Do we need more protection than just the PP?

[smurff]

1. The HBPP is 25% cash, 25% gold and 25% LTT, of course it will do well in deflationary crash or long-term deflation. Have the Japanese lost purchasing power holding a standard Japanese PP or gained? I thought consumer prices have been dropping there for years. You have to think in terms of purchasing power not in total dollars/Yen. If all I owned was one ounce of gold and we had hyperinflation and gold went to 1 trillion dollars an ounce then I'd be a trillionaire. It wouldn't do me much good though.

You could use that 1 trillion dollars to pay off your $240,000 mortgage, $27,000 in auto loans, $25,000 student loan debt, and $15,799 credit card debt.  (These are average American debt figures I gathered from a Google search.)  You'd have $999,999,692,201 left to play with.

OR, you could sell a 1/20 oz Chinese Panda for $50 billion, pay off the debt, and have 0.95 ounces of gold left, along with $49,999,692,201 left to play with.  If you had a 1 gram Pamp Suisse ingot (0.0322 troy ounces), you'd do slightly better, but at some point you would have to consider dealing in dust to sell just enough gold to pay off the debts.  (Or switch to your stash of a less expensive precious metal, like silver.  Maybe.)

That's why it's important to include a mix of gold coins, including 1/20, 1/10, 1/4, 1/2 ounce, in your PP, especially if you can get them at low premiums over the gold price.

This all assumes, of course, in the state of emergency/martial law that would exist in the USA
under these circumstances, the government did not forbid any prepayment of debt, and the loan contracts are all for fixed rate loans with no hyperinflation bombs included in the fine print.  

Of course, if you had no debt, you're right--a trillion dollars would do you no good.

[Kshartle]

You could use that 1 trillion dollars to pay off your $240,000 mortgage, $27,000 in auto loans, $25,000 student loan debt, and $15,799 credit card debt.  (These are average American debt figures I gathered from a Google search.)  You'd have $999,999,692,201 left to play with.

Of course, if you had no debt, you're right--a trillion dollars would do you no good.

People who owe (like the government) will benefit most. Those who own bonds or dollars will be out of luck. Banks will go under because their assets will be worthless. That's why Browne advocated borrowing money ahead of severe inflation if you can see it coming. People locking in long term loans at these low interest are making a big bet on inflation and I think a pretty safe one.

Having just gold and being negative long term bonds would be the ultimate position during hyperinflation but that's a big bet to make. I think people that are buying LTT at 3% are buying into a huge bubble right now, perhaps the biggest bubble ever. When that bubble finds a pin it's going to make the tech stock and real estate bubble look like nothing. At some point the fed will be forced to buy bonds to keep yeilds low which will only cause a greater flight from them forcing the fed to buy more and more.

That being said the central banks have been very good at holding things together up until now. No telling how many more years than can keep it together.

Ohhh yeah, that $999,999,692,201.........will probably just be enough to buy a really nice tailored Italien suit and some leather Italien shoes.

[smurff]

Don't forget the leather chaps.

[Gumby]

Have the Japanese lost purchasing power holding a standard Japanese PP or gained?

According to Clive (as I remember), the Japanese PP lost real purchasing power. However, Harry Browne made it very clear in The Best Laid Plans that a PP might not actually work properly with other currencies besides the US dollar.

In Appendix G of Why The Best Laid Investments Usually Go Wrong is a short two page recommendation on Foreign PPs titled, "Permanent Portfolio Alterations for Non-Americans," Harry Browne says:

Permanent Portfolio Alterations for Non-Americans

The suggestions in this book are made with American readers in mind. If you live outside the United States, some of the suggestions I've made for the Permanent Portfolio can be changed. Whether you should use U.S. investments or use investments of the country in which you live depends on how stable and useful you consider the investment markets in the country where you live.

If you are an American living abroad and you expect to return to the US to live within the next few years, it isn't necessary to make any changes from the suggestions I've made. If you don't know when or whether you will return to the US, consider making the changes.

The purpose of Treasury bills in the portfolio is to provide stable purchasing power through a default-proof investment in the currency you rely on. So, for US Treasury bills, you can substitute the equivalent investment in the country in which you live. That can be bills, notes, or bonds issued by the government and maturing in one year.

The long-term bonds can be bonds of the government of the country in which you live, so that you will have protection if there's a deflation in your country. Use the longest maturity available.

