: millions of people live in areas with long histories of floods, hurricanes, tornadoes, tsunamis, droughts, and forest fires. Their immediate consideration should be whether to remain in place and face the risks of the next disaster. If they decide the risks of staying put are too great (loss of property and possible loss of life) the obvious solution is to move to a safer locale - even if doing so is a huge hardship. If instead, they decide to assume the risks and remain in place, they should prepare for lengthy losses of electricity, access to food, cell phone service, medical care and damage to or the wholesale destruction of their property. Sadly, most people will do neither. They will simply "hope for the best". But "hope" is not a plan. They are likely to pay a very steep price for ignoring known risks. You do not want to be one of them.
Past financial and political disasters were the direct results of past bad decisions by bankers and political leaders. For example, Hitler's decision to invade Russia during WWII was a disaster that had horrendous consequences for both the invader and the invaded. Many millions of people died. He learned nothing from Napoleon's earlier ill-fated invasion. In the early 2000's, US banks decided it was a great idea to fund a vast number of loans to sub-prime borrowers buying overpriced houses. This was based on the absurd premise that housing prices never go down. They did.
Funding these loans was insanity, but as then Citibank CEO Chuck Prince famously said in his own defense, "If the music is playing, you've got to get up and dance," meaning that if other banks were doing it, Citi had to do so as well. Six million people lost their homes during the 2008-9 great financial crisis and the Fed spent trillions of dollars bailing out the banks whose earlier profits were privatized, but their bailout costs were funded by the taxpayers. Financial and political leaders seem compelled to relive past disasters due to their ignorance of history and unwarranted belief in their own genius.
The risks of "known unknowns and unknown unknowns" are certainly concerning. Yet one does not need to be a victim of every crisis brought on by their government's incompetence. We can learn from history what has happened before. Past causes led to certain unfortunate results. It is reasonable to assume that future similar causes will lead to similar future results.
The "Known Knowns"
Since its inception in 1913, the US Federal Reserve Bank's primary statutory duty has been to maintain the value of the US dollar (ensure price stability). This chart reports on its efforts. It shows the dramatic decline in the purchasing power of the dollar. The dollar has lost about 98% of its value under the Fed's "guiding hand" - and that loss continues.
Instead of acting to protect the dollar, the Fed has directed its efforts at supporting the US government's efforts to spend money vastly in excess of its revenues. It has done so by buying government debt instruments and suppressing interest rates. The latter reduces the interest the government must pay on its monumental debt. If interest rates were allowed to rise to market clearing levels, an existential fiscal crisis would quickly develop. The Fed needs to keep interest rates artificially low or it would soon be "game over" for government finances. One problem is that low interest rates discourage investors from buying Treasury debt and they stimulate price inflation. These are "known knowns" which we need to take into account.
The chart below shows that for the last twenty-five years (right half of chart), the inflation-adjusted Federal fund rates have been negative more than 80% of the time. Purchasers of US government debt have been consistently (and unwittingly) losing their money on an inflation adjusted basis. They could not write off this loss on their tax returns against other income or take a tax credit for their "donation" to the US Treasury. To add insult to injury, they were forced to pay income tax on their phantom interest income. This is one of the government's insidious methods of transferring wealth from the people to itself. In economic terms, this process is known as "monetary repression". In common terms, it is "theft by deception".
Source: Stockman Contra Corner
Another way your government confiscates your wealth is by assessing capital gains tax on your nominal gains instead of your real inflation-adjusted capital gains. The chart below shows the government calculated (ie, highly manipulated lower) increase in the Consumer Price Index. Suppose you bought $10,000 of a stock in 1970 and sold it recently for $80,000. Your nominal gain is $70,000. If you pay tax on that at the 20% rate you will pay $14,000 in taxes. However, your real, inflation-adjusted gain is ZERO and you should owe no tax - not one dollar.
Your real result is that over a fifty-five year holding period, you actually lost money on this trade that you thought was highly profitable. The increase in price was wholly illusory. Capital gains should be indexed to the inflation that was created by your government, to keep you from suffering this loss. Such gains will never be indexed to inflation because this scheme helps to support your government's fiscal profligacy - more theft by deception. Your current best hope is to die and let your descendants get a "stepped-up basis" for the shares. They can then sell the stock and pay no capital gain tax (for the time being). As your government sinks deeper into fiscal crisis expect this tax benefit to end.
This next chart shows the results of the unrepentant, self-serving, spendthrift members of the US Congress whose mantra for many decades has been: "Spend Money and Damn the Consequences, So Long As It gets Me Elected." While Congress pretends to be fiscally prudent by periodically setting "Debt Ceilings", it always increases them, after which debt continues to soar.
Source: Wolfstreet.com
This chart shows government spending since Congress (the fine stewards of the US national fisc) raised the debt ceiling just two months ago. Debt has soared by $1.2 trillion dollars.
Source: @CharlieBilello
The Fed has been under relentless pressure from President Trump to lower interest rates. He wants lower rates because they stimulate borrowing that has the temporary effect of raising stock prices and GDP. Fed Chairman Powell has finally submitted to this pressure, citing flagging employment, and begun to lower rates, even though price inflation remains 50% above his 2% goal and is still rising. Those in the financial world benefit from lower rates and wildly cheer the reduction. One who does not is Ruchir Sharma writing at the Financial Times.
