Recently: Doug Casey on Insider Trading
L: Howdy Doug; had a good week? We can talk, but I should warn you that my Internet connection has been very flaky today.
Doug: Are you still in Bamako?
L: No, I'm back from Mali. It's my good old all-American high-speed Internet that keeps disappearing. Anyway, what's on your mind today?
Doug: Well, one thing is my upcoming trip to Tel Aviv, Cairo, Beirut, and Dubai from June 9-22. If we have any readers in those cities who'd like to get together, it would be great to hear from them. I'm sorry I couldn't join you in West Africa.
We both travel almost as much as officials from the IMF. In light of that, I guess we should follow up on the Dominique Strauss-Kahn (DSK) scandal. It's still vaguely on people's minds — not quite yet flushed down the memory hole and replaced with something else torn from the pages of the National Enquirer. Maybe the Greek central banker who's just been arrested for the same thing will serve…
L: You don't sound very enthusiastic.
Doug: Well, following the depredations of IMF bureaucrats, whether in the bedroom or the boardroom, is depressing. Only a sociopath could become head of the IMF anyway, so why should anyone be surprised by such a man's sociopathic behavior?
L: [Laughs] I should have known.
Doug: We could talk about the IMF, though, and its ugly stepsister, the World Bank. There's a pair of lofty institutions that need a little deflating. Abolition, actually, but let's start with lancing the boils. Do you know much about the IMF?
L: Not really. I've never paid much attention to it. It's just another of these transnational bureaucracies stuck in the quicksand of money thrown at problems money can't solve. On the fringes of my awareness, I've noticed that it positions itself as being a benevolent group of bright economists who can help benighted u201Cdevelopingu201D nations solve their economic problems. But it's not really sound economics they teach, it's First-World bureaucracy — rules and regulations — they spread to Third-World countries already tied up in red tape, enticing them with cash bribes.
Doug: [Chuckles] Well said. That's pretty much the way I see it. It was set up in the waning days of WWII, to impose order on currencies, trade policies, debt structures, and the general financial and economic affairs of poor and troubled countries. That's its official mission. In reality, it's a vehicle made necessary only by the fact that all of its members have fiat currencies.
L: Okay, we can debunk the IMF. It certainly deserves it. But is there really nothing instructive about the demise of DSK? He hasn't been found guilty of anything yet, but it looks like he's toast, regardless of the outcome of his trial.
Doug: I don't know about instructive, but I certainly found the arrest of DSK gratifying. I don't want to say that I experience schadenfreude every time I see a high government official ensnared in his own wrongdoings… Let's just say that my sense of justice triumphant gives me a good laugh at such times.
L: Is it justice we're seeing carried out?
Doug: You can rarely be sure about these things. If he did violate that poor woman, then it might be. But the IMF is such a powerful and corrupt organization, it's just as plausible to me that the whole thing is a setup, perhaps a coup d'tat within the IMF, hidden right out in the open. Perhaps some group wanted to get rid of him and set it all up for that purpose. One conspiracy theory being floated — apparently by the Russian Federal Security Service — is that DSK had evidence that most of the gold in Ft. Knox was gone and was about to spill the beans. If that were the case, I would think that an unfortunate fatal accident would have been a much better guarantee of silence.
Regardless of whether he violated that chambermaid or not, he impresses me as being the type of criminal personality who's capable of absolutely anything. But, that said, people should be presumed innocent until proven guilty — even people like DSK, or, for that matter, bin Laden. Whether or not he's guilty of this crime, he's absolutely responsible for an immense amount of damage to the world economy. So, good riddance.
L: I've long thought things might be better if the presumption of innocence were reversed for public officials. Anyone who presumes to rule, anyone who takes up the power of legalized theft and homicide — taxation and war — should be purer than the driven snow. They should be held to the highest possible ethical standards. And if there's ever any reason to believe they might be abusing their power, they should be stripped of it immediately until they can show they can be trusted.
Doug: But that would take most of the fun and profit out of being a high government official. Therefore it will never happen.
L: Of course. And a person of the highest ethical standards would never participate in the inherently coercive mechanisms of the nation-state as we know it today. Anyway, I guess it's a good thing this goon seems likely to be locked up for a long time.
