The First Global Bubble

Previous bubbles of assets or financial instruments have tended to be restricted to specific countries. Starting with the famous tulip bubble in Holland and more recently with the real estate bubble in the USA these anomolies were localized. The Nasdaq bubble in the nineties affected predominantly investors in the US market. There were many more asset bubbles not as well known as these but I believe we are about to enter a new situation where demand for commodities will be a global phenomenon and eventually lead to a global bubble.

Essentially, no one will have any trust in paper money. The dollar which is the "reserve currency" will continue to suffer as the treasury can print them to pay off debts and obligations. Eventually, this has to lead to a lessening of value for the dollar. This will lead to a forced situation of returning to a gold standard. It will not be a choice of the government but people will demand payment for goods and services only if that payment is backed up by something tangible.

There is an ongoing devaluation of the dollar and the problem is if you look to another currency to park money they are all trying to devalue their currencies. This is done to maintain exports and domestic businesses. It boils down to which currency is the least bad. The only place to maintain value is in commodities and more individuals and countries will seek commodities to maintain asset value.

China and other buyers of US treasuries will not accept a declining dollar and will cease to purchase our bonds. This will require the interest rate on the treasuries to skyrocket in order to find buyers to accept US debt instruments. This will lead to further printing of money to pay these higher intersest rates causing further declines in dollar value and the viscious cycle continues. I suspect that China will only lend us money if it is backed by a gold standard. Meaning, that their return of principle and interest will be adjusted to reflect any loss due to dollar devaluation (which is essentially a gold standard).

Individuals and governments all over the world will want to park their money in commodities and the demand will be tremendous causing price increases. So the demand side of the equation will also lead to soaring prices. I would not be surprised if new currencies will be created that are backed by a gold standard.

These are fundamental economic trends leading to higher commodity prices but as is human nature they will become overvalued as prices exceed the fundamentals. The bubble will inflate worldwide. So in a nutshell US debt will decline in value on two fronts. The underlying dollar currency is declining in purchasing power and as intersest rates rise the bond's value will decline. So what am I doing? or beter yet what should I be doing?
1. Get out of any bond instruments.
2. Leverage as much as possible (maximize outstanding mortgages and DO NOT prepay). You will be able to pay the debt back with much cheaper dollars.
3. Convert any floating loans to fixed interest rates. Let the money you owe be fixed but let the money you lend (money markets) float.
4. Buy commodities, hard assets, real estate. Tangible stuff.
5. Buy stocks in miners. Better yet become a miner. Don't chase dividend producing stocks because the 2% or 3% from a stock will not look good next to much higher and safer money market rates.
6. Buy the inverse US treasury which rises as treasuries decline. See stock symbol TBT.

I have not done all these things and I am not an expert. Use your judgement.