Q. Your recent column on measuring the true size of the deficit was scary. For folks like me— late 50’s with retirement on the way in four or five years— what do we do to preserve our capital? If and when the inflation day of reckoning comes, and it will, what happens to our savings? What specific investment can prosper in a debt-based, bankrupted environment where the government is just printing money? Should investment be in commodity based ETFs, precious metals etc.?  K. K., Austin, TX

A. There may be no way to preserve all of your capital. The future is most likely about relative loss, not positioning for gain. The best you can do is diversify broadly, reduce investment costs as much as possible, and have a portfolio that leans toward hard assets.  In "The Coming Generational Storm" (MIT Press, 2004), the first book on this issue that I coauthored with economist Laurence J. Kotlikoff, we suggested a portfolio that contained Treasury-inflation-protected-securities (TIPS), foreign bonds, REITs, energy stocks and both international and domestic stocks. In this portfolio the energy sector fund works as a substitute for commodities investment.

The performance of this low-cost portfolio, called "Six Ways from Sunday," is reported monthly on my website. This portfolio declined sharply in the 2008-09 crash, as did everything else, so there is no absolute protection. There is only relative performance. In a world where people are lined up to go broke, a well-diversified portfolio should put you well toward the end of the line. The folks who put all their money in CDs will likely be toward the front of the line. Being at the back of the line is about as good as it gets when trying to prepare for a broad disaster. Anything more focused puts you in in a “bet the ranch” position.

Q. Assuming that our “fiscal gap” is real, and I have no doubt that it is, wouldn’t investments in metals be a long-term hedge? If not, how do we protect against the looming disaster?  —F.F., Austin, TX

A. Many readers have been asking the same basic questions. What do we do? How can we protect ourselves? The reality is that while a financial crisis isn't a large asteroid heading straight for earth— an inescapable event truly bigger than all of us—the onrushing financial crisis of the United States will affect everyone on the planet. It's an event considerably larger than a shift in asset allocation from paper money to metals. It's a lot bigger than putting gold in your IRA as many advertisements now pitch.

This doesn't mean we should do nothing. As long as the Federal Reserve chooses to reward banks with no-cost deposits, punish savers with yields that are below the inflation rate, print large supplies of new paper money, and tell us they intend to continue doing this for as long as it takes, savers need to vote with their feet.

How do you vote with your feet? You put some money in gold and other resources not related to paper money.

The operative word here is "some." Gold is not a cure for disaster. It is insurance, similar in nature to keeping a supply of batteries, candles, water and canned foods on hand to cope with winter (or summer) power outages.
Without becoming a die-hard "Doomsday Prepper" here are some prudent steps:

  • Before you buy gold, make your home is a place you can stay for some period of time without going to a store.
  • See your doctor and ask for a prescription to get a supply of critical medications. Try to keep a 90-day supply on hand.
  • Sell your gas-guzzler while you can. They were un-saleable after the 1973 OPEC embargo and they will be worthless again.
  • Pay close attention to energy usage, have a plan to reduce it drastically.
  • Buy a solar charger or some other means to keep critical electronics functioning.
  • Create a small stockpile of rough-wear clothing.
  • When you do buy gold, buy it in small coins and consider buying some silver as well.
  • Note that all of this, with the exception of precious metals, is what we should do, as a matter of course, as safeguards for natural disasters like hurricanes and blizzards.

Is this extreme? I don't think so. The Boy Scout motto says it all: “Be Prepared."