The U.S. dollar and all other fiat currencies are in their last days. The signs of this are evident as the Federal Reserve printed 22% of all dollars in circulation in 2020 alone, in the midst of record high unemployment levels, lighting the spark to hyper-inflation. Once the dollar fails – like all fiat currencies in history have – there has to be a global currency reset. This means that there will be a sad day in the near future where we will wake up and our debit and credit cards won’t work, and the 401(k)’s people spent decades working for will be worthless. In this article I will cover why fiat currencies are on their last leg, why all dollar denominated assets (including 401(k)’s) will take a huge hit, and how to appropriately position yourself to take advantage of what’s happening using your 401(k) instead of being an unfortunate victim.
Disclaimer: I am not a financial advisor, this article is for informational purposes only and should not be considered investment advice or an individualized recommendation. Please consult a financial advisor regarding your personal financial desires.
A dollar collapse is when the value of the U.S. dollar plummets. In that scenario, anyone who holds dollar-denominated assets will sell them at any cost, including foreign governments that own U.S. Treasury’s. When the crash occurs, these parties will demand assets denominated in anything other than dollars. The collapse of the dollar means that everyone is trying to sell their dollar denominated assets, while no one wants to buy them. To understand what’s happening, let’s first cover some brief history.
When Richard Nixon took the United States off of the gold standard in 1971, it meant the beginning of the end for our country’s financial stability. The gold standard meant that the dollar was backed 1:1 with gold. This kept the governments in check because they couldn’t print as much money as they wanted to, but instead had to raise money from the people. I think It’s helpful to remember that in a society in which capital investments are financed from savings, capital is in the possession of individuals in society with a lower time preference (long-term views) who earned their wealth from the sweat of their brow (excluding inheritances).
These individuals would allocate the capital based on their own estimation of the likelihoods of it generating an appropriate return, receiving rewards for being correct and losses for being wrong. Prior to the gold standard, governments were off the leash and could print as much money as they desired. So instead of the allocation being decided by the most prudent members of society with the lowest time preference and the best market insights, It’s decided by governments whose incentive is to lend as much as possible while not worrying about being correct/generating a return, since they’re protected from the downside.
This is important to know because It’s the basis as to why the U.S. consistently has large bubbles in different asset classes every few years. This is also why the purchasing power of the dollar has been in a steady downtrend since the creation of the Federal Reserve in 1913. You can probably recall the good ol’ days where you could fill up your gas tank for less than $10 or do all of your grocery shopping for less than $30. When we were taken off the gold standard, it meant the end of stabilization for not just the dollar but all currencies. The Bretton Woods conference in 1944 established that the dollar was to become the world reserve currency, meaning that all currency's value would be pegged to the dollar and that the dollar would be pegged to gold. Once we were taken off the gold standard, all currencies began to fluctuate which created the now multi trillion-dollar foreign exchange market. More importantly, since currencies aren’t backed by anything, this means that their value is solely based on the laws of supply and demand (increasing supply + less demand = less value). With this in mind, It’s easy to see why printing so much money amidst record high unemployment levels can spark hyper-inflation. Let us now elaborate more on inflation and hyper-inflation.
The Federal Reserve's job is to try to keep the rate of inflation or deflation at a balanced level by moderating the amount of money in the economic system. In periods of inflation, they try to decrease the total money by raising interest rates. Inflation happens when there are too many dollars circulating in the economy. When the supply of dollars exceeds the supply of goods to buy, each dollar is worth less, so the prices of those goods increase. Inflation affects your standard of living by reducing your purchasing power. Retirees are often greatly affected by inflation because most of them live on a fixed income. While their pension income remains flat, prices rise. Consequently, their discretionary income is reduced as day-to-day expenses consume the majority of their income.
When faced with inflation, you can either decrease your spending or borrow the funds needed to maintain your standard of living. If you choose the latter, debt payments eventually erode your earnings similar to inflation. You can combat a small decrease in your spending power by eliminating discretionary spending like going out to the bar or video streaming subscriptions. A more substantial loss of spending power could force you to move into a smaller home or to rely on public transportation rather than a personal vehicle. Wage earners experience similar problems if wages stay flat or if inflation outpaces wage increases. You avoid the ravages of inflation if your income level rises at a pace that exceeds the rate of inflation. The next step after inflation is hyperinflation, which occurs when prices spiral out of control. In such an economy, one could easily drain their entire budget buying basic necessities such as food and water. Let us now cover how dollar denominated assets (mainly what’s in 401(k)’s) will take a huge hit.
