Skin in the Game: How to Protect Savings When America Goes Broke
What To Do *Before* A Big Debt Crisis
Ray Dalio recently released a book “How Countries Go Broke”. I’ve not read the book, but I get the gist. Whether or not you believe the US is entering a doom loop, what assets you want to hold if it is is an interesting question. In a recent interview, Dalio talks about buying inflation protected bonds or gold as a hedge for this scenario. He also covers the dynamics of a big debt crisis.
Right now, the United States is spending about 40% more money than it collects each year. Most economists agree this is not a stable state, it can work temporarily during wars and pandemics, but year in and year out, it will eventually result in interest payments that are too big.
The One Big Beautiful Bill that just passed appears to ensure we’ll continue spending more than we take in by a large amount for several more years. For the purposes of this exercise, let’s assume that is true.
So we’ve taken a leap of faith, and we believe there is a chance the US will have to solve a big debt crisis. For organizational purposes, let’s start with what actions the government could take.
Allow hotter inflation. This action means your savings account pays nothing, while everything you pay for keeps costing more.
Cut benefits. This means social security, medicare, medicaid or veteran benefits are cut. It could be broad based, or it could be something minimal like raising the minimum age for applying for social security.
Raise taxes. This could be more income taxes. More tariffs. A new consumption tax. New/more capital gains taxes. Or even pushing services down to states so that state taxes go up instead of Federal taxes.
Default/Restructuring. This could be along the lines of new taxes on foreign debt holders, or even refusing to pay “rogue states” treasuries they hold. These actions can work once, but are nuclear options.
Asset Seizures. This is when the government expropriates assets from citizens. Can be disguised as a tax or a “national security” action.
The ideal scenario is a tolerable amount of hotter inflation, benefit cuts and raising taxes. But doing these things is not always politically acceptable. It should be obvious that all the baby boomers are going to vote against any cuts to social security and medicare. It is also obvious that tax cuts are popular, even when most of the benefits go to the rich. And you could argue hotter inflation got the last President voted out.
As things stand, we are refusing to take any of the three actions needed to lower the budget deficit. It is unclear to me which of these actions will be taken, but I think it is likely some or all of them will have to be taken in the next decade.
So what is one to do?
Hold Dollars?
Holding dollars is never a great idea for protecting wealth. Dollars are great at settling transactions. If you need to buy something this year, holding dollars is exactly what you should do. Barry Ritholtz explains this better than I can.
Buy CDs or Short Term Treasuries?
Again, no. This isn’t a good long term strategy. If you have something you need to buy in 18 months, sure, CDs are great! But if hotter inflation is a potential solution to our problems, you don’t want to be stuck in a five year CD.
Buy Long Term Treasuries?
This is one of the worst options I can think of. And I say this as someone who owns no long term treasuries. Buying a 30 year bond at 4.5% from a country spending 40% more than it takes in, with a social security program that will be bankrupt by 2033? No, I don’t think that’s a good idea.
Buy Treasury Inflation Protected Securities (TIPS)?
This is something Ray Dalio recommends for protecting wealth. He might be right. He might not. It will depend on if the inflation measurements end up being accurate.
Gold?
There is a long history of gold being used as money. This history means that it may still retain value as money in the future.
Cryptocurrency?
Could be a good thing. Lots of people like BTC.
Baseball cards? Beanie Babies? Supercars? Artwork? Comic books? Watches? Sneakers? Stamps?
See cryptocurrency. BTC is the same thing as all of these. If you have special knowledge and conviction in one of these dimensions, you might be able to store wealth in these assets. I personally think a 458 Speciale will continue as a store of wealth.
Real Estate?
Real estate might be a good place to store wealth, but watch out for property taxes or other government interventions. New Jersey just passed a huge wealth transfer tax (so dumb it isn’t graduated).
Stocks?
Hard to say how stocks will do. They did terribly through the 1970s when we had stagflation.
Foreign Stocks?
Might be nice to have a hedge. Debt may be a drag on American performance going forward.
Pay Taxes Today?
This is a sneaky one. No one wants to pay taxes today. However, if you believe tax rates could be going up for you in the future, paying taxes today could make sense. This looks like maybe not maxing out your 401(k). Maybe pulling more from your IRA than you need. But as odd as it sounds, paying taxes today at today’s rates might end up looking smart in 2032.
Move overseas?
That trick doesn’t work for Americans, we have to pay US taxes wherever we live. However, owning real estate and living somewhere else might work out well for you, especially if things get heated over how to fix the budget.
How Can We Improve Our Guess?
That’s right, all we can do is guess. My previous comments on different categories and strategies are common wisdom you can find hundreds of blog posts on. Where I think I have an insight is combining the question “how to protect my wealth in a debt crisis?” with the concept of skin in the game.
Why is skin in the game a good lens for viewing hedges for the upcoming debt issues? Because if everyone has skin in the game, the actions the government takes are likely to be more tolerable. Either the asset will be left alone, or the pain shared is likely to be spread more evenly because we all have some skin in the game.
While it is likely certain that we’ll craft laws to hit the wealthy the most, I think if the wealthy invest in assets the middle class also own, the chance of ruin will be less. In my research, skin in the game has a strong track record of predicting when an asset will be protected during internal struggles. For instance, if only 1% of the population is a homeowner, and the rest of the population is a renter, then when a debt crisis or internal struggle happens, it is tolerable to the population as a whole to seize all homes and re-distribute them. This has happened many times. What is unusual, is a population inflicting ruin on the majority. Once 60% of the population owns their own home, suddenly seizing homes in a revolution or debt crisis is not a good solution.
