A Deeper Look at the Debt Debacle-Gold, Us Dollar and GDP, Part II

In part two of Carol Schmidlin’s interview with Rodney Johnson, President of HS Dent Publishing, she asks him about the prospects of investing in gold, the devaluation of the U.S. dollar, and the growing federal debt. She also asks Johnson for his advice for federal employees and actions they should take in light of some of the proposed cuts on their salaries and benefits.

During the second part of my interview with Rodney Johnson, president of HS Dent Publishing, an independent economic research firm, we continued our discussion on gold, the devaluation of the US dollar, and the dismal GDP that is being overshadowed by the debt.


If you were fortunate enough to have the hindsight to invest in gold back in 2010, you would have experienced an annual average return of 45%! What are your feelings about gold at this point in time? The question that has been popping up from a lot of my clients is: “Should I be buying gold, or selling the gold in my portfolio? What is your opinion of gold as an investment and do you believe it’s a good hedge against our currency?


I think gold has been a good hedge against the currency, which is the devaluation of the dollar. If you believe the dollar is going to decline in value, in what it can purchase on the global marketplace, things like commodities, oil, wheat, grains and metals, then gold can be a great thing to hold. But that’s really a big conversation about yesterday, or the devaluation of the US dollar over the last couple years.

Our huge devaluation of the U.S. dollar started in 1971 and went through the 70’s. The US dollar got a little stronger in the late 80’s, then stronger again in the 90’s. The current run of devaluation of the U.S. dollar started in 2001 when the U.S held interest rates very low and the rest of the world raised interest rates. We’ve seen value bleed out during the 2000’s.

When we had our credit crisis in late 2008 and early 2009, gold went down dramatically, well over 20% and the U.S. dollar shot up in value. When we got into the spring of 2009 the crisis subdued a little bit as the Federal Reserve started printing money at a phenomenal rate and the Federal Government ramped up the deficit at a phenomenal rate, both of which devalued the dollar. So, devaluation started again in the spring of 2009 and continued until where we are today. So, we’ve already done the things that will take the dollar down and push up precious metals.

So, from here we’re starting down the next leg of the cycle, which we believe will be contraction. Reports last week on GDP are very clear that the U.S. is slowing down dramatically. That makes the dollar stronger which will in turn make precious metals like gold and silver lower in price. And, so we do see them as a great hedge against devaluation but we feel that devaluation has already occurred. We don’t know if gold is going to $1700, $1800 or $1200. Gold is one of those things that doesn’t pay you a dividend. You don’t earn anything off of it. Your value of gold is what you can sell it to the next guy for.

It’s called the Greater Fool Theory. The only thing you can do is sell it to someone else at a higher price. We think a lot of the value is already in. We would caution people to guard against loss.

If you’re looking to buy gold , I wouldn’t say run right out and purchase it. We think there’s more risk than opportunity. If you already own a lot of gold then you’re very concerned about the dollar. We suggest hedging your position. Maybe putting on a stop-loss of some sort. Just do something where you don’t suffer a dramatic drop over several days, or a week, up, down 20% and say geez, now what do I do? You don’t want to be stuck like a deer in the headlights feeling frozen as things go against you. You want to have a plan in place, see it execute, and then go about your way.


You mentioned Friday’s GDP report. Can you talk about it and do you think it was overshadowed by all the talk of the debt ceiling?


The conversation of the last two weeks has been all about the debt ceiling which really makes no sense because the debt ceiling itself was something Congress put into place. Now here they are talking about taking it off. This is a man-made, conjured up debacle that Congress has created for itself and continued to bash about.

GDP is an economic report about what’s going on around the nation. The Friday report showed two things. First, the second quarter GDP which was expected to come in at about 1.9% annualized growth came in at 1.3%, which was very low. The big deal was the first quarter GDP which had been reported at 1.9% for the year, instead came in at 0.4%. Remember that’s an annualized rate. That means the rate of growth in the first quarter was 0.1%, as in nothing.

We have seen our economy slow dramatically and this is while we were printing money. These reports were about the first and second quarters when the Federal Reserve was printing well over 70 billion a month.

So, if we were slowing down dramatically while the Fed was printing and all this activity was taking place to help the economy to recover and rejuvenate, then what in the world is going to happen now that we stopped printing money as of June 30th.

We believe it’s very unfortunate that people are giving very little attention to the important thing, which was GDP waving a big flag saying look, this thing is slowing down again! Instead we are focusing on this man made bit of chaos that Congress has brought on itself. The debt ceiling will get raised…We will issue more debt…We will pay our bills. We will not default. But, we are also not growing.

This may stay with us for many months and even the next few years. We want investors and advisors to be very clear that they need to focus on what’s important long term and that’s the lack of growth in the U.S. economy.


Which brings me to a good point regarding something we call the Yo-Yo Effect, which means: “You’re On Your Own”. Federal employees are especially feeling the pain. They are worried about furloughs, further pay freezes, higher cost to their healthcare, increased costs to their pensions, and decreasing the federal workforce, to name a few! Already 4000 FAA employees have been furloughed, and federal employees are on a pay freeze through 2012. If any of these proposed cuts come to fruition, it will mean less of a paycheck, at a time that we are experiencing higher cost to things like healthcare, gas, food, etc. Especially for those under the FERS retirement system, the threat of a lower paycheck will make it harder to save in their TSP accounts, which is an integral component of their retirement plan.

With all these cuts you will still need to find a way to maximize your savings. Whether trough TSP or Roth IRS’s. It’s difficult. I caution you not to go it alone. Get professional help because chances are likely that if you try to go it alone it’s not going to get done.

Rodney, do you have any other things to add that people should do right now?


The first thing I would say is to be very clear about what’s being asked of you. Particularly Federal employees which I know is a large portion of Carol’s practice. Understand that the government is coming your way. It has to be that way because the Federal Government is particularly inefficient at going after cuts that seem to be common sense. So instead they implement blanket cuts of X% across departments, which is much easier to do. We’ll cut a piece of the budget by making the employees pick up more costs without changing their compensation. Make them pay more toward medical benefits and pension contributions. They are not lowering your compensation on paper, but they are certainly lowering what you are bringing home.    Think about this well ahead of when it occurs and be aware this is one of the most likely scenarios. In the years ahead there will be a gradual tendency to shift down the overall compensation package of Federal Employees because that’s the easiest thing for government to do.


I am recommending that my clients contribute and convert as much as possible to Roth IRAs. In addition, if you are within 5 years of retirement, start looking at how you can maximize claiming strategies with Social Security. One example is that by choosing to delay receiving Social Security payment to age 70, your payment will be 32% more than if you took it at your full retirement age. In addition, Social Security’s average COLA has been 2.8%. If you factor cola into the equation, you are looking at a 64% increase in your Social Security payment. And in some cases, while you are waiting to collect your Social Security, you can take your spousal benefit!

About the Author

Carol Schmidlin, Certified Financial Fiduciary®, MRFC® is the President of Franklin Planning and has been advising clients on how to grow and preserve their wealth for 25 years. In addition to her financial planning practice, she is the founder of FedSavvy® Educational Solutions, which provides Financial and Retirement Literacy Programs for Federal Employees. She is passionate about helping families with all phases of Wealth Management and is a member of Ed Slott’s Master Elite IRA Advisor Group. Her practice maintains a home office in Sewell, NJ along with a satellite office in Washington, DC. Carol can be reached at (856) 401-1101.