This is unfortunately the same alarmist reflex — rush to the rescue at the slightest hint of economic trouble — that has been undermining Fed credibility and fuelling financial bubbles for decades. And the timing could not be less opportune. Financial conditions are very loose. The economy is still resilient. The basic Fed lending rate is not restrictive. Signs of job market weakness are minor compared with the evidence that inflation has become entrenched.
Capital pouring into the US stock market has driven valuations close to historic highs. Venture capital is pouring into profitless tech firms. Credit growth is surging, particularly in private markets. Junk firms can borrow at rates only marginally higher than solid ones or even the government; the premium they pay over Treasuries is as low as at any point in the last half century. If anything, there is an equally strong case for a rate increase.
When it comes to government finances, there are no adults in the room.
Worldwide Currency Debasement
The long-term debasement of the US dollar is not unique. Every fiat currency around the world has been debased by its government - every single one. Doing so is the preferred means by which governments continuously extract wealth from their citizens to fund its ever-expanding operations. Below is a chart showing the global rise in price of historic money - gold, in multiple currencies. An ounce of gold has not changed since its first use as money. What has changed is how many more paper currency units are needed to buy that ounce of gold because governments relentlessly devalue their currencies. In July, 1971 it took forty-two US dollars to buy an ounce of gold. Today it takes over three thousand seven hundred dollars to do so. Painful lesson: Those who saved their money in fiat currencies have suffered a near total confiscation of their wealth. Those who saved in gold have retained their purchasing power.
Source: AllStarCharts
Famed Austrian economist Friedrich Hayek wrote in 1975 that,The pressure for more and cheaper money is an ever-present political force which monetary authorities have never been able to resist. It was only during the rise of the prosperous modern industrial systems and during the rule of the gold standard that over a period of about two hundred years (in Britain from about 1714-1914, and in the United States from about 1749 to 1939) prices were at the end about where they had been at the beginning. During this unique period of monetary stability the gold standard had imposed upon monetary authorities a discipline which prevented them from abusing their powers, as they have done at nearly all other times. With the exception of this 200-year period of the gold standard practically all governments of history have used their exclusive power to issue money in order to defraud and plunder the people.
Most investment advisors scoff at the notion that gold should play any role in your investment plans. They parrot the Keynesian meme that gold is an anachronism, a historic footnote, and unsuited for your serious consideration. "Historic" is correct. Gold has successfully served as sound money for thousands of years. Governments cannot create it out of thin air as they can fiat currencies. It was abandoned by governments when they discovered they could print vast sums of paper money to pay for endless wars, social services and vastly expand the scope and reach of their governments. Paper currencies freed governments to recklessly grow their spending - and they have all done so and will continue to do so. This is a "known-known" which should be the foundation upon which you build your financial plans
Investment advisors denigrating gold are clearly ignorant of what is currently taking place in global affairs. So far in 2025, central banks around the world have bought over 1000 tonnes of gold. That follows buying over 1000 tonnes in 2024 and another 1000 tonnes in 2023. Either central bankers have become foolish "gold bugs" that wealth advisors love to ridicule, or central bankers know something that financial advisors do not know - that gold is a reliable store of value and currencies are not. Or as Stephen Innes of SPI Asset Management writes that when the going gets tough, "Gold becomes the one institution that doesn't default, dilute or lie."
Several developments prompted these central bankers to buy vast quantities of gold, and they are related. First, the US "sanctioned" Russia for invading Ukraine by freezing its holdings of US Treasuries and confiscating the interest earned. Other nations immediately and justifiably worried that their Treasury holdings could be frozen at some time in the future and they needed an asset that was not dependent upon or related to the US dollar. Gold is the obvious solution. Second, the dollar, although still a reserve currency, is clearly not a reliable store of wealth - having lost 98% of its value - and it continues to depreciate in value. Consequently, many nations are loading up on gold. There is a global and highly liquid market for it making it an excellent reserve asset. Individual investor demand is also rising evidenced by money flowing into physical gold (coins, bars), gold backed ETF's and gold mining shares.
What are some notable advisors beginning to say about gold? Morgan Stanley's Chief Investment Officer Mike Wilson writes, "Gold is now the anti-fragile asset to own, rather than Treasuries." Deutsche Bank analysts forecast that gold prices will likely reach $4,000 by the end of end of the year, resulting in a full-year return of more than 50%. Jeffrey Gundlach, founder and CEO of DoubleLine Capital, agrees with the $4,000 figure and says gold should make up 25% of an ideal portfolio, a figure he believes is not excessive considering the constantly declining dollar.
Bear in mind that gold is at new nominal highs. It has not risen in a straight line. It has suffered set backs as do all asset classes. Should you buy now if you own none, or wait for a price correction. Only those with a crystal ball know the answer to that question. As an alternative, you might consider gold's little brother, silver. It is higher in price but not yet at its former nominal high. The problem with it is that it takes a much larger quantity to make up much of a percentage of your portfolio and large quantities are difficult (and expensive) to store. You can own gold and silver based ETFs but they are a security, not precious metals in your possession. You can also buy gold and silver mining stocks to benefit from the rise in price of the metals. They all give you some exposure to these precious metals and each has advantages and disadvantages.
