Unfortunately, the problems with the neighbors, whom to protect their identities I will call the Lolos, didn’t have to do with fences or even patches of woods, but about the road running down the side of their property – the only way in to our small development. You see, even though they had sold the road easement to the developer, it seemed apparent that they never expected the road to be built. Regardless, they still considered the land it ran over as theirs (and, I guess, technically it is).

Now, I have always tried hard to be a good neighbor, and so soon after moving in I invited the clan up to our house and plied them with finger foods topped off with their favorite hooch. While I’m sure that at least a couple of the Lolos warmed to us, it was always obvious that the rather domineering matriarch held her blessings in reserve.

The result might be called an uneasy truce. A truce which came undone after the farmer’s unmarried daughter adopted and brought home a rescued dog from a shelter. Despite the fact that the large dog was clearly insane and a serial biter, in the eyes of the daughter it could do no wrong.

And by serial biter, I mean that I can personally attest to four people, two of them residents on the hill, being bitten by the mad dog. Showing itself to be an equal-opportunity biter, the mad mutt also bit the long-suffering husband of the Lolo matriarch and viciously mauled our own dog, the friendliest beagle mix you’d ever hope to meet.

The long and short of it was that the residents on the hill were essentially limited to cars only in order to travel down the short road running down the side of the farmer’s property. Any other alternative, say walking, jogging or riding a bike, required running a gauntlet with a very good chance you’d be attacked by the never-chained dog. The Lolos were, of course, well aware of the situation, yet, for what I can only imagine were purely vengeful reasons, refused to do anything about it.

Of course, the attacks were reported to the local police, who duly sent over the animal control officer, but the Lolo matriarch always made quick work of them – denying any attacks, pointing out that if there was an attack it took place on their property and threatening to pull strings with the local governing council to have them fired.

The final confrontation, regrettably, involved me and my children, still quite young at the time. The kids wanted to visit friends about a quarter of a mile away, and as it was a nice day I thought we should walk. While I can’t recall my exact mental state at the moment, I suspect I was fed up with the fact that the equivalent of a troll had for years effectively blocked walking access on the road leading to and from our property.

Being indignant but not stupid, I armed myself with an African war club I had traded a chief in Botswana for (he got a cigar and a baseball cap), handed one of the kids a bull whip, and off we set.

Despite walking as quietly as we could, right on cue the berserk troll dog, growling a mad and dangerous growl, came charging out of the driveway of the farmhouse. Shifting into full defense-of-family mode, I wound up and swung my African war club with all the strength I could muster, fully desirous of sending the hound to the burning hell it deserved. Unfortunately, instead of being rewarded with a satisfying thud, or even better, the sight of the dog’s head bouncing down the road, I whiffed it completely.

Even so, the club passed close enough to its snarling snout to cause it to pause in order to better reflect on its options. At which point the long-suffering husband of the matriarch rushed out and managed to get hold of the dog’s collar without getting bitten himself (yet again).

Extremely unhappy at the attack, on principle and specifically because it had put the kids at serious risk, I did something I am loathe to do and have only done once before in my life (when my car was stolen) and called the police.

Well, it turned out that my complaint, coming on top of all preceding it, fulfilled the allowable per-dog maximum for attacks on humans. Based on local regulations, the order went out for the dog to be put down.

Fighting the order, the matriarch forced the issue to court, where I was to appear as the star witness against the hellish hound. While I don’t want to drown you in the details, I will report that I opened my statement by flawlessly delivering a paraphrased line lifted from Paladin ofHave Gun – Will Travel fame.

“While I greatly regret having to appear in court against my neighbors,” I said with a dramatic nod in direction of the Lolos, “I have no moral or ethical compunction about having to do so.”

During my testimony, the daughter who spared no affection in her unremitting love for her maniacal mutt, grunted, sighed and laughed loudly. And while doing so, literally waved her hands in the air as if appealing to god her own self to smote me where I sat. In fact, she raised such a racket that the judge finally signaled me to pause in mid-sentence, leaned forward and asked, “What the hell are you doing?”

“I am laughing so I won’t cry,” she replied, raising her hands once again to the gods.

When it was her turn to testify, she stated that I made the whole story up. When pressed for a motive, she stated that I done so as part of a nefarious plot ginned up by myself and the neighbors up the hill to take revenge on the Lolos because we were mad they owned the road up to the development and so decided to take it out on her misunderstood mutt. (If the logic expressed in that last sentence seems convoluted, it’s only because it was.)

It was my turn to laugh, but I did so in a quieter and more dignified fashion (I like to think).

Unfortunately, due to a tight court schedule, the judge had to postpone the rest of the hearing to another day. And that gave the single-minded matriarch the time she needed to cajole members of the local council into giving her daughter’s dog a free pass. Leaving the dog free to bite another day. In fact, a few days after the hearing, an acquaintance of mine was bitten while biking by the farm. According to him, the daughter rushed out and asked him please not to report it. Unaware of the situation, he kept mum.

And so, pretty much for the entire childhood years of our kids, they and all of the residents on the hill remained unable to freely walk down the road.

By now, if you’re not asking what the point of these meanderings is, there’s something seriously wrong with you.

Well, here it is.

First and foremost, it is always worth remembering that humans can adopt very warped attitudes, even to the point of falling in love with mad dogs… and mad rulers.

But more to the actual point of mad dogs and all that, the mindset of all the various branches of what is currently lumped under the moniker “Homeland Security” – from the top right down to the domestic police force – has devolved to the point where a growing swath of the general population is now actively afraid of them.

In essence, we the people have stood passively by while our government has done the equivalent of falling in love with a REALLY BIG mad dog and set it by the side of every road leading from every house in America.

Previously, it was only black people who had been trained by bitter experience to fear “the man.” Now the rest of us are beginning to understand what they have been complaining about all these years.

(It strikes me that I am uncertain as to whether there is another more politically correct mot du jour than “blacks.” Having moved my primary residence to a country where political correctness has yet to take hold and never really having paid attention to the linguistics of racial typing any way, I fear I’m out of the loop.

But wait, I’ll look it up! Clicking over to Google and typing, “What is the acceptable term for black people?”…

The crowd-sourced Yahoo Answers sheds light by asking readers to answer the following question from a user:

What is the acceptable term for black people?

I’m just a little confused, because the NAACP is National Association for the Advancement of Colored People, yet it’s not politically correct to say colored. Now black is “bad”… but I don’t know why, “white” is still used for Caucasian people. Why does this term change so much?

Surprisingly (because it actually involves some logic), the “Best Answer” according to those who cast a vote on Yahoo Answers was the following from a user named “Evolving Squid”…

How about “people”, and “man” or “woman” when referring to individuals?Calling people with dark skin “African” or “African American” is really stupid for a number of demonstrable reasons:1. Not all people with dark skin come from Africa. Many people from south Asia and the Caribbean have dark skin.2. Not all people who come from Africa have dark skin. Across north Africa and minorities in the southern bits of Africa tend to be white.3. Almost no dark skinned Americans come from Africa, nor have had any relatives that have been within 500 miles of the African coast, let alone being from Africa, within the last 100 years. Calling someone with dark skin “African American” makes as much sense as calling a blonde-haired person “Viking American” because he had a Norwegian relative hundreds of years ago.4. A good many Americans who came from Africa (hence real “African Americans”) are light skinned, having been chased out of South Africa, Zimbabwe/Rhodesia, Tanzania, etc. by the dark-skinned majority.

I continued to poke around the font of all knowledge, the web, but it seems that no one is actually sure what the correct term is anymore. Paula Deen, however, could tell you one term that is very much not correct. Oh well. Having dawdled long enough, I will now yank hard on the wheel and return to the thread…)

The stats show that an increasing trend of police abuse (here’s a link to one interesting infographic that, using the comments from the police themselves, should give you a sense of the scale of what’s going on). And it’s not just the beat cops people worry about: a number of polls show that a majority of Americans now see the federal government as a direct threat to their personal rights and freedoms. All that has come to pass since the passage of the Patriot Act through Snowden’s recent revelations reveal that threat as real.

