Letters to Tom (4)

Tom,

I am increasingly convincing myself our economy (including Europe's but to a lesser extent) is about to hit an unprecedented bout of inflation. My prior comments over the past few years about allowing China to take some of their hundreds of billions of dollars and buy US assets before they end up burning them for heating fuel in the winter is starting to take real shape (like the hedge fund guy Andrew Lahde's comment about the legislation that never passed because industry bought off the government, those industries also bought off the government by convincing them to not allow China to purchase several American companies which is the best thing that could happen to all those dollars they have collected).

This will not be the kind of inflation economist’s talk about, rising asset prices, wages etc. but a simple collapse in the faith of the US currency combined with the government's current bias towards literally flooding the banks and financial markets with "unlimited" dollars to improve liquidity. I am not kidding. We went from 10's of billions in dollars of support to hundreds of billions to now quoted everywhere, "unlimited" of financial support from the fed.

I seriously think China may in fact be using those dollars as fuel this winter, they will become that worthless as the US current reckless attempts to bail out a financial system that is larger then their capacity to deal with it results in a complete loss in confidence in the value of the dollar. I cannot say it will all happen by this winter, in fact it may take closer to 8-10 months to happen but I feel strongly it IS going to happen. It is in my gut for all I know as a measly undergrad economics degree holder.

The question is how to "profit" from this reality. The only asset class traditionally to migrate to is Gold. I hate Gold. I hate the thought that the idiots running our country and economy for the past 8 years or so still think like it is the 19th century, before central banks, when currencies went bust regularly, precious metals where the only stable value and vast amounts of resources were spent scouring the globe for mineral riches. I would much rather invest in the foundation of our technological advances over the past 30 years or so where some of the smartest people spend their lives creating more amazing products and devices that have ways of "improving" human life. Things like semi-conductors, real medical advances, energy saving technologies, better and more efficient products and art. Instead, my option to hedge what I fear is an impending loss of confidence in the dollar is to buy the very thing I despise the most, a damn base metal extracted from the earth.

I am really pissed off. I feel like the French during the French Revolution. I strongly believe our government (an expression that I have had for about 25 years now) had become so impotent and bought that they have put our entire system in jeopardy. It is unfortunate. I can remember back when I was in my early 20's and talked about entering politics sometime after I was 35 saying I felt by the early 21st Century the US would be in such a mess that it would be easy to run for president. I mean, who would want the job? To see what is going on now makes me feel for the next person to enter that house on Pennsylvania Avenue. I am willing to bet that within 2 years the house will become nothing but a ceremonious museum. The citizens of the United States will become so disenfranchised by what has happened to our economy that they will create a situation that causes smart people to conclude there is no way the leader of the US can govern from such an accessible location. It will simply be too dangerous. The entire seat of government around the capital will become sealed for blocks around and the 1/2 a billion dollars that has been spent making the Capital visitable again will be wasted cash.

Mark these words.

Now, how to profit from a complete loss of value in the dollar...

Patrick