Warren Buffett recently released his

annual shareholder letter for 2006. I read his letters every year, and so should you, whether you’re a Berkshire investor or not. Hidden in this year’s letter was an ominous message about the outrageous fiscal excesses our country has perpetrated in recent decades.

Our government has been the biggest offender, racking up staggering amounts of debt, and pushing the responsibility for paying for it off onto future generations. It is a shameful state of affairs. And one can’t help but wonder if the fiscal irresponsibility of individuals isn’t caused at least in part by he misdeeds of our government. After all, if our leaders, who are supposed to be role-models, can maintain a negative net savings rate without worry, why can’t we?

The Omaha Sage paints a disturbing picture:

“The ‘investment income’ account of our country – positive in every previous year since 1915 – turned negative in 2006. Foreigners now earn more on their U.S. investments than we do on our investments abroad. In effect, we’ve used up our bank account and turned to our credit card. And, like everyone who gets in hock, the U.S. will now experience “reverse compounding” as we pay ever-increasing amounts of interest on interest… Our citizens will also be forced every year to ship a significant portion of their current production abroad merely to service the cost of our huge debtor position. It won’t be pleasant to work part of each day to pay for the over-consumption of your ancestors. I believe that at some point in the future U.S. workers and voters will find this annual ‘tribute’ so onerous that there will be a severe political backlash. How that will play out in markets is impossible to predict – but to expect a ’soft landing’ seems like wishful thinking.”

At some point the party must end, and the piper must be paid. And the mounting evidence suggests that day is coming soon. As Mr. Buffett notes, the exact repercussions are impossible to predict. But we can make an educated guess. First and foremost, it’s difficult to imagine a future that will not include massive inflation. Productivity growth can’t keep up with the deficit forever, and when we can no longer service our debts through production, the only solution is to devalue the currency.

The Internet is full of doom-and-gloomers and gold bugs writing about the demise of the dollar. I don’t go quite that far. Plenty of currencies have undergone massive inflation and survived. (Remember the peso the 80s?) But it would be wise to prepare for a big drop in the dollar’s value. How do you do this? Diversify out of the dollar. Warren Buffett has been doing it for years. You can do it, too, by investing in assets like the following:

  • Precious Metals
  • Real Estate
  • Overseas Stocks
  • Foreign Currencies
  • Commodities

Which of these is best? Stay tuned for future articles on that topic.