My advice: Buy gold and sell Treasury bonds

The U.S. debt crisis became even more urgent when Standard & Poor’s finally downgraded its outlook for U.S. debt.

Of the 17 countries that S&P has rated AAA, the U.S. is the only sovereign that carries a negative outlook.

This has potentially dire implications for the U.S. economy.

Fortunately, as an investor, there are steps you can take to safeguard yourself against the abhorrent fiscal and monetary policy that has resulted in this U.S. debt crisis.

I’ll get to that later – but first, let’s examine how we got to this point…

First, the obvious: Deficits are a lot harder to get rid of than they are to incur.

That’s particularly true in the U.S., where spending cuts and tax increases are very hard to enact and spending increases and tax cuts virtually enact themselves.

Remember, the $787 billion U.S. Recovery and Reinvestment Act was passed in a couple of weeks in 2009, whereas it took Congress three months and a near-shutdown of the government to agree on a mere $38 billion of 2011 spending cuts.

Of course, it wasn’t always like this.

Traditionally, governments thought they had little alternative but to balance the budget or risk an economic collapse.

The blame for eradicating that admirable attitude towards deficits and debt can be laid squarely at the feet of John Maynard Keynes. His spurious justifications for increasing government spending in depressions and reducing it in booms were used to create deficits, and never surpluses (except accidentally, as in 1998-2001).

When Britain faced a debt problem in 1945 it increased public spending rather than decreasing it. And it sorted out the debt by creating inflation. Thus it balanced the government’s books by robbing bondholders like my great-aunt Nan – who was reduced to penury before her death in 1974.

It is now very clear that the approach of President Obama and Ben Bernanke to public debt is similar to that of British leaders Clement Attlee and Hugh Dalton after 1945. They created a huge wave of unproductive spending when faced with recession in 2009. Most of which became locked into the “baseline” expenditure for future years – thus preventing the budget from ever approaching balance.

Their strategy for tackling the resulting debt is the same as that of Britain after 1945: Create inflation and watch it magically melt away, becoming a smaller and smaller percentage of a GDP that is inflating in nominal dollars.

There are two problems with this approach.

One is that there are no longer sweet old ladies like my great-aunt Nan who can be leveraged to absolve the U.S. debt crisis. Instead, much of the debt is held by Asian central banks and the ultra wealthy in the Middle East. They probably won’t like being swindled in this way. And will find some way of getting revenge.

The second problem is that the policies of ultra-low interest rates, huge public deficits and increasing inflation are very bad for the real economy. They encourage banks to engage either in speculation or to simply buy government bonds and finance them short-term. Neither activity directs money to small businesses, which create jobs.

Liberals inclined to doubt my analysis should reflect on one thing: What kind of society do we have when Donald Trump is leading the polls for the Republican Presidential nomination?

If the Fed had maintained normal interest rates following the recent real estate crash, that overleveraged real estate and casino speculator would be too busy fighting for his financial life to finance a run for high office.

My advice: Buy gold and sell Treasury bonds. It won’t entirely mitigate the economic unpleasantness ahead. But it will help you avoid the sad financial fate of my great-aunt Nan! I would recommend you have at least 15% to 20% of your portfolio in gold and silver, the traditional inflation hedges.

Editor’s note: Please don’t forget to watch Martin’s presentation. It could literally change the way you view overseas investing forever.