The goal of these thoughts isn’t to somehow beat the payment that is going to be due if Ray Dalio is right. The goal is to avoid the ruin problem. So let’s run through each of the above categories, that aren’t sure losers like cash, and let’s look at this through the lens of skin in the game and chance of ruin. Note that I’m not striving to be factually correct here. Digging into the facts is something for you to do! I’m trying to lay out a framework for how to think.
TIPS
Finding stats on who owns TIPS and how much isn’t easy. I’ve seen assertions that 10% of the treasury market is TIPS and then when I look here, TIPS seems to be a small percentage of the recent treasury issuance. But maybe that doesn’t matter because CPI is used for more than TIPS. It is used for Social Security, SSI, SNAP and more. So there will be mass appeal to limit the manipulation of CPI. At the same time, cutting benefits almost certainly has to be done. I find this a hard one to judge.
Gold
Multiple sources point to about 11% of Americans owning gold. So I wouldn’t be shocked to see America enact hostile policies towards the shiny metal.
Cryptocurrency
Crypto ownership has been around 30% for the past few years. That’s three times the amount of gold! As such, I would think it is relatively more safe from the government than gold, as crazy as that sounds.
Baseball cards, Beanie Babies, Supercars, Artwork, Comic books, Watches, Sneakers, Stamps
Do your own homework. There is probably some protection in anonymity as well. If only five people trade in that good, how likely is it to be targeted? Whereas something highly visible like supercars might result in specific targeting.
Real Estate
This is a fun one to think about. Are we talking about a primary home? A farm? A datacenter? A storage facility? A second house? For this, apply the framework to the specific asset. As 60% of Americans own homes, it’s unlikely that the government will seize middle class homes. It’s unlikely we’ll seize primary homes. But we might see high taxes on mansions and second homes.
Retirement Accounts
More than 50% of Americans have a retirement account (401(k), 403(b), IRA). That makes a small amount in these accounts safe, as most have some skin in the game. As your amount in the account grows, I imagine your risk does too. I suspect we’ll see large accounts curtailed when we need more revenue. Perhaps you have to withdraw all money over $5M and pay income taxes on it. Perhaps you have to withdraw Roth IRA money over $1M immediately and reset the cost basis. But as everyone has skin in the game, I wouldn’t expect the treatment of even large accounts to be seized. People with skin in the game can imagine what a seizure would look like to them personally.
Stocks
Stocks are ownership of businesses. So there are a multitude of facets to consider. The first is that if taxes are raised, they may be raised on companies, hurting their value. The second that is in a situation with hotter inflation being allowed, company profits are likely to be hurt, again lowering their value. But the good news is that more than 50% of Americans own stocks, and therefore have some skin in the game. This asset class is unlikely to be seized in total by the government. But at the same time, individual companies are likely to have very different outcomes based on government policies and hotter inflation. For instance, Berkshire Hathaway has $600B in cash and equities right now. Maybe a cash strapped US government passes a law targeted at Berkshire. Maybe the US government takes a defense contractor private. Who knows. My point being that individual companies could still be exposed to ruin tail risk because of our growing debt. But if you buy a broad selection of companies, you are more likely to be OK.
Foreign Stocks
This idea has a lot of appeal. Why not invest in companies based in countries with more responsible governments? It is a nice idea and may work out really well. At the same time, if Americans don’t own a lot of foreign stocks, it could get dangerous. It isn’t hard to imagine a new “foreign stocks capital gains tax” that people rally behind, because it won’t affect them. You can hear the rhetoric now, “let’s encourage more investment in America!”.
I don’t think there is an easy way to avoid the pain that is coming. Any strategy that could work perfectly will incur a chance of losing it all. Maybe beanie babies are a great store of wealth, and maybe we enact the beanie baby tax of 99%. The best thing to do first and foremost is to lower your expectations of future returns. This debt has most likely pulled forward prosperity. You’ve gotten your returns today, with higher taxes, higher inflation and fewer benefits in the future.
Conclusion
What is a reasonable plan? I think a reasonable plan is to first make sure you own what Americans own. Own a home, have a retirement account funded holding a broad market ETF like the S&P 500. If you are retired, maybe pulling some money out of a pre-tax account and paying low tax rates today makes sense. Still have money left after that? First, congrats. Second, consider diversifying by leaning towards those things the crowd is most likely to own. As odd as it sounds, more people own crypto than gold, so perhaps crypto makes more sense to own if you want to go that route. For me, I like consumer staples like insurance and candy bars. Things I know my grandchildren will be buying. But I’m also aware that if all my money is in Hershey’s or Berkshire, I’ll have an elevated risk that a targeted law or tariff action might harm them. If 50% of Americans directly owned Berkshire, it’d be a much easier decision.
Counter Argument
There is a chance that the independent Federal Reserve does its job and limits inflation, using all the tools at its disposal. This case feels unlikely today, but what if it were to happen? I just don’t know. This one feels like a Pandora's box that still ends up with financial repression in the end. But I have to acknowledge there are some goldilocks scenarios if the Federal Reserve does keep inflation low.