There’s an old expression in the gambling world: If you can’t spot the sucker at the table… it’s probably you. 

The great American financial casino used to be an inviting place, with options for all kinds of people.

Investors with a fairly long time horizon and an appetite for risk, could sit down at the blackjack tables (i.e. the stock market) and let it ride. Sure, the dealer (brokerage firms) took a cut, but the deck was stacked in the player’s favor and the rules of the game were favorable. The players knew that if they could withstand some hot and cold streaks, over time they could expect to win about 10% a year on their investment. Of, course, if you did win money, the government would take a cut of your gains through taxes, but that’s hardly a concern when you’re making reliable profits just by playing your cards right.

People who wanted to play it safer in the great casino could play the slots (i.e. bond market) which produced a more steady and predictable stream of income. These were some friendly slot machines that posted their payouts on top of the machine. Signs like 8% or 4% informed investors of the yearly percentage gains from each machine.

Those who didn’t want to take part in the gambling activities could relax at the pool, enjoy the shows, and pay a reasonable price for dinner at the buffet. They could simply save their money in an interest bearing account that grew faster than inflation, and steadily build up enough money to buy a house, pay for their children’s education and set something aside for retirement. While they didn’t win money, they benefitted from the booming casino as the facilities got nicer, the shows got better, and the atmosphere became more exciting.

* * * * *

Today, the great American casino is a different place. A place where the stakes are higher, the odds are worse, and the house and the well-connected always win. The big flashing neon sign on the door now reads, “Suckers Welcome! Come on in!”

It turns out, the guys who run the casino (the federal government and big banks) spent a bunch of money they didn’t have, made a bunch of promises they couldn’t keep, and made a bunch of leveraged bad bets they can never cover. To keep the party going, they have been printing up a bunch of new chips at a faster and faster rate, and passing them out to their friends to spend in the casino. As a result of all this new money sloshing around, the hard earned money that the American suckers (err people) bring in buys a whole lot less.

You may have noticed that everything at the casino seems to be getting more expensive. The $5 all-you-can-eat buffet has been replaced with $15 cheeseburgers and $50 steaks. The boat drinks at the pool are twice as much as they used to be. A reasonably priced ticket to see Elvis has been replaced with a hundred dollar handshake with the bouncer at a club for the privilege of paying $500 for a bottle of vodka while listening to a DJ mix eight second sound bites of 80‘s rock songs over a techno beat. (But I digress.)

The guy who just wants to earn a living, spend his paycheck, and save a little for retirement, we’ll call him Joe, is getting squeezed at every turn. The more he tries to save for later, the less his money buys. Sucker!

To offset this loss of his purchasing power, he may be tempted to put his savings into the “safe” Treasury Bond slot machines. Unfortunately, if he pays for the privilege of sitting at the slot for five years, he’s only earning 1% a year on his deposit, while the (reported) inflation rate in the casino is over 3.5% a year and rising. He’s tying up his money for five years to lose purchasing power at a slightly slower rate than the guy who’s not even playing. Sucker!

But that’s not even the worst problem with the Treasury slots. Each year the casino adds tons of new slots to help pay its bills. In the past, these seats were scooped up quickly as senior citizens from Long Island bussed in with their 401k’s and foreign central bankers flew in to park their excess reserves in these machines. But as inflation rises well above interest rates, and ratings agencies like S&P no longer deem these slots to be 100% safe, those investors who piled into the slot pits may decide to relinquish their seat early, even though they may need to take a big haircut on their deposit to do so. In other words, not only are they getting a paltry return, they may lose part of their principal as bonds, err slots, become less desirable. Double sucker!

(For more on the danger of Treasury Bonds, check out my article, “Don’t Get Caught in the Treasury Bond Trap”.)

So with cash and slot machines losing purchasing power every year, average Joe and Granny from Long Island are pressured into taking their chances at the tables just to keep up with inflation. Unfortunately, the bad economy has stacked the deck against the player and the rules at the blackjack table have become less favorable. At today’s casino, you’re lucky if you break even much less keep up with inflation, as the stock market valuation has been flat for the past ten years. Joe and Granny may even be talked into playing games they’ve never heard of, like “Pai Gow Derivative Poker” and “Credit Default Swap Roulette” to stay ahead. A cold streak in this volatile deck can wipe out Granny’s 401k just as she needs it for retirement. Unfortunately, Joe and Granny have been turned into suckers, forced into risking their retirement savings by a government addicted to printing money!

So what’s a person to do if they don’t want to be a sucker? Get out of the great American dollar casino. (Or at least don’t place all of your bets there.) That means trading your dollars and paper assets for real, tangible things.

If you’re a gambling man, you can go to friendlier casinos around the world with better rules, favorable decks, and stronger currencies. Investors who don’t limit themselves to the U.S. can find a variety of excellent stocks and bonds in growing economies with currencies that are appreciating against the dollar. Unfortunately, even these casinos are not immune from currency risk, as more countries seem to be intent on devaluing their currencies to keep up with the dollar.

Perhaps the safest and easiest way to avoid being one of the suckers stuck holding a pile of worthless U.S. dollars and paper assets is to get out of the casinos entirely, and park some of your money in physical gold and silver until the money printing stops and the game becomes fair again. I won’t rehash all of the reasons to buy precious metals here, except to say that if you think governments will continue to print money to try to dig themselves out of debt, you might want to look into gold and silver. (Here is a good place to start.)

Of course, if the price of gold rises as the value of the dollar falls, the government will still take its cut. As they say, the house always wins.