Speaking personally, unlike the idyllic country town in Argentina we now live for most of the year (a town where the police tend to follow more of the Barney Fife archetype), when I see a policeman here in the US I reflectively ratchet my threat assessment level to “code orange” – be on guard against a possible assault.

It may just be that I am becoming a paranoid, but if so it is because not a day passes without receiving emails from correspondents with stories about out-of-control members of the Homeland Security apparatchik.

Proving the point, a quick dip into my email box for just the past few days:

• Police kill dog. The story, which has gone viral as I have received it from a number of correspondents, has to do with a black man who was being rousted for no good reason when his dog, which he had put into his car but jumped out, was gunned down by the harassing officers. In fairness, I can accept that the police felt threatened by the large Rottweiler, but the fact remains they were in the process of roughing up its owner over filming them roughing someone else up. In other words, rather than having a quiet chat with the dog’s owner, who was so cooperative that even before the police reached him he had docilely assumed the recommended position – hands behind his back in order to facilitate being handcuffed – they felt compelled to start pushing him around, thereby creating the situation in the first place. If you want to watch the video, it’s available all over the Internet. It’s disturbing.

• Police terrorize Belgium diplomat and his wife over breastfeeding. It happened at a New York golf club when the wife began discreetly breastfeeding their baby and replied in the negative to a manager who asked her to do it in the bathroom. After which, according to the NY Post…Minutes later, the Greenburgh Police Department arrived.Detective Scott Harding allegedly yelled, “Close the doors!” and two other diners were told to leave the terrace.”He was walking as if he was acting in a Western movie,” Neijens said. “He had one hand on his gun, one hand on his Taser.”Here’s the story.

• US Army blocks access to Guardian website to preserve “network hygiene.” After all, can’t have our fighters for freedom learning the truth about the kind of freedom they are actually fighting for. Story here.

• US post offices taking pictures of all our mail for database. According to an article just published in Reason… “The Mail Isolation Control and Tracking program, in which Postal Service computers photograph the exterior of every piece of paper mail that is processed in the United States – about 160 billion pieces last year. It is not known how long the government saves the images….” Full story here.

• US mother loses baby over poppy seed bagel. Giving birth in a US hospital apparently now requires submitting to a blood test for illegal drugs. In the case of Elizabeth Mort, the test came up with a false positive – the result of having eaten a poppy seed bagel prior to heading to the hospital. And so, with zero due process, the authorities snatched her three-day-old daughter and held her captive for five days. Story here.

• College student arrested after buying a carton of bottled water. And I quote, “Undercover Virginia police pulled a gun and tried to break through the car windows of a 20-year-old college student, suspecting that the underage girl’s sparkling water was a 12-pack of beer. She was later jailed.”When agents from Virginia’s Alcohol Beverage Control (ABC) division saw college student Elizabeth Daly leaving a supermarket with cookie dough, ice cream, and a 12-pack, they assumed that she had purchased beer as an underage student and took extreme actions to stop her.”The seven plainclothed agents approached the vehicle in which the girl and her roommates were sitting, and one officer allegedly jumped on the hood of the car. Daly claims another officer pulled out his gun, which scared the students and prompted them to drive away.”

Just in this small sampling, we have police harassing a peaceful individual – then shooting his dog – for recording them on his phone camera… a police squad led by a detective is sent out to roust someone for breastfeeding… the US government applying cyberwarfare techniques against a media outlet… a baby taken from its mother for a false positive drug test… and seven undercover officers, with guns, aggressively “investigating” underage drinking.

In the case of the latter, I would have loved to hear the radio chatter, though I suspect it went something like this…

“Alpha team, we have a probable coming out of the door of the Jiffy Mart. It looks like she’s got a package!”

“Roger that, Bravo team, we have eyes on target.”

“Roger that, Alpha team. Can you see the package? Say again, can you see the package?”

“Bravo team, hold one. Officer Lipshitz is moving into position to identify the package.”

“Lipshitz, Bravo team leader here, Alpha team is asking if you can see the package.”

“Bravo team leader, Lipshitz here, hold one. Wait, it’s blue. Some beer cans are blue. It must be beer!”

“Alpha team, we have a confirm from Lipshitz – it’s beer!”

“All units, all units, we have beer! Move in, I say again: we have beer, move in!”

Is it just me, or does anyone else surveying the purported inability of the US government to reduce its massive budget by any real amount concur that paying seven officers to man a stakeout designed to arrest college students for drinking beer is money poorly spent? That they then mistakenly identified water as beer only adds inanity to the insults and injury.

But seriously, somebody could have been killed during this incident, and someone – a 20-year-old college student who had done nothing wrong – did end up in jail for the night.

You how you can tell you live in a police state? How about when people have to start worrying that they might end up dead or in jail as a result of breastfeeding in public, or buying water at a convenience store?

As one regular correspondent put it in an email to Doug Casey with a copy to me…

Doug:

You have often made the paradoxical observation that it will be worse than you think it will be. While the context was economics and the financial hardships that would manifest, I think it is safe to say that culturally your quip has already played out. It is certainly happening way faster than I thought.

And, like any police state, the authorities will find any number of willing accomplices within the populace. In the case of the brazen Belgian breastfeeder, shown here, apparently the manager was concerned that the black backpack containing the baby’s necessities might also contain a bomb.

Reading even the local paper in this very small town, it is notable how many of the reports in the police blotter these days are the result of the police being called out by “concerned” citizens as a result of paranoia or a bad case of busy-bodyness. A sampling…

June 18, at 3:31 p.m., complaint about people partying on a vacant lot on Jones Hill Road. No one was found.

June 19, at 10:16 p.m., a suspicious vehicle was seen at Maggie’s Bridge. It had mysteriously disappeared by the time police arrived.

June 21, at 7:42 p.m., report of two employees at a local bar having a verbal argument; no arrests were made.

June 23, at 9:33 a.m., a caller reported a Quebec RV parked next to the construction site for Stowe’s new ice arena. The caller was worried the campers were about to “dump their tanks” on the site. Police spoke to the owners of the RV, who said they were headed home and hadn’t planned on dumping their tanks.

June 24, at 12:18 a.m., report of an underage drinking party at Maggie’s Bridge. Police found two people, who were not underage and were not drinking.

June 26, at 2:36 p.m., a man was “making people uncomfortable” at the Union Bank on Smith Street.

June 28, at 8:08 p.m., a woman on Homes Lane complained about a neighbor’s child “being loud.” Police spoke with the child’s parents.

June 29, at 12:38 p.m., police were told a stop sign went missing at the intersection of South Hollow and Lane Hollow roads. It was there when police arrived.

Going back to the mad-dog-waiting-on-the-side-of-the-road analogy, it seems to me that the risk of misadventure at the hands of the overzealous state is escalating to a perilous point.

I’m not talking about just being beaten up or gunned down, but also about being made a social outcast or financially ruined for tripping over some law that shouldn’t have been enacted in the first place. Even wishing to peacefully trade goods and services using private currencies – such as the Liberty dollar, whose founder Bernard von NotHaus was labeled a “financial terrorist” – can get your door kicked in.

In terms of a specific roadside threat, the classic example is provided by the alcohol blood level which, if exceeded even a little, tips you into the category of hardened criminal. In most states, the allowable alcohol blood level is .08, well below what the original scientific studies on how much is too much to drive recommended. Nevertheless, if you are in an accident and you have had even a single drink, it will invariably weigh against you – and in a big way.

Even the founder of Mothers Against Drunk Driving has turned against the organization, accusing it of adopting a “neo-prohibitionist” attitude when the original mandate was to address the specific problem of drunk driving. And so it is that even a single drink at your favorite restaurant means passing the equivalent of a mad dog on your way home. You can only hope it doesn’t bite you.

(A PUBLIC SERVICE ANNOUNCEMENT: During the period around the Fourth of July holiday, celebrating American freedom and all that, the police are particularly active with road blocks.