Doug: I sympathize with the emotion, although his incarceration won't change anything. Congressmen, mayors, and all sorts of government officials are often prosecuted and jailed. But it's just window dressing, there just to give the state an appearance of propriety. The organization itself is corrupt and destructive, and inevitably draws corrupt and destructive people to itself. It has to be pulled out by its roots.
DSK himself is just another typical, arrogant, power-brokering scumbag. He'll be replaced by another scumbag who's just as bad or maybe even worse. They're like sharks’ teeth; they'll keep growing, and being replaced, until you kill the shark. So, again, we should talk about the IMF and the World Bank themselves, not whatever clowns happen to inhabit their penthouse offices at any given time.
L: Okay, lay the case out for us.
Doug: Have you noticed that while everyone's heard about these organizations, no one really seems to know what they do? Even you, generally a pretty well-informed person, don't have a precise idea of what they do on a day-to-day basis.
L: You've got me there. What do they do?
Doug: They are basically creatures of the United Nations. They're part of the UN and are the equivalent, in the financial and economics world, of the WHO (World Health Organization), the ILO (International Labor Organization), or the WTO (World Trade Organization), and about a dozen other UN agencies, each in its own bailiwick. But they're much more powerful, because they have large endowments. Member countries contribute money — from the U.S. having contributed the most on down to little nothing-nowhere countries that barely have two cents to rub together. The countries have voting rights in proportion to their contributions, so these organizations are pretty much extensions of U.S. foreign policy, and that of other developed countries. Of course, that's going to change as the Big Boys declare bankruptcy in the years to come.
The UN itself is nothing but a posh club for lucky and well-connected government bureaucrats who get to hang out, palaver, and play big shot all day on their expense accounts. If anything productive gets done, it's at 10, or 100, times the cost it would be in the free market.
The IMF's web site says it's u201Can organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.u201D In practice, that means the money pooled by the IMF is used to assist member countries to manage their economies and their currencies. It's a sort of cross between an investment bank and a consulting firm.
L: That doesn't sound too evil, on its face.
Doug: No, but it's an economic consulting firm run by a bunch of communists, socialists, and fascists. Only an idiot would ever welcome their advice. The advice they give seems to be useful at times, but only by accident, such as when they tell governments to cut deficit spending. Their economists are all very conventional political hacks, anxious to try out their nostrums on desperate little backwaters. In the u201850s, u201860s, and u201870s that amounted to having them set up huge bureaucracies to u201Cmanageu201D their economies.
Since the u201880s, the privatization of state enterprises has been fashionable — and that's a good thing. But the reason the IMF liked it had little to do with sound economic thinking, so much as the realization it would result in more tax revenue for the state. Plus, the enterprises were always given to well-connected friends, which made it easy for kleptocrats to steal not just millions, but billions.
They also spend a lot of time telling governments how to u201Cmanageu201D their intrinsically worthless paper currencies — raise interest rates, or cut interest rates, or implement other monetarist interventions…
L: Such as have worked so well for Ben Bernanke?
Doug: As well as Gideon Gono, Chairman of the Zimbabwe central bank. Again, to be clear, sometimes their advice makes business sense. It almost has to from time to time, just because of the law of large numbers. But improving the economy isn't the goal, so much as propping up and strengthening the existing government and the general status quo.
It's as if they never looked at what happened with Hong Kong since WWII. The place was a barren rock, with no capital assets except a good harbor, and was populated by poor, ignorant Chinese refugees. Hong Kong now has a per-capita wealth about that of the U.S. — and it achieved that with zero advice or help from the IMF. It did it exclusively through having an almost unregulated free market and very low taxes.
L: Why do you suppose the IMF was set up?
Doug: Well, let's think about it. A bunch of governments got together to do what? Decrease their power over the economies they parasitize? Not hardly. It's about using economic policy to keep the gravy train going, which is all most politicians anywhere care about. The primary directive – the imperative — for all individuals and organizations is to grow and become more powerful to the greatest degree possible. And these people all believe in the state. The IMF was set up mainly to ensure the success of fiat currencies — which were the only kind in existence after WWII. It's been successful in that regard, since people are still using intrinsically worthless scraps of government paper to do business and represent their wealth. But the whole system is on its last legs. It's going to collapse, along with the IMF.
