We can’t rely on US Treasuries?? If so, what can you do to preserve purchasing power?? I will ignore a variety of exotic strategies/derivatives and focus on things that can be executed by individuals and small institutions.
The first idea that comes to mind is gold, silver and commodities.? Commodities don’t lie, they just sit there.? But the prices don’t just sit there.? They go up and down with demand and supply.? I’m not an expert there, so I would say keep positions small, enough for diversification relative to volatility.
Idea two is foreign debt of unquestionable solvency.? Well, that takes much of the world off the table, leading to investment in the developed fringe currencies — Canada, Australia, New Zealand, Norway, Sweden, and the Swiss Franc.? Toss in the Yen, though it isn’t fringe.? Not a very large group, and their currencies have run like mad.? Could they fall?? Imagine a US default, where aggregate demand drops across the world because the Treasuries in the banks of other nations are only worth 70% of face value.? Deflation would drive commodities and fringe currencies lower.
Idea three is an echo of two — buy the debts of emerging markets with more orthodox economics than the US, Eurozone, and China.? Nice, but their currencies are high as well.? Same problem as two.
Idea four is buy high quality equities that pay dividends.? There’s a plus and a minus here.? Minus: Equities are highly sensitive to confidence / trends in aggregate demand.? Plus: equities, if conservatively financed have positive optionality, subject to the same problem you have: what is a good store of purchasing power?
Even buying needed resources ahead might not work because demand conditions might be lower going forward.
Idea five is buying high quality non-Treasury domestic debt.? Along with ideas 2, 3 and 4, this seems to be Pimco’s strategy.? But our payments system is interconnected.? Any non-payment, or serious threat of non-payment will disrupt the ability and willingness of others to pay.
Idea six is stay in US Treasury debt — where else can you go?? You’ll get paid back eventually, with interest, most likely…? Hey, TIPS could work in an inflationary scenario.
Idea seven is hold physical US cash.? That should retain value of a sort until the debt ceiling situation is settled.
My main point is that there is nowhere to hide with certainty.? There are places to diversify into, and maybe you should consider some of them as part of a broader asset management strategy.? But avoid changes motivated by panic.? They almost never work.
In a debt-driven world, with fiat currencies, everything is confusing because there is no obvious store of value offering some small (but not near-zero) yield.? A small positive inflation adjusted return is healthy for savers, and good for the economy.? Let the Fed adjust its policy, and then the hiding place would be simple — CDs.
I think your post understates the viability of physical U.S. cash.
Treasury securities are a liability of the U.S. Treasury, whereas cash is a liability of the Federal Reserve.
THe world collectively desires physical currency; imagine the dislocation a barter system would cause. “Two men enter, one man leaves”.
“then the hiding place would be simple ? CDs.”
Assuming we can’t depend on U.S. Treasuries, how is holding private bank debt backed by a similar U.S. Government guarantee any better?
On that point, what is the normal spread between bank CDs and equivalent-duration U.S. Treasury notes? If it’s positive, then it’s simply a liquidity premium, right? Shouldn’t be increased credit risk if the FDIC is working well, nor inflation risk if the CD is the same duration in the same currency.
So, we’re left with harvesting small liquidity premiums. Which is how I’ve always thought of CDs – slight positive yield spread in exchange for decreased liquidity.