As the breathalyzers used at these unconstitutional road blocks are notoriously inaccurate, if you are stopped and asked to blow, it is within your rights to ask that the analysis be performed with a blood test. The police don’t like the inconvenience of having to transport you to the local hospital for the blood to be drawn, but don’t be afraid to ask. Just do it politely or they could shoot your dog.)

This same mad dog lurks by the side of every road, watching in every airport, data center and pretty much everywhere else you turn in the US these days. That it is supposedly owned by we the people makes the situation the height of irony. Even walking quietly is no guarantee you won’t be attacked.

While I wish it were otherwise, the authoritarian trend that has escalated so surprisingly since 9/11 will, I am sure, run its full course. Which is to say that the trend is likely to slow and maybe turn down again only after something akin to Kent State happens that finallyawakens a level of righteous indignation sufficient to send the public en masse into the streets.

When might the tipping point be reached? Looking at the litany of abuses of power – to which you can add widespread domestic spying and the prosecution of whistleblowers – and the lack of public reaction, I think we are a long way off.

Speaking of whistleblowers, I have a whistle to blow. A business associate of mine who has a sister in the New York police force showed me a card that is issued by the police union to the immediate families and even just friends of police officers in that state. If pulled over by the police for pretty much any reason, simply show the card and the police officer will send you on your way. In other words, it’s a “get out of jail free” card.

Oh wait, I just did a quick search and the whistle was already blown on these cards earlier this year. Yet it appears to have had no consequence, as the cards are still being issued. You want to know how else you can tell you are living in a police state? How about when regular folks get harassed and the relatives and friends of the police get a free pass?

Befitting its status as a “classic,” George Orwell’s 1984 is frequently mentioned by practitioners of the written arts, usually in a context such as, “Reminiscent of Orwell’s 1984, the US government today revealed plans for more scanning of private Web traffic, email.”

Actually, the energetic referencing of Orwell’s most dystopian of works – which is saying something – has caused it to transcend the realm of a mere classic, enshrining it as a cliché.

The reason for said overuse is that the parallels between the all-powerful government so starkly envisioned in Orwell’s book and the steady growth in government power in the real world today are hard to ignore. It’s almost as if Orwell penned a script that every subsequent government, as circumstances and technology allowed, has followed as closely as a devout Amish follows the Ordnung.

But there is one aspect of 1984 that most commentators fail to mention: in the end, Big Brother wins.

It’s not even a close thing: at no point in Orwell’s book does Big Brother break even a little sweat as it goes about crushing Winston Smith and all other would-be malcontents.

Now, it may be that Orwell, seriously afflicted with tuberculosis at the time of writing his darkest book, couldn’t muster the creativity to concoct a deus ex machina to tip Big Brother over. But in my opinion, he simply came to the conclusion that once a certain threshold of power has been attained by government, there’s no way to unseat it. Minor examples for that contention are found in abundance and include, I would propose, the longevity of Robert Mugabe’s reign and North Korea’s Kim Il Sucks dynasty.

For me, then, the real message of 1984 is that once governments are allowed to get too firm a grip on the reins of power – including the judicial, the constabulary, the military, the media – they are not just imminently corruptible but super-hardened to any real change.

Which brings me to the theme of today’s musings: the chestnut from whence such grand power grows.

I, Pencil, Leonard Read’s 1958 essay, a video version of which you can watch here, explains how the free market works using the simple example of how the lowly pencil is produced and brought to market.

While I can have no hope of duplicating the success of Read’s work, I’ll try to use the same sort of simplistic example – replacing the pencil with the coca leaf – to expose the genesis of Big Brother’s steady assent to unassailable power.

That there is even a law against such a plant as this – or any plant, for that matter – seems just the right starting point for today’s musings. And so tucking a few coca leaves into the space between my cheek and jaw, which thanks to culture and tradition in this corner of Argentina is still legal, we begin.

Recently by David Galland: Have You Overlooked Comprehending This Piece of the US Economic Puzzle?

Befitting its status as a "classic," George Orwell’s 1984 is frequently mentioned by practitioners of the written arts, usually in a context such as, "Reminiscent of Orwell’s 1984, the US government today revealed plans for more scanning of private Web traffic, email."

Actually, the energetic referencing of Orwell’s most dystopian of works – which is saying something – has caused it to transcend the realm of a mere classic, enshrining it as a cliché.

The reason for said overuse is that the parallels between the all-powerful government so starkly envisioned in Orwell’s book and the steady growth in government power in the real world today are hard to ignore. It’s almost as if Orwell penned a script that every subsequent government, as circumstances and technology allowed, has followed as closely as a devout Amish follows the Ordnung.

But there is one aspect of 1984 that most commentators fail to mention: in the end, Big Brother wins.

It’s not even a close thing: at no point in Orwell’s book does Big Brother break even a little sweat as it goes about crushing Winston Smith and all other would-be malcontents.

Now, it may be that Orwell, seriously afflicted with tuberculosis at the time of writing his darkest book, couldn’t muster the creativity to concoct a deus ex machina to tip Big Brother over. But in my opinion, he simply came to the conclusion that once a certain threshold of power has been attained by government, there’s no way to unseat it. Minor examples for that contention are found in abundance and include, I would propose, the longevity of Robert Mugabe’s reign and North Korea’s Kim Il Sucks dynasty.

For me, then, the real message of 1984 is that once governments are allowed to get too firm a grip on the reins of power – including the judicial, the constabulary, the military, the media – they are not just imminently corruptible but super-hardened to any real change.

Which brings me to the theme of today’s musings: the chestnut from whence such grand power grows.

I, Pencil, Leonard Read’s 1958 essay, a video version of which you can watch here, explains how the free market works using the simple example of how the lowly pencil is produced and brought to market.

While I can have no hope of duplicating the success of Read’s work, I’ll try to use the same sort of simplistic example – replacing the pencil with the coca leaf – to expose the genesis of Big Brother’s steady assent to unassailable power.

That there is even a law against such a plant as this – or any plant, for that matter – seems just the right starting point for today’s musings. And so tucking a few coca leaves into the space between my cheek and jaw, which thanks to culture and tradition in this corner of Argentina is still legal, we begin.

David Galland is the managing editor of Casey Research.

The Best of David Galland

This missive begins with a couple of unusual charts — unusual because they contain no reference points. Here’s the first. As you’ll note, something occurred that triggered a waterfall slide in the chart. We’ll get to what that triggering event was in a moment.

(Click on image to enlarge)

And here’s the second. In this case, again it’s clear that something triggered the chart line to do the equivalent of a moonshot.

(Click on image to enlarge)

We’ll return to those charts momentarily. First, however, a confession.

As much as I read, and despite interacting with very smart people on a daily basis, until just recently I have missed something about our economy that, on reflection, should have been as obvious as the computer screen I spend far too many hours staring at.

Allow me to emphasize the point in somewhat stronger terms.

That I could have overlooked this particular aspect of the US economy and the overarching consequences that follow from it for all these years should, if I were a lawyer, cause me to be disbarred. If I were a doctor, the medical practice board would be entirely within their rights to revoke my license. If I were a politician, my benefactors would be entirely justified in cutting off my bribes donations. If I were a… well, you get the idea.

Interestingly, as smack-up-the-side-of-the-head obvious as this feature of the economy is, and has been for years, virtually everyone else has failed to spot it as well.

So, what is this mystery?

Succinctly, it is that, like Europe (where, during my recent trip there, the spark of awareness was lit), the economy of the United States is — and has been for decades — increasingly under the control of central planners at the expense of the free market.

As proof of that contention, we return to the two charts above. Here again is the first, but with the contextual reference points in place.

(Click on image to enlarge)

As you can see, the chart tracks the purchasing power of the US dollar since 1914, the year that the government, through its stooges at the Fed, took command of monetary policy. Laughably, the stated mission of these central planners was to preserve the value of the dollar. Predictably, exactly the opposite resulted.

And here’s the second chart, also with the reference points in place.

(Click on image to enlarge)

As you can so clearly see, after severing the last connection with the gold standard in 1971, after which point the central planners took command of fiscal policy, we have seen an exponential growth in government debt.