Stock-market investments are meant to provide profit when your country is prosperous and inflation is low. So, in general, you should buy stocks of the companies in your country.

However, you might prefer to use American stock-market investments instead. Usually, the stock markets of the world move upward or downward together. And the US securities markets offer a greater number of alternatives — including such things as warrants and specialized mutual funds.

The decision may depend upon how adequately you believe you can cover yourself with stock investments of your own country. One possibility is to split the stock-market budget between investments of your country and the United States.

There is no reason to alter the suggestions I've made for gold, no matter where you live.

It's just less likely that a group of currencies would all fail vs one currency failing.

And you know this how?

Nations like Russia and China have been calling for an alternate world reserve currency.

So, they are planning on leaving the US market altogether? Seems unlikely. Those countries love dollars.

The dollar will not maintain that status forever and when it loses it all those dollars are going to come home to roost here. It won't be pretty.

And you know this how?

Even with reserve currency status and the built-in demand for dollars it has been in steady decline for decades with only brief pullbacks in the downtrend. I would argue that now looks like an opportune time to switch out some dollars for foriegn cash after this little rally in the greenback these last few months.

Sounds like a speculation.

It's not much more volitile and when it is that volitility is likely to be with the upside.

And you know this how?

It will not protect investors if the government turns to massive inflation to pay it's debts and entitlements.

Why would the government turn to "massive inflation" to pay its debts and entitlements? It can just issue more debt or make cuts where needed. The debt doesn't ever need to be reduced so long as the economy can support the increased money supply (by hiring more workers, ramping up production, etc) — and right now the private sector needs more money supply to pay off private loans and debts. The US government has absolutely no problem servicing its debt and there is no reason why that will change anytime soon.

Look, globaly diversified stocks and global diversified bonds might not save your wealth either. Maybe when it's all said and done only gold, silver, possibly land (if you can protect it) and other real things would survive a scenario I'm envisioning. That being said, diversifying has to be safer.

What you're talking about is a heavy speculation on inflation. Nothing more. The future doesn't have to be inflation. In fact, it's very unlikely that the US dollar would hyperinflate. Nevertheless, if it did, it would probably be the end of the world and your foreign bank accounts would be toast anyhow as each foreign bank imploded under the stress of a major currency collapse — taking their countries with them.

[Gumby]

...and for US citizens, holding foreign bank accounts in excess of $10K introduces all sorts of mandatory tax disclosures and additional taxes. A failure to properly report these accounts, each year, is considered to be one of the worst tax offenses, with penalties up to $500,000 and a potential prison term up to ten years.

[Kshartle]

A group of currencies is going to be safer than just one. It's called diversification. It's the same as buying stocks in lots of different companies rather than just one. If you disagree that spreading your money in differnent investments is less risky than in one please explain because I honestly don't understand what you're getting at.

They love dollars? I hope that's sarcasm. Here's just a couple links below. Everyone please look these over and reevaluate keeping half your investable wealth in dollars please.

<http://www.ibtimes.com/articles/85424/2 ... dollar.htm>
<http://online.wsj.com/article/SB123780272456212885.html>
<http://www.globalcrisisnews.com/general ... ts/id=691/>

The USD has been dropping against the major world currencies for 40 years and it's just had a pullback. Betting on the dollar to reverse this multi decade trend with this group of money printers at the central bank is the height of speculation. The real risk is holding USD not getting out of it. It's what makes the HBPP so risky. Only time will tell if the dollar reverses the trend but that doesn't make the risk of dollars less now.

A basket of currencies has a standard deviation of 10 or so. This is less volitile than the other three components. It's only 25% of the portfolio. It doesn't add much volitility to the total portfolio. Even if the USD keeps pace with the others you might realize better returns by selling foriegn cash when it's higher and buying back when it's lower. It's not highly correlated with the other components either. Obviously if someone had substituted foriegn cash for dollars this past decade they would be much richer.

I don't know if you noticed....but the economy isn't doing that great. The government has to borrow about 40 cents of every dollar it spends. That money HAS to be paid at some time. If you think there is no limit to how much the government can borrow I just don't know what to say. Have you seen Greece or Italy this year? The limit will be imposed by creditors. They will demand ever increasing rates. The average maturity on the debt is so low it's the biggest adjustable rate mortgage in history. Higher rates will be devastating to the government and the Fed will have to either monitize it or the government will have to make enormous cuts in spending. Which political party do you think is going to make the cuts neccesary?