Do Your Risk Analysis
What are the odds that your government will suddenly become fiscally prudent, reduce expenses, stem the growth of debt, lower taxes, and end the steady erosion in value of your national currency? History convincingly proves those odds to be ZERO. Currency debasement will continue - and likely at an accelerating pace. Trump's Big Beautiful Budget Bill ensures a $2 trillion budget deficit in just 2025 to be papered over with the sale of more government debt (Treasury obligations).
Nilus Mattive recaps the sorry history of US fiscal mismanagement and the dire consequences for Americans trying to plan for their future.
If the purchasing power of our dollars stayed the same over time, then simply SAVING money might be enough. We wouldn’t need to take any additional risk. We wouldn’t need to constantly try to keep our nest eggs growing at — or preferably above — the pace of rising prices. Even using the government’s own manipulated CPI numbers, something that cost $100 in 2000 now costs $191. That means our money has lost about half of its value over the last 25 years. And if you go back to the start of the Federal Reserve in 1913, something that was $100 back then currently costs $3,296! So inflation [debasement of the currency] is really our mortal enemy. (Emphasis added).
French Prime Minister Francois Bayrou recently lost a vote of confidence and was ejected from his position after failing to convince members of the National Assembly that a reduction of just 44 billion euros in government spending and the elimination of two national holidays were required to prevent a fiscal crisis and possible need to seek a humiliating monetary bailout from the IMF. He warned (without effect),
Our country is in danger because of the risk of over-indebtedness...Debt dependence has become chronic in France, and this money borrowed, in the hundreds of billions, has not been used as it should do, invest, to provide our country with the best equipment, it was used for current expenses. So, if the path we choose is to pretend, to pretend that the problem does not exist, then I tell you, as I believe it from the bottom of my heart, we will not get out of this, France will not get out of this.
The country's budget deficit reached 5.8% of GDP last year and shows no signs of shrinking. President Macron previously lost his legislative majority and is attempting, unsuccessfully, to govern through coalitions with minority parties. France is facing a fiscal crisis. Public spending consumes 57% of the nation's entire GDP.
The British Chancellor is soon to propose an array of new taxes and tax increases to cover the mounting cost of England's out-of-control welfare spending and debt. Tax increases will hurt businesses, discourage new ones from setting up in England, others from making capital improvements, and will prompt employee layoffs that will then increase social service spending. Like France, England has been mis-governed for decades and may also face a fiscal crisis that could force it to go hat-in-hand seeking an IMF bailout.
Ray Dalio, CEO of the world's biggest hedge fund (Bridgewater Associates), prolific author and frequent interviewee on national and international financial news programs and blogs recently wrote that the UK and US have very serious financial and debt problems. Both nations suffer from low productivity, large wealth disparities, deep political divides and a growing public loss of faith in the government. He warns investors of need to prepare for a coming crisis. What to do? Dalio uses the analogy of a smart rabbit who has "three holes." When danger approaches he has ready-made alternative places to hide. Dalio warns that if the majority of your net worth is in your home, your options are severely restricted because you cannot take it with you should you need to relocate.
Elected public officials never volunteer to reduce expenses sufficient to meet their nation's revenue. Instead, they always seek to extract ever more of their people's wealth in order to keep the plates spinning a little longer, even as the quality of their services rapidly decline. While some taxpayers are the beneficiaries of their government's largess before a crisis strikes, all will become victims during the crisis. Those who fail to do anything to prepare for the next crisis will suffer the most.
The Flaw in the Diamond of Democracy
The inherent problem with all representative democracies is that those seeking public office always campaign on platforms of more benefits, subsidies and handouts to voters and businesses in order to garner political contributions and buy votes. Once elected, they promise ever more benefits with the hope of being continually re-elected to office. No politician will propose large cuts to spending. That would enrage the vast beneficiary population and elect their political opponent who will promise not to cut benefits. This internal destruct mechanism of democracies is no secret. It has been known for centuries. In 1787, US Founding Father Ben Franklin is said to have written that, "When people discover they can vote themselves money, that is the end of the Republic." We are long past that point. There is no US "republic" in which supreme power is vested in the people. Supreme power has long since been seized by vast and multi-layered governments.
Alexander Fraser Tytler, a Scottish advocate, judge and historian wrote a more ominous warning in the early 1800's,
A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that democracy always collapses over loose fiscal policy, always followed by a dictatorship.
Early proof of this is the fall of the great, representative Roman Republic followed by the Roman Empire headed by ruthless emperors.
People around the world are coming to realize that their governments no longer exist to serve their needs and, instead, they now exist to serve their government's needs. This ensures growing conflict between the workers and taxpayers who fund their leviathan governments and those in government who seek ever more control over the people and their wealth. Governments never willingly reform themselves. Therefore, the people must reform their governments or they will be subjugated by them.
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