(Of course, the numbers on the national debt are grossly understated as it doesn’t account for the tens of trillions of dollars of unfunded and unpayable obligations tied to Social Security, Medicare, and so forth.)

The point is that the economic model that allowed the United States to rise out of abject poverty at its inception to become the most powerful economy the world has ever seen has been tossed aside in favor of a model that has proven time and again to be fundamentally flawed and always doomed to fail.

That the central-planning model, here and around the world, has been advanced by a fiat global reserve currency is undeniable. However, as the two charts clearly show, the consequences of having central planners controlling monetary and fiscal policy have created a ticking time bomb set to explode.

A few additional comments are warranted.

The first has to do with who the central planners actually are. And the best way to understand that is by considering who they are not.

Who they are not is successful entrepreneurs. Stating what should also be obvious, were they successful entrepreneurs, they would be otherwise engaged in creating jobs and building wealth for themselves and their co-workers.

Instead, the central planners almost always hail from the halls of academia, their stock and trade consisting entirely of a college degree and a faade of really knowing what they talk about. As a friend likes to say, “The biggest problems in this world are not caused by a lack of knowledge, but by people who pretend to know when they don’t.”

Over the years I have met and even gotten to know people who have gravitated toward jobs involved with setting government policies. And to a person, they have never held a real job outside of academia, or if they did, they failed at it. Yet they are unhesitant in telling everyone who will listen in tones most professorial how the world should work and why enlightened government policies — not the free market — are the only answer.

These people have taken over our country and, in fact, the world. The current mess we are in should not be a surprise to anyone. All anyone has to do is look at the history of the Soviet Union or communist China, pre-economic liberalization, to see how the story of command economies ends. How it always ends.

So, where do things go from here?

Earlier today I dropped an email to our editors, which I will quote from here as it deals with what I see as the fate of the global economy over the next six months or so.

“It’s all about the debt.

“The sovereigns owe a lot of money that they can’t repay. As they try to roll over their existing debts and have to borrow more, the lenders — if any can be found — will want higher and eventually unaffordable interest rates. When the lenders dry up, the only solution will be for the central bankers to monetize, but the world will be watching closely, so this will likely trigger a death spiral in the fiat currencies.

“There are intractable problems on a fundamental, systemic basis that cannot be resolved in an orderly fashion. The day is coming when the lending locks up again, after which point everything starts to fall apart.

“So, no, I don’t think it’s a muddle by outcome, but a systemic crash… hopefully big enough to cause a rethink about the entire current setup with funny money and central economic planning.

“But that would take a very big crash.”

Now, I know that a lot of dear subscribers, having accepted our arguments for including tangible assets as a core portfolio holding for many years now, have struggled during the latest retracement and consolidation period in the precious metals and associated stocks.

But if you step back and look at the big picture as it is constantly revealed in the headlines and regular releases of poor economic data, I think the conclusions we came to back before the crisis hit, that the Fed (and all the central bankers) are stuck between a rock and a hard place, remain the correct conclusions.

There is no simple or easy way out of this situation as the central planners are forced into a haphazard and highly destructive retreat. And the consequences won’t just be economic or political… the mini-riots in Anaheim this past week are just a straw in the wind.

So, how does one cope in a command economy headed, like all its predecessors, into the trash bin of history — in this case, on a global scale?

First and foremost, diversify. Everything contains risk, so spreading it around to mitigate the chances of getting hit especially hard from any one investment sector makes a lot of sense.

Personally, I use a spreadsheet program to analyze my holdings from a number of different angles, including percentage dedicated to natural resources; percentage in non-US-dollar-denominated assets; percentage outside of the United States; percentage with any one financial institution; percentage in dividend earning stocks; percentage liquid vs. illiquid; percentage in common equities; percentage in cash and so forth.

The idea is that if any one area becomes overweight or underweight, I look to make adjustments. In addition, I set certain goals — for example, the percentage of our net worth we want outside of the United States — and manage to that number.

In short, pay close attention to where your assets are allocated and don’t go overboard in any one sector.

Secondly, skew toward things tangible. Over the next few years, we are going to see massive dislocations as the fiat currency system cracks apart, starting with the euro and then, after a final rush into the “safe harbor” of the US dollar, spreading to the dollar itself.

As much as possible, own things with a tangible value. Precious metals are fine, but don’t go overboard as that makes you susceptible to a change in government regulations that could literally be invoked overnight. Consider property and even income-producing property (in low-tax jurisdictions). But, again, don’t go overboard because real estate is always a fixed target, which means the government can tax it or even confiscate it, and you won’t be able to do much about it. Owning currencies of countries with large resources is a proxy for owning something tangible, though an imperfect proxy.

Be careful. It will only get more challenging to build net worth going forward. Whether it be higher taxes on capital gains (a certainty at some point) or the cancellation of tax breaks, or more demands on business owners from legislation such as Obamacare, generating — and more to the point, keeping — net worth will not be easy. Therefore, rule number one has to be to avoid risking big chunks of money.

Sit tight, and be right. Per my comments above, I remain convinced that our Casey Research base case — of a global economic crisis that will get much worse before it gets better, and that the central planners have few options left to them other than monetary debasement — is correct.

For those of you who already have allocations to the tangibles and to the gold stocks (which are massively undervalued at this point), sit tight and you will come out right. If you are just now rethinking how to reposition your portfolio to get through what’s next, then do yourself a favor and take a low-cost, money-back-guaranteed subscription to our BIG GOLD service and start adding positions on the inevitable pullbacks.

These are, of course, only some of the strategies you can use. The most comprehensive analysis of the situation and how to prepare for what’s next, will be presented at the upcoming three-day intensive Summit we are co-hosting with Sprott, Inc., Navigating the Politicized Economy, in beautiful Carlsbad, California, September 7-9. The early-bird discount for the event is scheduled to come to an end on August 3, so if you are interested, look over full list of faculty, the schedule, and register today.

David Galland is the managing editor of Casey Research.

The Best of David Galland

Recently I helped out with some delivery chores. As I drove about, I discovered that one of the roads I would normally use was closed by roadblocks. It was, I imagine, due to road repair work. I had to reverse course and take a substantial detour.

I wondered why the road crew hadn’t put up a sign indicating the road was closed back at the main intersection, but I shrugged and muttered something like “Typical government operation.”

Driving back home, this idea of roadblocks took root in my mind. The thing is, only governmental entities can set up roadblocks — at least, legally.

Obviously, there are times when such roadblocks are entirely appropriate… for example, when a bridge is found to be dangerous.

In that case, putting up a roadblock to let drivers know that the road is a no-go makes perfect sense.

For example, a temporary warning sign to let people know that there is a road crew fixing potholes ahead makes sense and that sort of thing.

Otherwise, unless a road is damaged to the point where driving is either impossible or ill advised, there should be no roadblocks set up. Makes sense, right?

The decision to set up a roadblock should be taken only by people who are close to the problem, who understand the issues, and can deal with the problem on the road, fix it, and open it up again as quickly as possible.

Imagine then a world where government officials, as often as not operating hundreds or even thousands of miles away, are in control of the roadblock rules.

Despite having no real knowledge of the problem at a local level, they dictate that those roadblocks be set up and made permanent based not upon the specific condition that a road is out, but rather based on political expediency, cronyism, imaginary threats, and donations by influential lobbyists.

In a world like that, where roadblocks are set up all over the place and without any real thought to the consequences to road users, imagine how difficult it could be to get from Point A to Point B.

In fact, it would not be out of the question that the single road leading to your house could be blocked, leaving you no way out.

While that seems rather extreme, I would contend that it is a valid metaphor for the world we now live in.

To make the point, a couple of weeks ago, I discussed my recent travels to Ireland and Portugal and the devastating consequences the actions of the European central planners have had on those economies.

Before the European Commission bulldozed their way of life, the Portuguese fishermen made a nice living. They made money and supported their families the same way they had for generations. Life was good.

But not long after Portugal’s admission into the Eurozone, however, they woke up one morning to discover their own regulatory roadblock.

