Since August 15, 1971, we have been living in a unique time period in history. On that day, the United States terminated the ability of foreign governments to convert their dollars into gold.  This action severed the last links of currency to any backing by precious metals which had been the case for much of human history.

The impact has been dramatic. Without needing gold to back the value of the currency, central banks could now create money without constraint, facilitating proliferate government spending and borrowing by serving as a “buyer of last resort” for debt. It has brought us to the point where, today:

• “Official” federal debt stands at approximately $17 trillion which exceeds the economy’s annual production of goods and services (Gross Domestic Product or GDP).
• This “official” federal debt excludes many federal unfunded liabilities (including pensions, healthcare and Social Security) with low end projections estimated at $70 trillion.
• Together, total U.S. federal liabilities equal a staggering $87 Trillion or over 5 times GDP.
• This gross overspending is not slowing down. Nearly all U.S. tax revenue is consumed by entitlement programs.  Expenditures for all discretionary programs, including defense, are borrowed.
• In addition, annual deficits continue to multiply at an alarming pace. In 2012 alone, under standard accounting practices, federal liabilities grew by $6.6. trillion (equal to 42% of that year’s GDP).

Even with talk of tax revenue increases or cost cutting, the U.S. national debt, like that of many countries, can never be repaid.  Nor can the economy “outgrow” these debt levels. Ultimately, the governments will repay debt with their last remaining option – printing more money.  As money floods the system, this will drive inflation higher even with continued weakness in the economy. 

We foresee dramatic changes which, if investors are properly prepared, will allow them to prosper.  However, portfolios must be immediately positioned for two major challenges ahead:

1.  Finding satisfactory returns in an increasingly return-starved world.   
2.  Preserving the purchasing power of wealth in light of the coming inflation.

We fear that most investors with a static mix of stocks and bonds will see their portfolio worth significantly less in the years ahead, diminished by the ravaging effects of inflation. To learn how we build portfolios for clients to address these challenges, additional information can be found here. For more insight on the state of the world, view our featured video: Gold, Government and a Game Plan.

Worldly wisdom teaches that it is better for the reputation to fail conventionally than to succeed unconventionally.
- John Maynard Keynes, famous 20th century British economist.

On this single point we agree with Keynes.  Who does not find a feeling of safety in numbers? Therefore, it is easy for investors to find comfort in copying the actions of the investment community at large.  If they lose when markets collapse, at least they are no worse off than most others. And no doubt the investor’s wealth manager will console them by pointing out that “no one saw this coming.” 

This happened with technology stocks, then with housing, and most recently with the stock market as a whole. Why did the investment community fail to see these past bubbles and advise their clients accordingly? There are a number of reasons which we discuss here, but ultimately it is their misplaced faith in the economics of John Maynard Keynes.

Today the financial community generally adheres to Keynesian economic philosophy.  They believe government, through significant regulating, spending, and the printing of money, can steer economies towards prosperity and avoid financial calamities.  We disagree.  In subscribing to the free market-based Austrian School of Economics, we understand the inevitable repercussions of government intervention. 

So why are we “entrepreneurial-minded advisors”? Conventional wisdom associates the word “entrepreneur” with the assumption of risk.  While risk can never be fully avoided, what actually makes entrepreneurs unique is their understanding of risk. Our unique insight of the risks posed by governmental interference in the economy serves to protect our clients’ wealth.  As entrepreneurial-minded advisors, we emphasize independent and creative thought to boldly seize opportunities while minimizing key risks.

Go to State of the World