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The Main Problem


The primary reason my assets are not in U.S. dollars is the country's penchant for debt. This debt permeates at all levels of the economy, from the consumer's credit card and mortgage debt to the government's public debt. For all the hubris of budget surpluses in the late 1990's, no debt was ever paid off. Those surpluses came primarily from borrowing from current cash surpluses in Social Security that were only temporary: the current (already promised) liabilities of Social Security are around $13 trillion while its assets are only $3.5 trillion.

If you take the ratio of total non-financial debt to total GDP output you get the amount of dollars of debt to produce a dollar of output. In the 1960's this number was $1-2. In the 1990's it was around $4. Today it is around $7.

The basic reason for this is that the overall amount of debt in the system is so high that more marginal liquidity must go to service that debt, so less and less is available to go into productive assets. The problem becomes more acute, obviously, the higher interest rates go.

The U.S. is addicted to debt. Just like a drug addict, this vicious cycle must be broken by a painful process. This is called a debt liquidation cycle and in my opinion it is long overdue. This process is being put off just like in our poor drug addict's case: the habit is being "fed".

But it is just a matter of time.

So I advise everyone to be patient. Shorting stocks is a silly response; as Keynes said, "Markets can remain irrational longer than I can remain solvent." The only correct response is to position your assets conservatively.
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No positions in stocks mentioned.

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