It was cooked up by bureaucrats thousands of miles away who have no idea of the local challenges or hazards it would bring to the local economy and the families that rely on it.

This roadblock required them under law to destroy their fishing boats, thereby preventing them from earning their livelihoods.

Another example of roadblock insanity can be seen in energy policy here in the US.

Hollow Sound Bytes and Pointless Platitudes

Politicians bray about the need for energy independence.

Behind the scenes, however, they kowtow to the environoids and special interests by littering the landscape with roadblocks that prevent energy companies from achieving and innovating our way to exactly the independence they tell us we must have at all costs!

Here’s where it affects you:

Government has set up another sizable roadblock. This time it is in the path of savers.

By meddling in the market in order to allow the debt-bloated government to continue its out-of-control spending, the Fed has suppressed interest rates to the lowest levels in US history.

Almost overnight, retirees and others who counted on the yields earned on savings to cover living costs have come to a dead stop in front of a roadblock placed in the way of their most pressing needs.

Their finances now in tatters, even people in their 70s who have worked hard and saved all their lives are being reduced to serving up French fries at fast-food joints.

For another roadblock, look no further than Obamacare.

In a recent Reason magazine article, it also expressed the same sort of convoluted logic that has gone into creating a series of related roadblocks. As one wit put it:

“If you think health care is expensive today, wait until it’s free.”

One of those roadblocks has to do with the considerably higher taxes tucked away in reams of unreadable legalese that will shift yet more funding from the private sector to the public. Here’s the text from an email sent to Doug Casey by a financial professional friend of his this week:

You may have had only a casual interest in the debate over the Obama Health Care bill, and even if you followed it closely, the headline discussion seemed to be more on the inclusion of millions of uninsured citizens, the penalties for not being insured, etc., vs. the fact that this is a noticeable income tax increase on investment income.

For those who have an adjusted gross income of $200k ($250k for joint returns) or more, the number on the bottom of the first page of your 1040, which comes before itemized deductions, charitable gifts, or personal exemptions, there is a +3.8% uncapped tax applied on all investment income (capital gains, interest, dividends, etc.), plus an obscure provision of the code known as the Pease, which reduces the value of itemized deductions, adding another +1.2% to the tax rate.

Be aware that if the current “Bush tax cuts” are not extended, the current long-term capital gains tax rate of 15% will go up by two-thirds to 25% beginning 1/1/2013. The top rate on dividends will nearly triple from 15% to 44.6%!! Ouch.

Unlike Social Security taxes, which are capped, the Health Care tax is uncapped. The mouthy Warren Buffett is finally getting his wish — paying more than a 15% tax rate. Instead of just writing a check for more, which he is certainly welcome to do, as an advisor to the administration, he probably had some influence on getting it applied to all higher-income Americans.

As you know, I am not a tax attorney nor an accountant, so am sending this as a heads-up, and if it is relevant to you, you should confirm the details with your tax advisors.

On the topic of throwing up more tax roadblocks, here’s one from overseas… sent along in an email from our own Vedran Vuk. In Vedran’s own words…

“Most of the time when we think about raising taxes, it’s the threat of millionaires leaving. We don’t usually think about them not coming to a country. Here’s an interesting case of Zlatan Ibrahimovic signing a soccer contract for 14 million euros per year. If the new tax goes through in France, he will be taxed for 75% over the first million euros. If the tax does go through, good luck attracting multimillion-earning players to France. A lot of people in the 99% will be pretty unhappy when all of their sports teams become horrible as a result of the tax.”

My favorite quote from the article is:

“Ibrahimovic will earn 14 million euros annually, sports daily L’Equipe reported. Sports Minister Valerie Fourneyron said that indicates that European football needs more regulation.”

Yes, just what the world needs — more roadblocks.

Of course, this time it’s to block decisions that the football team’s management believes it needs to make in order to win (and therefore attract fans, sell tickets, and raise rates to sponsors).

Insane.

I recently ran into a public-high-school English teacher and asked how the education business was going.

His response was, “Do you have four days for me to tell you all that’s wrong?”

“It seems like every month some team or another shows up from the government in order to introduce a new teaching program. And the really frustrating thing, is that none of these people has ever taught school.”

He went on to say that it becomes clear very quickly that they have no idea what they’re talking about and that each new protocol was conceived by some bureaucrat with no teaching experience either.

It was eye-opening to hear such emotive language from a public-high-school teacher — in my experience, most of the people who choose that profession are largely on board with the whole big-government thing.

Yet, it seems that more and more people are beginning to catch on to the idea that central planning is not such a great idea.

It’s how you end up with roadblocks where roadblocks don’t belong.

It’s how you end up on a road you never intended to travel along, forced there by roadblocks that don’t make sense and clearly don’t help.

Ultimately you risk getting hopelessly lost, or you turn around go back the way you came and start again.

So yet another school program gets introduced, another law, another rule. And it all starts again.

Happily, it is almost a certainty that, in time, the bureaucrats and their many roadblocks will be shoved aside.

I say that because there really is a limit to how long people will put up with being denied access to their fundamental rights of life, liberty, and the pursuit of happiness.

There is only so long that entrepreneurs will put up with having to navigate around more and more roadblocks in order to provide a product or service to consumers, when such roadblocks serve absolutely no useful purpose.

Unfortunately, while there are a number of things you can do to get started and plenty of sound advice along the way, it will take time.

That’s because there is still a considerable swath of the voting public who actually buys into the idea that government is a force for good and that without it, equality and justice would go by the wayside.

And so it is that the US and virtually all of the large economies around the world are still firmly in the grip of the notion that central planning is the only way to get to the green pastures that surely must be just over the next hill.

Or, more specifically, the next round of legislation and policy machinations (read “roadblocks”).

There has never been a starker example of the mindset of the current administration and its many followers than a comment made by President Obama this week. Here it is:

“If you’ve got a business, you didn’t build that. Somebody else made that happen.”

His point is that essentially, all human progress is due to the good work of governments.

• That without governments, there would be no roads to set up roadblocks on.
• There would be no Internet.
• There would be no body of case law nor a judicial system to enforce that law.
• There would be no telephones.

I disagree, and so do many others — including many from past governments who see the direction Washington, DC is taking and don’t like it.

I contend that this view of the world is essentially the opposite of the tenets of the capitalist/free-market model.

In the view of Mr. Obama and his ilk, We the Sheeple are all but helpless without the government to lead us forward.

That the US government’s activities as a share of GDP have gone from well under 10% at the beginning of the last century to over 40% today — and will go over 50% by the time Obamacare is fully implemented — makes it clear that this country is now operating on principles that run completely contrary to those that promote success and economic well-being.

The consequence of continuing to operate on this model will be a steady decline in the quality of life for most Americans, while favoring a ruling elite that produces nothing… except more roadblocks.

Ayn Rand will someday be celebrated as a futurist.

But how does one fight back? Grab a gun? Don’t even think about it: the Second Amendment may have been intended to protect against a tyrannical government, but the actual truth is that the weaponry of the US government is so incredibly advanced at this point that even the most well-armed militia wouldn’t last a minute.

No, the best way to “fight back” is to get wise to the whole thing.

Understanding what’s happening and knowing where the roadblocks are likely to be just makes sense.

And having clearly set out strategies that both sidestep the roadblocks and preserve your wealth is not just a good idea — it’s critical.

The upcoming Casey Research conference, Navigating the Politicized Economy, will give its attendees a real sense of both knowledge and preparation.

The speaker lineup is a “who’s who” of investment success, and each brings a world of experience to the event.

Among the confirmed faculty are former US Comptroller General David Walker; The Creature from Jekyll Island author G. Edward Griffin; Karl Denninger, author of The Market Ticker; and Mauldin Economics Chairman John Mauldin. The early-bird registration discount ends on July 31, so grab your seat now.

David Galland is the managing editor of Casey Research.

The Best of David Galland

Glancing at the news most days, it’s hard not to feel like Bill Murphy’s character in Groundhog Day. In the event you are unfamiliar with the movie, in it Murphy’s character becomes trapped in the same day… day after day.

