Porter Stansberry: Gold and Real Estate Are My Hedges

 | Dec 13, 2012 07:27AM ET

With nary a glimmer of hope that economic sense will supplant political expedience, Stansberry & Associates Investment Research Founder Porter Stansberry expects rampant inflation to roar in once the cost of capital rises. How is he preparing himself? Stansberry tells The Gold Report he continues to buy and hold gold and also discusses how real estate can cushion against the fiscal cliff.

The Gold Report: Not a day goes by that we don't hear or read something about the fiscal cliff. To what extent are you worried about the fiscal cliff? Or do you foresee a resolution?

Porter Stansberry: You can be sure of a couple of things from Washington. One is spending will not slow down. The increase to spending in 2013, 2014, 2015 will be the same kind of increases we have seen in previous years. We will continue to spend 24% of GDP at the federal level.

TGR: And what else can we be sure about?

PS: Some actions will be taken to increase the tax rates on some taxpayers, but they will produce no material change in revenue. The government will continue to take in far less than 20% of GDP in taxes, probably only 16% or 17% of GDP. Further, those changes also will narrow the tax base, which is to say that fewer people will be asked to pay more in taxes.

Those two things—more spending and higher tax rates for some taxpayers—will happen because they're the only politically expedient things that can happen. That's been driving politics and the budget since 30, 40 years ago, and will continue to do so because voters demand more from the government and voters demand that they not pay. That will continue until the system completely collapses.

TGR: The fiscal cliff was set up a couple of years ago in theory to force Congress to do something. There's a lot of fear about it, but at what point will there be enough fear that voters say we can't proceed in this fashion anymore?

PS: People should fear not going over the cliff. If we go over the cliff, the tax base will greatly expand. The payroll tax cuts will be done away with and the broad middle class—the people who have benefited from the tax cuts—actually will have to pay taxes again in America. There's no other way to generate the amount of revenue that is required. You cannot finance the federal government on the backs of the top 5% of wage earners because even if you charge them 100%, it wouldn't come close to being enough money.

Right now the U.S. takes in something on the order of $1.5 trillion (T) a year in income taxes, but we have an annual deficit of $1.6T. Even doubling the amount of income tax collected would leave a deficit. Taxing the rich cannot solve this problem. It can be solved only by freezing spending and broadening the tax base. That will never happen because it's unacceptable politically.

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TGR: Eventually something will happen.

PS: Yes, it will. Our trading partners and the people who finance our debt finally will say, "We're not doing this anymore." But look at the Treasury bond market. It's not happening yet.

TGR: It's amazing that the U.S. hasn't been downgraded just on the basis of all the political bickering.

PS: That's partly because the Federal Reserve keeps buying up all the excess Treasuries. People have no idea how dangerous this is, but they will find out when inflation goes crazy. Another big reason is that there's not a really viable alternative. What would the Russian Central Bank or the Chinese Central Bank do with their trade surplus? Buy British paper money? Or European paper money? Where's the hard dollar alternative? There isn't one. No government-backed money is any more secure than the dollar. Even the Swiss have turned on the printing presses to equalize exchange rates with the Europeans. There's nowhere to go. That's why these central banks are buying all the gold they can get. And that's why gold prices are going to absolutely go higher.

TGR: China particularly has been buying a lot more natural resources such as copper or iron ore.

PS: I have been following the strategic buying of the Chinese and you're right, it has been buying up lots of resources, especially in Canada. That will continue for sure, but it is also buying lots and lots of gold. I think Russia and China have been neck and neck in gold purchases since the 2008 crisis, spending almost half of their current account surpluses on gold every year.

Some folks have been critical of my prediction that the U.S. will lose its world reserve currency status, but I think it has already happened. When two of the world's largest economies would rather buy gold than Treasury bonds, you've got a big problem.

TGR: When do you suppose the gold price will start climbing again?

PS: I don't have any timetable. I can just tell you that I haven't sold any of my gold and I won't until there is a gold-backed, well-financed national currency that offers me a reasonable yield for the risk I take to finance the government. There's nothing like that in the world and I don't see any prospects like that.

TGR: The last time we chatted, you here .

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