The value of the dollar fluctuates over time as the U.S. economy strengthens or weakens in relation to the economies of other nations. Occasionally, national currencies become virtually worthless when economic problems rapidly degenerate. High unemployment can lead to reduced income for businesses and decreasing revenues for the government. In turn, governments, consumers and businesses fall behind on debt payments which would cause the Federal Reserve to print more money and lower interest rates, driving inflation even higher. Eventually, rising prices can evolve into hyperinflation during which the value of the national currency plummets on a daily or even hourly basis. This occurred in Germany during the 1920s when the currency became basically worthless.
In theory, the dollar could become worthless if a severe recession spiraled out of control. Needless to say, such an event would have a dreadful impact on a 401(k) containing American stocks, bonds, and other dollar denominated assets. If the consumer cuts back spending because basic expenses are too high, a recession usually follows and this means lower earnings for public companies and lower prices for their stocks. The share price of U.S. based publicly traded companies are obviously denominated in dollars with the share price reflecting the value of the company as a whole. If the dollar collapsed, the actual share price may increase as a result of hyperinflation but the real value of your shares when compared with other currencies would decrease. In the longer term, the economic collapse would likely cause many firms to file bankruptcy in which case your 401(k) shares would essentially become worthless.
What about bonds in your portfolio you ask? Under this scenario it would mean that the base interest rate would be lower than it was before inflation. While it makes logical sense that your bond would be worth more and that you could sell it for a profit, that may not be the case. You’d be trying to sell them for dollars (just like everyone else) which would increase the supply of dollars which would devalue the currency even further. Even if you hold on to them, the rate of inflation is subtracted from your returns, because while you are getting the same amount of dollars in interest, they cannot purchase as much.
Now, you’re probably thinking to yourself, “maybe I should just withdraw my entire 401(k) and allocate it how I see fit!”. I would say not so fast, as your 401(k) grows on a tax deferred basis. You pay income tax on your withdrawals and a 10% penalty on withdrawals made prior to reaching the age of 59 1/2. If the dollar collapsed, the federal government might attempt to rectify the issue by raising taxes to settle debts. This would mean you would lose more of your money to taxes when you eventually made withdrawals. So, what’s the best option? Let’s first cover the assets that could protect you in a dollar doomsday scenario, then go over how to use your 401(k) as a vehicle to appropriately position yourself.
Real estate has historically been a good investment in times of high inflation, particularly if you have a fixed-rate mortgage. The reason for this is because you are paying back the mortgage with money that is reduced in value due to inflation. Purchasing a home protects you from potential increases in rent, which often accompany inflation connected to a declining dollar. You can also benefit from the mortgage interest expense deduction. If you purchase a home while locking into a historically low interest rate, your future payment amounts are fixed. This is beneficial, because if the value of the dollar declines, you will be paying down your mortgage with dollars that are worth less, translating to a discount.
Investing in gold can also provide an effective hedge against a falling dollar. Transactions for gold take place in terms of dollars, so if the dollar drops in value, the value of gold rises. I’m sure you’ve heard that it’s always beneficial to have 10% of your portfolio in gold. You can rebalance your portfolio quarterly or yearly. Rebalancing is beneficial because it’ll allow you to buy gold cheap if your holdings fall below 10% of your portfolio or to sell it for a profit if it’s over 10% of your portfolio. You could even go as far as dividing the 10% of gold to 5% in actual gold bullion and 5% in the top gold mining companies. Gold has always been viewed as a safe haven for funds during times of crisis.