In the current circular condition, we have the powers-that-be assuring us that the next high-level meeting will finally produce a permanent fix to the broken economy, essentially solving the sovereign debt crisis. Then, in no more than a few days, or at most a couple of weeks, the fix is revealed to be flawed and the crisis again sparks into flames. Followed shortly thereafter by yet another high-level meeting — and the cycle begins anew.

While the characters may change — one week it is Greece, the next it is Spain, the next it is France, the next it is the US, the next it is Greece again, etc., etc. ad nauseam — the detached observer who steps back to a distance sufficient to view the larger picture can only come to the conclusion that we are now well outside of the bounds of the normal business cycle.

As we here at Casey Research have written on this topic at great length, I don’t intend to dwell on this topic today, but I did want to loop back in just long enough to comment on the recent price action in commodities, especially gold, in the face of the continuing crisis.

Today, a glance at the screen reveals that gold is trading for $1,565. For comparative purposes, as revelers warmed up their vocal chords to sing in the New Year on the last trading day of 2011, gold exchanged hands at $1,531. And exactly one year ago to the day, gold traded at $1,526 for a one-year gain of a modest 2.6%.

A year ago, the S&P 500 traded at 1,325, while today it trades at 1,318, a small loss. Yet, have you noticed we don’t hear much about the imminent collapse of the US stock market, as we do about gold? This perma-bear sentiment about gold on the part of what some people lump together under the label “Wall Street” is especially apparent in the gold stocks.

Using the GDX ETF as a proxy for the sector, we see that the shares of the more substantial gold producers are off by an unpleasant 24% over the last year. More on the topic of gold shares momentarily, but first let’s round things out by also looking at the price action of a couple of other core components of the global economy.

For instance, a year ago, a barrel of WTI crude sold for a tick over $100. A couple of weeks ago, it was still selling for $102, though it has slid a bit to $91 today. Even so, that is still considerably higher than where it traded as recently as New Year’s 2008, when it was just $38 per barrel. Since that low, the price of oil has made a steady advance and for the last year and a half has traded right around $100/bbl.

Then there is the matter of base metals. Copper, for example, traded at $8,980 per tonne a year ago, and is today at $8,289, a loss of almost 11%. Likewise, the iron ore price is off by 15% over the last year, and zinc is off by 13%. Even the minor monetary metal with industrial applications, silver, is off 8.39%.

With that “baseline” in place, I would like to now turn to the current outlook for gold, and touch on some of the other commodities as well.

• Gold. In the context of its secular bull market, and given that absolutely nothing has gotten better about the sovereign debt crisis — only worse — gold’s correction is nothing to be concerned about.

  I know the technical types will point to levels such as $1,540 as important resistance points — and there’s no question that if gold was to break decisively below that level, and especially below $1,500 — that a lot of autopilot trades would kick in and put further pressure on gold.

  Yet, when you view the market through the lens of hard realities, which is to say, by focusing on the intractable mess the sovereigns have gotten the world into… in Europe, in Japan, in China and here in the US… then viewing gold at these levels as anything other than an opportunity is a mistake.

• Gold Stocks. As far as the gold stocks are concerned, I consider today’s levels to be extraordinarily compelling for anyone looking to build up a portfolio, or to average down an existing portfolio.

  I say this for a number of reasons, starting with the contrarian perspective that this may now be the most unloved sector of the stock market. No one wants anything to do with gold stocks, and hasn’t for some time now. As a consequence, the sellers will soon dry up, leaving almost nothing but buyers to push the sector back to the upside.

  This contrarian perspective is important because in today’s world literally thousands of competent equities analysts plop down at the desk each trading day with the sole purpose of searching for prospective investments. Many of these analysts are backed by huge firms with billions of dollars at risk in the markets, and so are armed with high-powered computational tools of the sort that was unimaginable even a few years ago. All of these analysts, armed with all their computational power, habitually scan a universe that totals about 4,000 publicly traded companies. Realistically, however, even a thin analytical screen will weed out all but perhaps 400 of those companies as being potentially suitable for investment.

  Thus, you have thousands of high-priced and well-armed securities analysts crunching pretty much the same data on a very small universe of possible investments. Given this reality, is it any surprise that securities are so tightly correlated? Which is to say, is it any surprise that these securities all trade right in line with the valuations that the analytical screens ultimately derive that they should? Which means there are really only two possible circumstances under which any of these stocks move up, or move down, by any significant degree:

1. Broad market movements. The saturated levels of analysis mean that, within a fairly tight range, all the stocks now move more or less together. Thus, with few exceptions, a big upswing or downswing in the broader market will send almost all stocks up or down together. To help make the point, I randomly pulled a chart of IBM and compared it against SPY (the S&P 500 tracking ETF) for the last year. Note the lockstep price movements:

1. OK, IBM is a big company, so it will have a lower beta than many companies, but the point remains that saturated coverage of the stocks greatly reduces the odds of any one issue breaking free from the larger herd, unless there is…
2. A surprise. All of these analysts, and all of their computerized analysis, help form a certain future price expectation for each security based on past financial metrics (earnings growth, return on equity, and so forth). Other than the broad market movement just referenced, or moves in line with a sub-sector of the larger market (e.g., if oil falls, oil-sector stocks will move up or down in sync), for a company to deviate in any substantial way from analyst expectations, by definition requires a “surprise” to occur.

   Of course, such a surprise can be positive, but because these companies are so closely watched, it is more likely to be negative. In the former category, a positive surprise might come in the form of an unexpectedly strong new product launch la the iPad. In the latter, less happy category of surprise, it can be the blow-out of a big well in the Gulf of Mexico… or any one of a million other unanticipated vagaries of fate.

As investors, recognizing these fundamental realities is important because it points to where above-average market opportunities are most likely to be found (or not). And that brings us back to the whole idea of being a contrarian. As I mentioned, “Wall Street” has never much liked the precious metals, and by extension the gold stocks. Given the length of the gold bull market — which, in our view, reflects systematic risk in all the fiat currencies, but which Wall Street views as an indication of a fatiguing trend confirmed by the underperformance of the gold stocks — traditional portfolio managers are unhesitant in giving the boot to the few gold shares that somehow made it into their portfolios against their better judgment.

If our thinking is not clouded by our own bias, then it would behoove us as good contrarians to buy these shares from the eager sellers at such unexpectedly favorable prices. So, is our own bias leading us to believe in gold and gold stocks when virtually the entire army of analysts won’t even consider them? Some inputs:

• Gold prices remain near historic highs — and that has a significant impact on the bottom line of the gold producers. Barrick Gold Corp. (ABX), for example, currently boasts a profit margin of over 30%, better than twice that of IBM and almost ten times that of Walmart. While ABX sells for just 1.6 times its book value, IBM sells for 10X.
• Interest rates remain at historic lows, producing a negative real return for bond holders. Unless and until investors are able to capture a positive yield — a potential stake through the heart of gold — there is no lost-opportunity cost for holding gold. And bonds are increasingly at risk of loss should interest rates be pressured upwards, as they inevitably will be.
• Sovereign money printing continues — because it must. In today’s iteration of Groundhog Day, the Europeans are once again meeting in an attempt to fix the unfixable, but the growing consensus — because there is no other realistic option left to them — is that they will have to accelerate, not decelerate the money printing. Ditto here in the US, where a fiscal cliff is fast approaching due to the trifecta of the expiring Bush tax cuts, mandated cuts in government spending from the last debt-ceiling debacle and the new debacle soon to begin as the latest debt ceiling is approached. The problems in important economies such as China and Japan are as bad, and maybe even worse (in the Weekend Reading section at the end of this edition is a very worthwhile article on the Chinese economic slowdown.)
• Debt at all levels remains high. With historic levels of debt, rising interest rates are a no-fly zone for governments, because should these rates go up even a little bit, the impact on the economy and on the ability of these governments to meet their obligations would be dramatic and devastating. This fundamental reality ensures a continuation of policies aimed at keeping real yields in negative territory, meaning that the monetization/currency debasement in the world’s largest economies will continue apace.