Their website also says the IMF u201Cpromotes international monetary cooperation and exchange rate stability, facilitates the balanced growth of international trade, and provides resources to help members in balance of payments difficulties or to assist with poverty reduction.u201D
Notice the noble-sounding and very politically correct inclusion of u201Cpoverty reduction.u201D Direct poverty reduction schemes are socialist plans of forced wealth redistribution — the opposite of allowing economies to grow strong and healthy so that their rising tides lift all ships, even the poorest ones.
But the gobbledygook about exchange rate stability and balance of payment difficulties would be completely superfluous if countries were still using gold for money. Exchange rates would simply be a function of how much or little any country debased its currency in terms of gold, and balance of payments would be settled in gold, as they were until Bretton Woods.
Before then, a currency was a government-issued stand-in for a certain amount of gold. A dollar was just a word for one-twentieth of an ounce of gold. A franc, a deutschmark, a lira, a peso — all were just names for a certain amount of gold. That's what they were: government warehouse receipts redeemable for certain amounts of precious metals. People have forgotten that. And for several generations now, people have been treating receipts for stored goods as if they were, themselves, the goods. This is a prime example of Wile E. Coyote economics, before people realize the system has run off the edge of a cliff. The result will be a worldwide monetary catastrophe.
All a country has to do to maintain stable exchange rates, and a workable balance of trade, is to not debase its currency. You don't need a bunch of bureaucrats with cockamamie monetary schemes. That's one reason why gold is such a good money. It imposes fiscal discipline on countries. Repudiation of gold was just a desperate move by broke governments to try to escape fiscal discipline. It was an encouragement of binge spending.
If the global financial system were a real free market, currencies would not be forced into circulation by government fiat, we'd be back on gold in no time, and the IMF's whole raison d'tre would disappear.
L: I can hear it coming: the IMF serves no useful purpose?
Doug: None whatsoever. We don't need it — never did. It's a destructive waste of money that distracts people from what they really need to do, which is to get back to basics: use sound money; produce more than they consume; save the difference; and invest it.
L: Just to play devil's advocate, we do have Robert Mugabes and similar kleptocrats running amok in the world. If the IMF bribes these crooks into being less destructive to their economies, couldn't that be viewed as a net positive?
Doug: Sure. It'd be nice if there were some sort of superhero Justice League that went about forcing dictators to steal less and let the people be more free and prosperous–
Doug: [Chuckles] But in the real world, there is no Batman or Superman who always does the right thing. And that's certainly not who populates the IMF's boardroom. The bureaucrats of the IMF have the psychology of postal employees, only they've spent years at school learning incorrect and useless economic notions. And they're arrogant enough to believe the world should do as they dictate.
Look, if some idiot running a country gets the place into a real economic jam and appeals to the IMF for help, what does the IMF do? The answer varies, depending on who's involved at any given time. Sometimes they'll tell the country to cut taxes, sometimes to raise taxes. They often tell countries to devalue their currency, which is only necessary when the government controls the exchange rate and has been denying reality. Of course, if they tell countries to devalue currencies without telling them to adopt a sound money policy, all it does is lop off a few zeros until the next time the government adds more via the printing press. Real, sound money isn't even in their vocabulary.
They never tell countries to default on debts, which is usually the right thing to do, because it makes it impossible for spendthrift governments to borrow more money for a time — and default punishes the fools who lent the spendthrift government money in the first place. Default is bad, but it's really nothing more than an honest admission of failure. But default isn't in the IMF's vocabulary either, and admitting the failure of the whole system isn't even in their realm of imagination.
Taking advice from the IMF is like getting sex advice from a nun.
L: [Chuckles] Painting lessons from a blind man.
Doug: Financial advice from Bernie Madoff. Or, perhaps, from one of those old “Magic 8 Ball” toys…
Doug: [Laughs] A Magic 8 Ball full of random messages written by a bunch of statists and collectivists who don't know the first thing about healthy economies and strive only to maintain the status quo — which is, in fact, unsustainable.
Worse, to implement this bad advice, the IMF gives the governments money that has to be repaid by the poor working stiffs, through their taxes.
So, yes, the IMF serves no useful purpose at all. It generally achieves the opposite of its intended goals because no one running it has the slightest idea what is really necessary. The institution is run by pretentious socialist college professors. And worse.