One could also invest in foreign stocks and bonds. However, this can be tough for newer and even seasoned investors because foreign investments require more research. Many investors use international mutual funds as a hedge against a downturn in the U.S. economy. An international mutual fund is a pool of securities that were issued in nations other than the United States. Income funds contain foreign government bonds and corporate debt, while growth funds contain stocks in foreign companies. You can buy funds based on geographic regions as well as on different types of securities. For example, some funds contain energy stocks from all over the globe while others contain bonds only from certain geographic regions. These funds can be risky given the current strength of the dollar accompanied with the fact that nobody knows the day it will collapse. The best thing to do would be to speak with your financial advisor and structure your portfolio in a way that no matter what happens in the global economy, you’ll own assets that will appreciate in value.
The last and in my opinion the best asset class that you can invest in to hedge against the falling dollar would be cryptocurrencies, mainly Bitcoin, and for many reasons. First, at the time of this writing, the crypto market cap is hovering at around $1.5 trillion. That may sound like a lot but It’s actually really small compared to all other major asset classes such as stocks, bonds, gold, and real estate, etc.. that are sitting at multi-trillion dollar levels. This means that the amount of capital inflows needed in order for the market cap to double is very small given that there’s only $100 trillion in the world. Also, what's happening right now is that large corporations are buying Bitcoin with the cash on their balance sheet to hedge against inflation. They’d rather own Bitcoin vs. the dollar because of the loss of purchasing power of the dollar due to the rapid money printing taking place on behalf of the Federal Reserve. I’m sure you’ve heard the news regarding Tesla buying $1.5 billion worth of Bitcoin. This is significant because Tesla was the first Fortune 500 company to buy Bitcoin, which will pave the way for other large corporations to follow suit.
It isn’t often where you get to be born in a time where a brand-new asset class is born and then becomes mainstream. Right now the opportunity inside the crypto space is very asymmetrical, meaning you can invest a small amount and reap very large gains. Institutional investors can only pile into a new asset class for the first time once, and that’s exactly what's happening now. Those who invest into this space now will get to ride the wave of the crypto market cap from $1.5 trillion to multi trillions of dollars. Crypto currencies as an asset class have already generated the highest investment returns (in terms of percentage gains) of any asset in history, and Bitcoin was already the best performing asset of the last decade. And while dollars are becoming more abundant which lowers its purchasing power, Bitcoin is becoming more scarce, with its purchasing power increasing significantly as time goes on.
On top of all of this, owning Bitcoin puts you in a more dynamic financial position as It’s the best form of collateral the world has ever seen. I always recommend having a large portion of Bitcoin that you’ll never sell no matter what. Instead of selling it, It’s much more beneficial to borrow against it. Let’s walk through a scenario. Say you want to purchase a home to serve as an investment property and all of your net worth is in Bitcoin. You could sell your Bitcoin to pay for the house, but selling Bitcoin triggers a taxable event which means you’d have to pay short or long-term capital gains taxes depending on your income and when you sold. So this means you’d pay on average 15% in taxes on your profits and you’d also miss out on Bitcoin’s price appreciation if it goes up after you sell.
Now, let's use this same scenario where you’re looking to purchase a home but you didn't sell your Bitcoin but instead borrowed against it. Interest rates are up and down, and not everyone can take out a loan from the bank because of a number of things such as having a low credit score or having a criminal record. But if you own Bitcoin, none of those other barriers matter. Now, let's say the house you want to purchase is $100,000 and you own $200,000 worth of Bitcoin. You could go to a company like BlockFi and take out a loan using your Bitcoin as collateral using a safe 150% LTV (for every $100 you want to borrow you pay $150 in collateral so that you have a margin that your collateral can drop down to before you receive a margin call or get liquidated).
Under this scenario, you would pay $150,000 as your collateral and then you would receive a $100,000 loan. You’d still technically own your Bitcoin which means if it increases in value, you’ll realize that value once you pay back your loan and get your Bitcoin collateral back. Now, you use that loan to purchase your investment property and then once you find a renter, you could use that monthly cash flow to cover your monthly loan payments (and possibly still have profits leftover). More importantly, instead of selling your Bitcoin, triggering on average, a 15% capital gains tax and missing out on possible future price appreciation, you borrowed against your Bitcoin with a 9.75% interest rate ($828.75 p/mo) bought your investment property, used the monthly cash flow to pay off your loan so that you can get your Bitcoin collateral back, so that you can repeat the process. Now that you’re aware of these different investment methods and how they can serve as a hedge to a dollar doomsday, let’s briefly go over why you should consider converting your 401(k) to take advantage of these circumstances and how to do it.