  To get a sense of just how bad things are and how soon the wheels might come off, sending gold and gold stocks to the moon as governments throw all restraint in money printing to the wind to save themselves and their overindebted economies — here’s a telling excerpt and a chart from a recent article by Standard & Poor’s titled, The Credit Overhang: Is a $46 Trillion Perfect Storm Brewing?

Our study of corporate and bank balance sheets indicates that the bank loan and debt capital markets will need to finance an estimated $43 trillion to $46 trillion wall of corporate borrowings between 2012 and 2016 in the U.S., the eurozone, the U.K., China, and Japan (including both rated and unrated debt, and excluding securitized loans). This amount comprises outstanding debt of $30 trillion that will require refinancing (of which Standard & Poor’s rates about $4 trillion), plus $13 trillion to $16 trillion in incremental commercial debt financing over the next five years that we estimate companies will need to spur growth (see table 1).

(Click on image to enlarge)

You can read the full article here. While the authors of the S&P report try to find some glimmer of hope that roughly $45 trillion in debt will be able to be sold off over the next four years — even their base case casts doubt on the availability of the “new money” shown in the chart above. Note that this is the funding they indicate is required to fund growth. Which is to say that should the money not be found, the outlook is for low to no growth for the foreseeable future.

It is also worth noting that the analysis assumes that something akin to the status quo will persist — which is very unlikely given the pressure building up behind the thin dykes keeping the world’s largest economy’s intact. The landing of even a small black swan at this point could trigger a devastating cascade.

We have said it before, and we’ll say it again: there is no way out of this mess. At least not without acute pain to a wide swath of the citizenry in the world’s most developed nations. While this pain will certainly be felt by sovereign bond holders (and already has been felt by those who owned Greek issues), it will quickly spread across the board to banks, businesses and pensioners — in time wiping out the lifetime savings of anyone who is “all in” on fiat currency units.

In this environment, gold isn’t just a good idea — it’s a life saver. And gold stocks are not just a good contrarian opportunity, they are one of the few intelligent speculations available in an uncertain investment landscape. By speculation, I mean that, at these prices, they offer an understandable and reasonable risk/reward ratio. Put another way, every investment — even cash — has risk these days. With gold stocks, you at least have the opportunity to earn a serious upside for taking the risk… and the risk is much reduced by the correction over the last year or so.

Now, that said, there are some important caveats for gold stock buyers.

• With access to capital likely to dry up, any gold-related company you own must be well cashed up. In the case of the producers, this means a lot of cash in the bank, strong positive cash flow and a manageable level of debt. (Our Casey BIG GOLD service — try it risk-free here — constantly screens the universe of larger gold stocks for just this sort of criteria, then brings the best of the best to your attention.)

  In the case of the junior explorers that we follow in our International Speculator service (you can try that service risk-free as well), the companies we like the most have to have all the cash they need to clear the next couple of major hurdles in their march towards proving value. That’s because a company can have a great asset but still get crushed if it is forced to raise cash these days… and the situation will only get more pronounced when credit markets once again tighten as the global debt crisis deepens.

• Beware of political risk. Despite the critical importance of the extractive industries to the modern economy, the industry is universally hated by politicians and regular folks everywhere. If your company — production or exploration — has significant assets in unstable or politically meddlesome jurisdictions, tread carefully. And it’s important to recognize that few jurisdictions are more politically risky than the US. This doesn’t mean you need to avoid all US-centric resource stocks — but rather that you need a geopolitically diversified portfolio that you keep a close eye on at all times (something we do on behalf of our paid subscribers every day).
• Know your companies. Some large gold miners are also large base-metals miners. And at this juncture in time, personally I’m avoiding base-metals companies like a bad cold. While most base-metals companies have already been beaten down — and hard — over the last year and a half, the fundamentals remain poor. Specifically, they not only have the risk of rising production costs and political meddling, but unlike gold — where the driving fundamental is its monetary role in a world awash with fiat currency units — the base-metals miners depend on economic growth to sustain demand for their products. In a world slipping back into recession — or perhaps, in the case of Japan and China, tripping off a cliff — betting on a recovery in growth is not a bet I’d want to make just now.

Having gone on longer than anticipated, I will now edge for the exit on this topic by pointing out that while it is hard to accurately predict the timing of major developments in any one economy, let alone the global economy, there are a number of tangible clues we can follow to the conclusion that the next year will be a seminal one in terms of this crisis.

For starters, there is the next round of Greek elections on June 17, the result of which is likely to be the anointment of one Alexis Tsipras as the head of state. An unrepentant uber-leftist whose primary campaign plank is to tell the rest of the EU to put their austerity where the sun doesn’t shine, the election of Tsipras would almost certainly trigger a run on the Greek banks, followed by a cut-off of further EU funding and Greece’s exit from the EU. And once that rock starts to slide down the hill, it is very likely that Spain and Portugal will follow… after that, who knows? As I don’t need to point out (but will anyway), June 17 is right around the corner, so you might want to tighten your seat belt.

A bit further out, but not very, here in the US we can look forward to the aforementioned fiscal cliff. Or, more accurately, the political theatrics around the three colliding co-factors in that cliff (the approach once more of the debt ceiling, the expiring tax cuts and mandated government spending cuts). While the outcome of the theatrics has yet to be determined, it’s a safe bet that the government will extend in order to pretend while continuing to spend — and by doing so, signal in no uncertain terms that the dollar will follow all of the sovereign currency units in a competitive rush down the drain.

Bottom line: Be very cautious about industrial commodities as a whole, at least until we see signs of inflation showing up in earnest, but don’t miss this opportunity to use the recent correction to fill out that corner of your portfolio dedicated to gold and gold stocks.

(Silver? Personally, I own some silver investments and believe it will do just fine over time — but I see no big rush to build a bigger position today as the metal’s industrial applications are likely to be a drag on its price for the next little while.)

David Galland is the managing editor of Casey Research.

The Best of David Galland

For pretty much everyone, no matter where they are located in the economic strata, few if any questions are more germane to making plans for the future than whether the US and other major global economies are in recovery.

Getting the answer to that question right is of special importance to investors and businesses.

Stating the obvious, if the broader economy really is in recovery, then investors would be well served by investing in the equities of solid companies positioned to take advantage. Similarly, those very same solid companies would be rewarded by increasing their productive capacity through investments in the plants and people necessary to meeting growing demand.

On the same side of the ledger, bond investors would want to begin shorting up their durations or leaving the bubbly bond market altogether, in anticipation that the flood of funds into fixed income would reverse, sending rates higher (and bond prices lower).

Conversely, if the recovery is a head fake, then an entirely different course of action is called for. For instance, one would want to adopt a cautious attitude about common stocks. And because of the nature of the crisis — crushing levels of sovereign debt — one would want to take advantage of pullbacks in precious metals to buy more, along with other so-called “tangibles.” That way they would have some measure of protection against the inflation that fiat-currency powers make all but a certainty.

In addition, reducing personal and business spending in order to conserve rainy-day cash would be advised.

And what about US bonds in the no-recovery scenario? A sound case can be made for including them in a portfolio as that puts you in lockstep with the government’s desperate need to keep interest rates down — or, better yet, have them fall further still. Given the highly politicized nature of our economy, that seems reasonable — and anyone who has been long bonds over the last few years has done very well, indeed.

While you’ll have to make your own call on bonds, my own enthusiasm is curbed by looking at the charts of the upwards-spiking interest rates on the bonds of Spain, Greece, Italy, and so forth. When Mr. Market ultimately becomes disenchanted with the fiscal excesses of the sovereign deadbeats, he can express his ire most energetically. When the current bond bubble here in the US ultimately bursts, as it must, it’s going to be a bloodbath.

Of course, there is much, much more at stake to coming to the correct answer on the recovery, or lack thereof, than that.

