This warning comes from “Big Al” Greenspan, age 88. He’s been in the news a lot lately, speaking with Gillian Tett of the Financial Times at the Council on Foreign Relations and at the New Orleans Investment Conference, where he was on a question-and-answer panel and attended a luncheon for one-on-one discussion.
After reading several reports of both events, I spoke with Casey Research colleagues who’d attended the conference and asked, “Did Big Al really say this, this, and this?”
Their response was crystal clear: “Yep! That’s exactly how I saw it and what I took his remarks to mean.”
Mr. Greenspan is issuing a warning to anyone who will listen, ‘fessing up to things many of us thought might be true. His candor reinforces many of my worst fears:
- The Federal Reserve is raining money down from the heavens to fund unprecedented government spending and to keep the banking system solvent.
- The credit needs of the US government are so huge that if the Fed didn’t add liquidity to the system, the private sector would be choked out, unable to afford to borrow money.
- An inflationary bonfire is just a spark away. Big Al likened the money supply to kindling awaiting a match to ignite an inflationary explosion.
The Fed’s Real Job
Greenspan made it clear that the Fed’s mission is to help fund US government spending and to defend the banking system. In his talk at the Council on Foreign Relations, he also mentioned coordinating with other central bankers throughout the world.
In essence, the Federal Reserve functions as a low-interest Visa card with no spending limit. The Fed enables a spendaholic government, dealing it trillions of doses of its drug of choice.
Frankly, Janet Yellen inherited a mess. When she talks about the Fed’s role in combating inflation and promoting unemployment, it’s window dressing. When push comes to shove, the needs of the US government and big banks take priority. As long as government spending continues, the Fed will continue to feed the beast with cheap money—just like Big Al says.
On Government Debt
While US government debt is reportedly in the $17-trillion range, that’s a drop in the bucket compared to its real liabilities. On top of Social Security obligations and unfunded pension promises, Big Al also reminds us that no one knows what the Fed’s true liabilities are because it has essentially guaranteed the liabilities of too-big-to-fail entities.
All this means that the US government cannot satisfy its debts without inflating the US dollar at a much greater rate than most of us could imagine.
He Who Has the Gold
Unlike Ben Bernanke, who’s likened gold to an ancient relic, Big Al sees things differently, stating: “Gold is a currency. It is still, by all evidence, a premier currency. No fiat currency, including the dollar, can match it.” Greenspan went on to discuss tapering and agreements with central banks, confirming that gold serves a very important role in monetary reserves.
All this reminds me of the other golden rule: “He who has the gold makes the rules.” Russia and China must believe that, given their buying habits over the last few years.
Let’s review Big Al’s warning. The Federal Reserve’s primary mission is to support out-of-control government spending. To do so it’s “created” trillions of dollars. Regardless of who is in office, politicians can’t help themselves. Spending will continue. If the Fed tries to reverse the trend, there will be a significant market event. If it keeps doing what it’s doing, significant inflation is inevitable. A lot of people will be hurt. Seniors and savers, particularly those holding the majority of their wealth in US dollars, are standing on the seashore so they can get a better view of the tsunami. There is a better way.
Back Away from the Tsunami
The day will come when the inevitable becomes imminent. I fear for those who ignore or refuse to accept the warning. Anyone who holds gold and/or other inflation hedges likely isn’t shocked by what Big Al is saying. For everyone else, don’t ignore Greenspan’s warnings—they are crystal clear.
Should you buy gold? That depends. A solid portfolio has 10-20% (depending on your comfort level) in core holdings for catastrophe protection. What are core holdings? Precious metals certainly fit that bill, as does farmland, certain foreign currencies, fine art, and various other tangible assets. Now is a good time to review your core holdings. If you’re adequately protected from the big, bad event, then you don’t need more.
If, on the other hand, you need to up your catastrophe protection, precious metal prices are making it an attractive time to do so. Remember, these investments are there to protect you and your family. They are the ultimate safety net, and it’s worthwhile to consider where you own these assets. Keep some of your insurance where it cannot be easily confiscated.
We live in dangerous economic times. Greenspan has reinforced this belief. We’ve cautioned our readers about the possibility of a “significant market event” and the possibility of high inflation, and we’ve shared step-by-step guidance for those who are do-it-yourself money managers.
And while I encourage everyone to do a year-end portfolio audit with these concerns in mind, many financial advisors disagree over what a well-protected portfolio looks like. I often hear from subscribers who’ve spoken to their advisors about high inflation concerns, only to be brushed off. Many report firing their advisors because they thought their nest egg was at great risk and the advisor refused to listen.
Don’t accept the brush-off. Whether your go-to guy is a fee-based CFP, a stockbroker, or a well-intentioned adult child, sit down and review your portfolio in depth with the worst-case scenario mindset. Ask yourself:
- What happens if there are five-plus years of double-digit inflation?
- What happens if the market drops 50% or more and doesn’t rebound?
This is not a drill, folks. These are distinct possibilities.
Mastering the Art of Financial Backtalk
It’s unfortunate when a trusted advisor brushes off your concerns as unrealistic or insignificant. Here are some typical responses you might hear:
- No need to worry about inflation. It’s less than 2% and under control.
- Not to worry. You have a little money invested in TIPS.
- You are well diversified within our family of mutual funds. You are protected.
Don’t let this sort of arrogance keep you from protecting yourself. Here’s what I’d say to those three comments respectively:
- I know what the current inflation rate it, but it might go much higher. How can I protect against high inflation destroying the value of my life savings?
- TIPS do not hedge against inflation. They don’t even keep up with inflation. They’re a terrible investment.
- How does a family of funds in all US dollars and US companies protect me if the dollar rapidly declines?
Act Like a Boy Scout
There is no downside to preparing. It’s much, much easier to prepare and be wrong than to try to recover after a disaster hits—especially if you’re over age 60. There’s good reason the Boy Scout motto is, “Be prepared!”
Big Al Greenspan is an insider if there ever was one. Hearing his concerns clearly expressed is cause for a complete portfolio review—sooner, not later. There’s nothing to lose and much to be gained. When Greenspan talks about high inflation and a significant market event, how much more warning do you need?
When you boil it down, it’s pretty simple. You might have to make some adjustments to protect against inflation and market exposure. The right adjustments will reduce risk and have minimal effects on your investment income. On the flip side, doing nothing may have negative, life-altering consequences.
Big Al Greenspan has been out of the news for a few years. Now all of a sudden he’s waving a big caution flag. Those who take heed will sleep better and profit when and if the big event occurs. And it will; it’s just a matter of time.
On the Lighter Side
I hope everyone here in the US had a food-filled Thanksgiving weekend. Each year my wife Jo comes up with a clever holiday gift that no one in our family can figure out. For the second year now, we’re inviting readers to guess along with the Miller family. The first reader to correctly identify the gift will win a complimentary signed copy of my book, Retirement Reboot… and instant Miller’s Money fame.
Take a look at the picture below and shoot us an email if you think you know what the gift is:
For the holiday season, a reminder of what love is:
Love is when you go out to eat and give somebody most of your French fries without making them give you any of theirs.—Chrissy, age 6
Until next week…