This isn't a bet on hyper-inflation. It's about protecting your portfolio in the event of it.

Who mentioned foreign bank accounts? And why do you think foreign banks accounts are less safe than U.S. ones anyway?

[Kshartle]

It can just issue more debt or make cuts where needed.

It doesn't just issue debt, it has to sell it. The interest is the big problem.

The Fed has nearly 1.7 trillion on it's balance sheet. It's there because the government can't make cuts and the market demand for U.S. debt isn't strong enough to keep rates at a level the government can support. It's theoretically possilbe that the Fed will sell it's bonds but this we be the opposite of everything Bernanke has ever said, written about or promised. I would take him at his word that the Fed is ready to print and buy bonds. It has been the Fed policy for a long time now. Also, as the economy get's worse, the real tax revenue is going to continue to shrink and the fiscal deficits are going to grow and grow.

[Gumby]

They love dollars? I hope that's sarcasm.

It's not. If those countries don't want dollars anymore, they have to stop doing business in the US. It's that simple.

The government has to borrow about 40 cents of every dollar it spends. That money HAS to be paid at some time. If you think there is no limit to how much the government can borrow I just don't know what to say. Have you seen Greece or Italy this year?

The US is not a European country. European countries can run out of money (much like a State or local government). But the US cannot run out of money. It's impossible. Our debt gets downgraded and interest rates go down. Not so with a country that can run out of money.

And no, we don't have to pay it back. That's impossible as well. The Federal Debt is where our monetary base comes from. If we paid it back, we wouldn't have a monetary base left. Now, obviously, the Fed can print money (via liabilities) and the Treasury can create as much coinage it wants as long as it can find the metals. But, the point is that the monetary base comes from the Federal Debt. Banks take that monetary base and expand the money supply by granting loans that are backed by the monetary base. Therefore, nearly every single dollar on the planet comes from either an initial Federal Debt or a bank loan. It's all debt-based money.

All of the bank loans must net to zero, so the monetary base is really created by our Federal debt. Taxation simply destroys that base money supply, and the threat of prison for not paying your taxes legitimizes the currency.

The private sector racked up too much private (bank) debt through the housing bubble. And now the private sector is deleveraging — trying to pay of its private bank loans. The problem is that there isn't enough money moving around the economy to pay back all of the private bank loans in time. This is known as a "balance sheet recession" — which is what happened in Japan.

So, the only way for the private sector to pay back all of its private debt (to banks) is either with debt forgiveness or an injection of more base money (which is created by Federal "Debt").

Of course, everyone thinks that our government is still borrowing money to create its money supply. But, that's not true anymore. It's actually nonsensical to suggest that China's benevolance is how we create our money supply. When we became fiat, Congress never changed the laws on issuing bonds to offset spending and the economics textbooks were never updated to reflect how money is created. If the US government wants to build a road or fight a war, the Treasury doesn't pick up a red phone and ask Japan or China for money. No. The Treasury spends first, and then issues the bonds later to offset that spending. Therefore the dollars to purchase every new Treasury bond already exists as base money in the bank reserves. Wherever those dollars wind up, they will be targeted by the Fed, as a bank reserve drain, and used to purchase Treasuries.

Here's how it works:

http://pragcap.com/who-will-buy-the-bonds

http://pragcap.com/breaking-news-bankru ... subscribed

Treasury Bond auctions are designed not to fail. The Fed finds out where the excess bank reserves are in the system and coordinates with the Primary Dealers and the Treasury to target rates and drain those reserves in conjunction with each Treasury auction. The Primary Dealers are contractually obligated to do this in order to fulfill their role as market-makers for US Treasuries — they essentially backstop every auction. This is all stated right on the Federal Reserve's web page:

http://pragcap.com/n-y-fed-explains-gov ... sues-bonds

http://www.newyorkfed.org/aboutthefed/f ... fed32.html

And if the Primary Dealers lacked the reserves for some reason, the Fed literally hands them the money to fulfill their contractural obligations as market-makers for Treasuries. The system is designed not to fail. That's why Treasuries are the world's safest investment.

The limit will be imposed by creditors. They will demand ever increasing rates.

The Fed has complete control of the rates. Otherwise you'd see higher rates.

Which political party do you think is going to make the cuts neccesary?

