State of the World

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 $31 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 $75 to $100 trillion.
• Together, total U.S. federal liabilities approximate at least a staggering $100 trillion, or over five times GDP.
• This gross overspending is not slowing down. The majority of U.S. tax revenue is consumed by entitlement programs.  Expenditures for all discretionary programs, including defense, are largely borrowed.
• In addition, annual deficits continue to multiply at an alarming pace. In 2022 alone, the federal budget deficit approximated $1.4 trillion.

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.