But talking about u201Cworse,u201D that would be the World Bank. It works hand in glove with the IMF, but its direct mission is to reduce poverty in the world, as opposed to facilitate the acceptance of fiat currencies. How hiring its 10,000 highly paid bureaucrats — very few of whom have any entrepreneurial experience — to flit around the world, flying first class and staying at posh hotels, will help reduce poverty is beyond me.
L: Well, we've already said that fighting poverty directly doesn't work. It's not just that government handouts give a man a fish instead of teaching him to fish, but that even when they try to teach fishing, they end up doing it in the desert. That's because wealth is created by business, and a business decision that has any other basis than business (maximizing profit) is a bad business decision. And that's what we see — busybodies who imagine they are businesspeople making bad business decisions.
Doug: Just so. The World Bank is famous for ridiculous projects, like building giant steel mills in the middle of nowhere in Africa, thousands of miles from any ports or coal or other necessary items, because their experts decide that Africa needs more steel. Those experts have no business sense, and even if some have technical knowledge, they're still bureaucrats. And it's not their money. Since profitability isn't the driver, they have no way of gauging success — so they almost always fail. Their approach is similar to that of the old Soviet Union.
These IMF and World Bank types are basically the same kind of people who go to work for the DMV, but they get to flounce around the world in $1,000 suits.
L: [Chuckles] Well, didn't they provide the money for Duvalier Ville, the ghost-city you saw in the middle of nowhere in Haiti?
Doug: That's right, they did! As far as I've seen, everything they've touched has turned to garbage. I'm sure that as soon as the locals know that IMF money is going into a project, they start thinking about how they can inflate costs, pad invoices, fix contracts for friends and relatives — everything and anything to divert money into their own pockets. It's just like any other government contract.
From the very beginning, the World Bank has financed all manner of uneconomic projects in Third World countries — usually pie-in-the-sky, totally impractical projects in places where only a fool would predict success. They lend the local government money for the project. Most of the money vanishes in waste, graft, inflated contracts, and high living. Then the government has to extract taxes from its impoverished subjects to pay the World Bank loans. It's actually criminal, the waste and destruction of capital in places that can least afford it. But it suits large multinational corporations, who benefit mightily from these contracts.
It's actually pretty much the way John Perkins describes it in his book Confessions of an Economic Hit Man, except his solutions as to how to solve the problem are just as statist/collectivist as the problems he quite accurately describes.
Both the IMF and the World Bank should be immediately and summarily abolished. Any investments that are made, anywhere, should be made by entrepreneurs, who use their own capital. That's the best insurance one can get that the capital will grow. Everyone benefits, even if only indirectly, as the amount of wealth in the world grows. And everyone loses — especially the poor people — when capital is destroyed. And capital destruction is what the World Bank is all about — exactly the opposite of their self-serving propaganda.
Entirely apart from the waste and corruption, the U.S. is certainly one country that has no business in funding either the IMF or the World Bank, in that the government is playing with money it's borrowing from the Chinese.
L: I'd vote for their abolition — but it's not going to happen anytime soon. We're stuck with them for the foreseeable future. Are there investment implications?
Doug: As long as these organizations exist, they will continue creating distortions speculators can take advantage of. You could, if you were fast enough, travel the world and invest in businesses that would benefit from World Bank investments in those locations.
L: Get in the way of a windfall…
Doug: Exactly. If they are going to throw money out of helicopters, you might as well stand under them with a big net.
L: Okay, but most people are not that footloose nor well funded. Is there a way for more typical investors to play this?
Doug: Sure: They can set up accounts to invest in companies listed in the local stock exchanges of places where the IMF and World Bank plan to waste a lot of money. Then research and buy shares in companies that have big nets waiting for the helicopters full of money to arrive.
L: Anything else?
Doug: Just another straw in the wind. The continued existence of organizations like these show just how irredeemable the current world economic order is. And that brings us back to things we've said many times in these conversations: rig for stormy weather.
L: Liquidate, consolidate, create, speculate — and diversify your political risk.
L: Roger that. Well, this wasn't the conversation I was thinking we'd have, but it was interesting.
Doug: I hope so. We'll talk again soon.
L: Looking forward to it.
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