I get the feeling that you are getting investment advice from political pundits. Bad idea. They are lying to you for their own agenda.

Who mentioned foreign bank accounts? And why do you think foreign banks accounts are less safe than U.S. ones anyway?

Well... Banks can only hold accounts in a domestic currency. If you want to hold foreign currency, you either need to open a foreign bank account, or invest in risky ETFs. Or I suppose you could collect tons of foreign paper currency and stuff it in your mattress. The safest option is a foreign bank account. The IRS will make your life rather difficult if you do this.

[smurff]

Florida-based Everbank allows you to open an account in the USA that can be denominated in a variety of different currencies other than (or in addition to) the dollar.  $2500 minimum to open; $10,000 minimum to earn interest, with complete FDIC coverage.  They do IRAs, too, as well as precious metals. 

[stone]

kshartle, here's a link about the MMT view of how interest rates are determined with a free floating fiat system such as in Australia (its by an Australian) or the USA (as Gumby said, the eurozone is very different because all the different euro countries have their own debt but share the same currency so it acts like borrowing in a foreign currency for all of them).

http://bilbo.economicoutlook.net/blog/?p=4656

I do see your general point that ever increasing USD "net financial assets" probably create an unsustainable system. I'm much less sure though that that unsustainability will play out in a way that means that holding USD cash and LTT is bad. Ironically, possibly holding a portion of USD (as in the PP) will be a way to ride it out. Much of the PP gains come from volatility capture. I think it is all too easy to overlook how little it matters to have  year by year attrition of USD purchasing power if that is overidden by 10% per year volatility capture gains.
I agree that the USD cash part of the PP would have been juiced if it had been Yen but it is so hard to look to the future and know that that will continue. Perhaps in ten years time, Americans won't consume so much and the USA will not be an importing nation. The US citizens with lots of money may have it invested in Greek Drachmas as Greece becomes the booming "growth centre of the world". Whenever "risk off" sentiment hits, all the foreign investments by Americans will be sold of as they sit it out in USD. Such a scenario would make the USD an ultimate "risk off" currency with a positive balance of trade just as the Yen is now.

Gumby- treasury coins are base money that doesn't come from being loaned into existance aren't they? They are just created from nothing on their own by pure fiat with no debt?

[stone]

Clive, which countries have PP that have actually increased their gold holdings overall over the past decade? Would a Brazilian PP have managed that?

[Gumby]

Gumby- treasury coins are base money that doesn't come from being loaned into existance aren't they? They are just created from nothing on their own by pure fiat with no debt?

That's exactly correct. I did my best to say that at the beginning of my post. But coinage is a minuscule percentage of the base money supply. The overwhelming of the US base money supply comes from issuing Federal "debt."

I am willing to accept to having all of one's money wrapped up in one currency is a risk. But you have to accept some of that risk when you choose to live and do business in that country. And the logistics of diversifying one's cash position into foreign bank accounts is a tremendous undertaking. The IRS makes it very difficult. I'm not convinced that the potential reward is worth the hassle. If the dollar died, the entire world and shadow banking system would likely collapse. ETFs would not be safe and foreign banks would likely collapse from leveraged CDS contagion, etc.

I'd rather just hold dollars. You can't very well price the end of the world into your performance models. And at least we already have a lot of gold to survive.

[stone]

Gumby, sorry for missing that. I am really curious to know what the consequence would be if all base money was such debt free coinage (perhaps could have elctronic "coins" issued by the treasury). Would it result in wild speculation as all asset prices rose to the point that they had a zero rate of expected return or would the liquidity preference for base money keep a lid on all of that so long as deficit spending was kept in check?

[stone]

Clive, the interest rates in Brazil are 10+ doesn't that make a massive change to the total returns? Also their stock market had a 10x increase (bad this year though).

[Gumby]

I am really curious to know what the consequence would be if all base money was such debt free coinage (perhaps could have elctronic "coins" issued by the treasury). Would it result in wild speculation as all asset prices rose to the point that they had a zero rate of expected return or would the liquidity preference for base money keep a lid on all of that so long as deficit spending was kept in check?

I don't know. But, the seignorage laws are very specific about what coins can be minted — except for Platinum coins, which can be anything:

The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.
Source: TITLE 31 > SUBTITLE IV > CHAPTER 51 > SUBCHAPTER II > § 5112 (k)

I just find it fascinating that the Treasury Secretary has the legal authority to mint a $5 Trillion platinum coin if it ever wanted to avoid a debt-ceiling "crisis." While it is a legal option, it would undermine the ability of Congress to provide oversight on what was actually worth spending money on. (Not that Congress has ever done a good job of providing oversight on spending.)

