$16 Trillion and Deeper In Debt: How to Profit from a Dying Dollar

BY Paul Solman  September 26, 2012 at 11:14 AM EDT


Photo by Chris Ratcliffe/Bloomberg/Getty Images

Paul Solman frequently answers questions from the NewsHour audience on business and economic news on his Making Sen$e page. Here is Wednesday’s query:

William McDonald: I don’t want to sound like I think the sky is falling but with $16 trillion in U.S. debt and going nowhere but up, I think it prudent to start thinking about a U.S. currency devaluation. How does one survive a dollar devaluation or even profit from it?

Making Sense

Paul Solman: Buy TIPS or I-bonds, which are indexed to inflation and will at least match it. That’s what I do. Buy gold, which is denominated in dollars and therefore figures to ascend as the dollar falls. Buy futures contracts on other commodities or call options because the commodities figure to maintain their real value, and thus will go up in price in terms of ever-devaluing dollars (all else equal). Buy a house — for the same reason. Buy futures contracts on other currencies, if you can find any that are less likely to experience inflation than the dollar. Do pretty much anything with your dollars, in other words, but tie them up long-term in investments denominated in dollars that aren’t protected against inflation.

I.e., DON’T buy long-term U.S. bonds. DON’T keep your money in the bank. DON’T stuff it under your mattress. Put it into something that will retain real value when the dollar no longer has any.

Mind you, that’s if you’re sure the dollar is going to tank. “Experts” have been predicting inflation for years. They have been predicting higher long-term interest rates for just the reason you cite: mounting debt. Who would tie up their money in dollars with inflation in the offing?

And so what’s happened to long-term interest rates in the past few years, as debt has ballooned? Look at the following picture of the interest rate the U.S. Treasury has to pay to borrow money that won’t be paid back until 2042; i.e., sell its 30-year Treasury bond to the lending public.


30 Years US Treasury Bond Yield.

Are you struck by the fact that the 30-year rate is now lower than at any time since Jimmy Carter took office — except when it crashed with the economy in ’08? Well, then, check out this chart: Bob Shiller’s look at 10-year rates since the late 19th century: CLICK ON “Excel file (xls)”. The red line is the interest rate. Note that it has never been lower than in recent months. And if you calculate 10-year interest rates back to the dawn of the Republic, according to NYU’s esteemed economic historian, Richard Sylla, you’ll discover that the rate has literally never been lower.


Online Data by Robert Schiller

So fear devaluation if you must, William. But beware of betting on it.

As usual, look for a second post early this afternoon. But please don’t blame us if events or technology make that impossible. Meanwhile, let it be known that this entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions