by David Galland: Why
Won’t You Die, Damn it!
I read an interesting story in Soundings magazine. It recounted
the final voyage of the S.S. Morro Castle, purportedly one
of the safest ships afloat back in 1934 when it regularly transported
revelers on junkets between New York and Havana. Then, on the night
of September 8, a series of unfortunate events occurred that ended
with the ship washing up on the New Jersey shore the next day, close
to half of its 300 or so passengers dead.
ship was hit by a storm. Then, while fighting the towering waves,
the veteran captain clutched his chest and fell dead from a heart
attack, moving a less experienced man into command.
Next, a ship’s
steward discovered a group of drunken passengers entertaining themselves
by flicking lit cigarettes into a trash can in one of the salons.
About an hour later in that same salon, a fire broke out.
With the ship
still battling through the heavy waves, the crew now had to turn
to putting out the fire – but were shocked to discover that
there was no water pressure, rendering the fire hoses useless.
decidedly worse, shortly afterwards the fire ignited an explosion
that blew out the salon window, sucking in the air necessary to
turn the blaze into an inferno.
the raging fire burned through critical ship’s wiring, causing
the electricity to short out. That, in turn, resulted in a failure
in the steering, leaving the ship helplessly afloat in the turbulent
With the blaze
rapidly spreading, the replacement captain gave the command to abandon
ship, but as there had been no lifeboat drills, the scene quickly
descended into chaos and death that ended several hours later with
the burned-out hulk washing ashore… turning the floating party
palace into the ruined remains seen in the photo here, in the proverbial
blink of an eye.
story resonated with me on a number of levels, but first and foremost
as a cautionary tale that even when everyone agrees that something
is “safe,” events can quickly prove otherwise.
in the current economic context, U.S. Treasuries are considered
the safest of harbors for storm-weary investors. But that assumption
contains within it the further expectation that the status quo will
prevail – that, proverbially speaking, no captains will drop
dead, or drunken passengers will set a fire by playing a truly mindless
parlor game. Further, should such unexpected events occur, a widespread
belief holds that the water pressure will be there when needed,
and that the power won’t cut out at the worst possible moment.
a lot of assumptions. And those just named are specific only to
a ship at sea – not the complex system of the U.S. economy,
which is, in turn, but a cog in a globally interconnected market.
In other words, a system that is unimaginably complex.
In the pre-history
days of emerging human consciousness, upright apes viewed the overt
expressions of the complex system that is nature – volcanic
explosions, lightning, seasons, drought, pestilence, etc. –
and tried to make sense out of it all by organizing around belief
systems that today would be considered laughable. At the time, however,
dancing around open fires bedecked in certain animal skins or allowing
shamans to sacrifice virgins were seen as effective methods for
controlling the natural chaos of things.
the nature of our belief systems has grown less barbaric, we modern
humans still persist in nonsensical notions and associated rituals
that are viewed in much the same light – rituals that do little
more than pretend to control the chaos intrinsic to life on this
small globe spinning through space.
among the modern belief systems is that shamans of government and
high finance can, by virtue of their Harvard degrees and clearly
advanced intellects, effectively manage large economies. The fallacy
in this notion should be evident to everyone – here in the
U.S., it’s as simple as noting how everyone from the Fed chairman
to almost all of the nation’s political leaders and the best
and brightest on Wall Street failed to anticipate the current crisis.
Any way you slice it, the lot of them were caught as flatfooted
as the crew and passengers on the last voyage of the Morro Castle.
big party… the next, diving over the side of a ship to an uncertain
future in mountainous, storm-tossed waves.
the power and water will stay on – for the shamans to have
missed the pending crisis is akin to the ship’s captain entirely
dismissing even the idea that a storm at sea were possible.
But a failure
of foresight isn’t the worst of it. The worst of it comes from
the idea that, when troubles do arise, the modern shamans can dissect
the entrails and proscribe a regulatory brew that magically solves
the troubles, and solves them for essentially all times.
Case in point,
currently the European Union is laying the bricks for a new round
of regulations that limit bankers’ compensation and require
some substantial percentage of any bonuses they receive to remain
in escrow for years, and be payable only if the bank does well.
The eurozone is not alone; similar legislation is in the works in
the U.S. as well.
This, we are
told, will somehow prevent any further excessive risk taking of
the sort that laid the world’s economy low. This, of course,
completely ignores the lead role the world’s governments played
in creating the debt bubble at the heart of the crisis – but
that’s not a topic the shamans will be addressing anytime soon.
Even so, I
would concur that in the cases where a bank receives government
funds – which it shouldn’t – the government, as shareholders,
could agitate with other stakeholders to vote down excessive, or
excessively risky, compensation schemes. But that’s an entirely
different thing than a heavy-handed new attempt at regulating out
all risk in the banking sector. Should such regulation pass, and
it likely will, all it will actually serve to do is create an exodus
of the more intelligent members of the sector to banks operating
in less restrictive regimes. Money goes where it is treated best,
and so do bankers.
this is just a speck of dust on a broader body of legislation and
regulation that will get much worse before it is finally revealed
for the virgin burning that it is.
Am I suggesting
that any and all regulation should be done away with? I have to
admit I find that idea tempting because it would immediately create
an environment in which people would have to rely on their own judgment
– or on that of those they trust – before making an important
it. What would happen if the government pulled its deposit guarantees
from the banking system? I can assure you people would pay a lot
more attention to the capital levels and loan policies of their
I can get my head around the idea that some minimal operational
standards may need to exist. Flipping back to the cruise ship metaphor,
I could see some requirement that the proverbial fire dousing systems
be kept up to code, and that the steering has a backup system. But
even if those standards didn’t exist, I have to believe that
cruise ships would soon learn to compete on safety measures as well
people could risk sailing on a less expensive and somewhat less
secure line… or not take a cruise at all. It’s not a perfect
world, and not everyone is going to enjoy the perfect life, no matter
how much the shamans promote the idea that they can deliver just
to the financial matters, it’s increasingly important to view
the steady passage of draconian legislation and regulation in much
the same light you’d view the sacrificing of virgins. In almost
all cases it accomplishes nothing and solves nothing. In fact, as
often as not, it is decidedly counterproductive – lulling people
into a false sense of security or causing them to make misguided
decisions about their businesses or finances. Not to mention forcing
businesses to spend money that could otherwise be invested more
profitably on nonsense such as carbon taxes.
I am but an inconsequential squeak in the night: The current belief
system will remain intact for many years into the future, probably
the rest of our lifetimes.
Thus, the best
thing you can do is to become as self-responsible as you can –
trusting no shaman and approaching every important decision with
a clear understanding that if things go wrong, no one – and
no entity – will be there to make it right. Increasingly, as
the sovereign states get noticeably bankrupt, that will be the case.
world in that context, it’s hard to consider the unbacked IOUs
of any government a safe investment, no matter how fancy or elaborate
are the shamanic runes decorating the paper.
investing legend Doug Casey, and economists Bud Conrad and Terry
Coxon make up the editorial team of The
Casey Report. Every month, they analyze big-picture trends
in the making and find the best investment opportunities to profit
from them. To learn how to make money even in the worst of times
is the managing editor of Casey