Here's an interesting perspective of fiat currency from none other than Thomas Edison in 1921:

If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good...It is absurd to say that our country can issue $30,000,000 in bonds and not $30,000,000 in currency. Both are promises to pay; but one promise fattens the usurer, and the other helps the people. If the currency issued by the Government were no good, then the bonds issued would be no good either....  If the Government issues bonds, the brokers will sell them. The bonds will be negotiable; they will be considered as gilt edged paper.  Why? Because the government is behind them, but who is behind the Government? The people. Therefore it is the people who constitute the basis of Government credit. Why then cannot the people have the benefit of their own gilt-edged credit by receiving non-interest bearing currency… instead of the bankers receiving the benefit of the people’s credit in interest-bearing bonds?”?
Thomas Edison, quoted in NY Times, Dec. 6, 1921

Edison goes on to argue why, in his opinion, fiat money is more credible than Gold. Even if you disagree — and it's not difficult to argue that today's spot price of gold proved him wrong — it's a very interesting contrarian viewpoint that is intended to make people think about what money actually is and where it comes from.

[Lone Wolf]

Edison goes on to argue why, in his opinion, fiat money is more credible than Gold. Even if you disagree — and it's not difficult to argue that today's spot price of gold proved him wrong — it's a very interesting contrarian viewpoint that is intended to make people think about what money actually is and where it comes from.

What a cool little historical tidbit!  While I find almost nothing in there that I agree with, it's a really interesting read.  Where'd you dig that one up?  It's too bad that Edison, while seemingly aware of the history of Lincoln's Greenbacks during the Civil War, doesn't address the ~100% inflation that currency suffered over the course of the war.  I'd have liked to get more of the nuances of his thinking there.

The only thing that could have made this even cooler would have been a counterpoint from his famous rival Nikola Tesla. 

I have to say, I was really shocked to see Edison asserting that lead was a "compound" and that gold was likely to also be found to be a "compound".  This is painfully embarrassing.

[edsanville]

I have to say, I was really shocked to see Edison asserting that lead was a "compound" and that gold was likely to also be found to be a "compound".  This is painfully embarrassing.

I don't know...  I don't think it's very embarassing when you consider the fact that the atomic theory of matter wasn't even widely accepted until the 20th century.  Back then, a "compound" was just any substance that could undergo chemistry and be broken down into two or more substances.  I could understand how somebody might come to the conclusion that a material like gold might possibly be broken down by some unknown chemical process.  Of course he turned out to be totally wrong with 20/20 hindsight...

[6 Iron]

I have to say, I was really shocked to see Edison asserting that lead was a "compound" and that gold was likely to also be found to be a "compound".  This is painfully embarrassing.

I love this sort of stuff, because I know that there are things we are dead certain of today in the scientific community that will be shown false in the future. Even smart guys can be wrong.

[Gumby]

Edison goes on to argue why, in his opinion, fiat money is more credible than Gold. Even if you disagree — and it's not difficult to argue that today's spot price of gold proved him wrong — it's a very interesting contrarian viewpoint that is intended to make people think about what money actually is and where it comes from.

What a cool little historical tidbit!  While I find almost nothing in there that I agree with, it's a really interesting read.  Where'd you dig that one up?

From here:

Coin Seigniorage and the Irrelevance of the Debt Limit

The article explains the law that allows the Treasury to mint a multi-Trillion dollar coin, deposit it in the Fed, and use it to buy up our so-called "debt."

[MachineGhost]

This seems awful.  It's basically a leveraged bet on real estate.  The rest of the portfolio (with the 15% Swiss Francs into ST bonds) earned a -7.33% CAGR since 1928 and only .66% CAGR during 1969-1980.  In comparison, the PP made 4.39% CAGR in the latter period.  A big 3.73% CAR difference that may or may not have been made up in the real estate and Swiss Francs.

MG

Rising inflation

35% Gold
15% Silver
15% Swiss Francs
10% Stocks
20% Real Estate
15% ST Bonds (this was 1981 and ST rates were double digits)
(10%) LT Bonds (this means take on debt don't buy it)

That's only 5% in fixed dollars, not 50%!