The chances are high that if you have a 401(k), It's most likely invested into American stocks, bonds and other assets that will be the most negatively affected if the dollar becomes worthless. In addition to that, a lot of 401(k) funds are allocated towards mutual funds, which invests your funds without getting paid in correlation to how your portfolio is performing but instead off of assets under management. This means they get paid their fees despite how your portfolio is performing when more than 95% of mutual funds underperform the S&P Index. You’d be better off buying the index because not only are your chances of appreciation higher compared to mutual funds, but the fees are much lower. If you feel like you don’t have the time or investment savviness to personally invest into the assets discussed above, I think you should explore allocating your funds to an investment vehicle that will allow you to have the appropriate exposure from trusted experts.
To do this you would have to convert your 401(k) to a self directed IRA. From there, you will have more freedom to allocate your funds into an investment vehicle that fits your needs. There are companies that specialize in converting your 401(k) into a self directed IRA to give you more of a say on where their funds are going. For example, Midland Trust can help you do this plus help you allocate your funds through your self directed IRA into a trading account, precious metals, stocks, bonds, real estate, private equity, hedge funds, and more. There are close to nine trillion dollars in IRAs, representing more than 30% of all retirement assets in the U.S.. For many investors, their retirement account is their largest liquid asset. IRAs also offer investors tax-sheltered returns and could mean better returns over the long term.
In closing, we are relatively close to watching the fall of the modern day Roman empire in the United States. We can’t just keep printing more money in hopes of solving all of our problems and paying off our debt. When the dollar finally becomes worthless, there will be a Central Banking Digital Currency (CBDC), or some sort of digital tokenized dollar issued to the public that will most likely be less than your USD balance at the time. There are a few things to think about when it comes to this initiative. This CBDC will reside on a blockchain which will give the Federal Reserve a better eye and more control over all of our transactions. In their effort to control the velocity of money in our economy, they will have the ability to send funds directly to our account and withdraw funds if they don’t think we’re “spending enough.” They will be able to pull any taxes or debt right out of your account if you haven’t paid, while also being able to decide what we can and can’t spend our funds on.
You might be thinking to yourself “I just won’t use the CBDC” and while that sounds logical, you’ll see that most people will use it for a few fundamental reasons. Once the CBDC is released to the public, the government will most likely consider it a legal tender and more importantly demand that taxes be paid with the digital dollar. It’s helpful to note the plethora of items – seashells, iron ingots, even slaves – that have been considered money, all because of a sovereign’s tax demands. As the famous economist John Maynard Keynes put it, “money is anything which the state undertakes to accept at its pay offices, whether or not it is declared legal-tender between citizens.” We all know that if our taxes aren’t paid, we would eventually be taken away from our family and sentenced to prison, which is understandably most people's biggest fear. So once this happens, the CBDC will quickly gain “currency”– not just for tax payments, but payments all over the United States. Why? Because, faced with arrest and jail time, everyone will go to great trouble, happily or unhappily, to get their hands on enough digital dollars to meet their tax obligations through work, borrowing, currency exchange, or whatever it takes. It would be inconvenient to work entirely in a different money in one’s business, only to convert that money into digital dollars around tax time.
Under this sort of scenario, there will be rebels who develop an underground market where you can buy everyday necessities such as food, water, clothes, etc.. These underground operators obviously won’t accept the digital dollar as a form of payment and will probably accept some form of crypto currency – whether it be Bitcoin or another crypto that can be converted/bought with Bitcoin – as a means of payment. So no matter what happens in the economy, it would be a good idea to have a portion of your portfolio in crypto assets for investment reasons and for everyday use case reasons. One could even argue that it’s a huge risk to not own any crypto. So now that you’ve had a glimpse of what the future can hold, how will you appropriately position yourself and your family? As usual I’ll end this article with one of my favorite quotes as it pertains to this article “one can have only as much preparation as he has foresight”.