For instance, poor economies make for poor reelection odds for political incumbents. And when it comes to maintaining a civil society, the lack of jobs inherent in poor economies often leads to a breakdown in civility. On that note, overall unemployment in Spain is now running at depression levels of almost 25%, and youth unemployment at close to 50%. How long do you think it will be before the citizens of this prominent member of the PIIGS will refuse being led to the slaughter and start taking out their anger on the swine (governmental and private) seen as bearing some responsibility for the malaise?

Meanwhile, back here in the United States, the commander-in-chief is striding around the deck of the ship of state trying to look like the right man for the job in the upcoming election, despite the gaping hole of unemployment just under the economic water line. His future prospects are very much entangled with this question of recovery.

So, what’s it going to be? Recovery… no recovery… or worse, maybe even a crash?

We all have a lot riding on getting the answer right.

The Quest for Confidence

Ultimately, the purpose of searching for the truth about the recovery isn’t about either fear or greed. It’s about confidence.

If you really knew what’s coming, then the right moves to make become obvious. You could then make those moves with the calmness of spirit that comes from certain knowledge and get on with your life. While others struggle or miss an opportunity by betting on the wrong future, you’d have set up your affairs to survive and prosper.

Of course, given that we are talking about a complex system — the economy — total certainty is never completely possible. But for reasons I’ll share, the nature of the current crisis paradoxically allows for more certainty than would normally be the case.

And so I want to share my conclusion about how I believe things will unfold from here, followed with some support for that conclusion.

While, as readers of any duration are well aware, we at Casey Research foresaw the current crisis years in advance and have remained firm in our conviction that the recovery is a charade… based on my own readings, and after spending the last two weeks in the company of a couple dozen very plugged-in economists, top-performing money managers, and top financial analysts, my conclusion is thus:

The world’s largest economies, including the US, Europe, Japan, and China are speeding for the equivalent of a brick wall. In short, I believe that before this crisis is over, we will experience the Greater Depression my dear friend and business partner Doug Casey has long anticipated.

In case that conclusion fails to communicate my current view sufficiently clearly, I will condense it as follows:

The world’s largest economies are screwed.

And I will even set my conclusion to music, in the form of the song Somebody That I Used to Know by Gotye, which seems appropriate because the economy that we used to know won’t be back again for many years to come.

Trust me, stating an opinion on the direction of the economy in such unequivocal terms troubles me. For starters, I wish my conclusion could be otherwise because no one likes to be a harbinger of doom. Mostly, however, I have long resisted adopting a set-in-cement position on something as wiggly as the future. In my experience, anyone who absolutely, totally buys into a particular future is almost always proven wrong by time.

Yet, as my quest for certainty unfolded, I could come to no other conclusion than that the world as we know it is headed for an economic catastrophe.

Allow me to explain.

The quest started with our Casey Research Recovery Reality Check Summit, April 27-29, in Weston, Florida. We took our mandate of getting to the bottom of this matter of recovery seriously, including faculty members with a variety of perspectives to see if an overarching conclusion about the recovery could be ascertained.

In addition to our own team of Doug Casey, Bud Conrad, Terry Coxon, Louis James, Marin Katusa and Jeff Clark, included in the faculty were: Lacy Hunt, former economist with the Dallas Fed and the world’s most successful bond manager; Jim Rickards, money manager and author of Currency Crisis; John Mauldin, best-selling author of Endgame and the just-released The Little Book of Bull’s Eye Investing; John Williams of ShadowStats fame; Porter Stansberry, founder of Stansberry Research; Michael Lewitt, editor of The Credit Strategist; Gordon Chang, China analyst; Harry Dent, author of The Great Crash Ahead (who also debated James Rickards on the question of inflation or deflation); Andy Miller on real estate; Greg Weldon of the Weldon Report; John Hathaway of the Tocqueville Funds; resource market guru Rick Rule of Sprott Asset Management; Caesar Bryan, a senior portfolio manager for the Gabelli Fund group; and David Stockman, the head of the Office of Management and Budget during the Reagan administration.

(Plus, on the taking-action front, there was a special panel on international diversification as well as panels where a dozen or so experts on everything from gold stocks to uranium, to rare earths, to graphite, to technology, to energy gave their best picks.)

In other words, a full program.

Then, immediately following the conclusion of our summit, Olivier Garret, Casey Research CEO and partner, and I climbed on a plane for California and John Mauldin’s Strategic Investment Conference.

John’s event was geared more for hedge fund and very-high-net-worth investors and, as such, included a more mainstream slate of speakers, but what a slate it was.

For the better part of three days, Olivier and I hunkered down to hear presentations and meet with the likes of: David Rosenberg, the star analyst of Gluskin Sheff; H. “Woody” Brock, an economist with some of the deepest credentials in the business (you can Google any of these guys for bio info); economic historian and best-selling author Niall Ferguson; Marc Faber of the Gloom, Doom and Boom Report; David McWilliams, the popular and very erudite Irish economist; David Harding of Winton Capital Management; Jeffrey Gundlach of DoubleLine Capital; Lacy Hunt again… and my favorite for this conference, Mohamed El-Erian of PIMCO fame.

In other words, for the better part of two weeks, I was immersed in presentations and one-on-one discussions with truly some of the smartest, best-studied people in the world today on economics and investment markets — with the primary topic being whether the so-called recovery is real, and the consequences if it falters.

While the speakers used a variety of methodologies to approach the topic, when all was said, the only conclusion that could be reached was that the world is headed for a very challenging period.

That conclusion was for the most part derived from three aspects of the many presentations:

1. Hard data. Tallying up all the charts and tables I viewed and heard discussed over the last couple of weeks, if such a thing were possible, would produce a number well in excess of 1,000. While there were some that dealt in forward-looking projections, the vast majority dealt with the here and now, as well as the historical context of how we got here.  
2. What wasn’t said. For business reasons, many of the big-name money managers couldn’t come right out and say that we were heading for a crash, but they all took pains to communicate in not so subtle ways that this was a likely outcome. Tellingly, not a single speaker over the entire two-week period — at either event — came out and said that we could expect a normal business-cycle recovery to continue.  
3. The complete lack of practical discussion about how the world can avoid hitting the wall. While the pessimism was palpable, even among the usually perma-bull Wall Street types, at no point did anyone espouse a politically feasible solution to avoid the coming crash. The few who even attempted to point to a solution, at best, mumbled platitudes about the politicians finding the spine to adopt fiscal-austerity measures. One of the speakers — something of a gas bag, it must be admitted — pronounced in all seriousness that the only solution to the economic malaise was for everyone in America to rush out and read his book. As an aside, over the course of lunch with that same gas bag, we had a discussion that went something like this:

[Me] “All of the speakers, you included, point to the current trend of higher debts and deficits and say they are untenable, and so the big economies will hit a wall in the not-too-distant future. Yet hardly anyone actually then defines what hitting the wall will look like.”

[Him] “Yes, well, things will likely get a bit messy if the politicians can’t pull together to address the structural problems in the economy.”

“But wouldn’t you agree that, given the nature of our democracy, the odds of the politicians taking action before we hit the wall are almost nil?”

“Not at all. If everyone in this country would read my new book, they would understand the situation and rise up to force their elected representatives to take the right action.”

“Seriously? The only way to avoid the next leg down is if everyone in the US reads your book? That’s it?”

At which point — I kid you not — he picked up his plate and changed tables. (There’s a reason I am only rarely allowed out in public.)

But the fact remains that other than perhaps Doug Casey and a small handful of other presenters at our conference, almost no one even attempted to anticipate just what happens when the crisis swells up to its full height and then comes crashing down.

Or, specifically, what the consequences are likely to be when the world’s largest economies all hit the wall at more or less the same time. For the record, I have compiled a list of the ten largest economies in the world, and a reasonable assessment of their current situation follows in descending order by size of GDP:

United States — screwed

China — really screwed

Japan — massively screwed

Germany — pretty screwed, especially in that export economies take a big hit in a crisis

France — le screwed!

Brazil — somewhat screwed

United Kingdom — blimey, screwed too

Italy — properly screwed

Russia — hardly screwed at all (lots of resources and next to no government debt)

Canada — pretty screwed, eh?

As concerning as it is to see how many of the world’s largest economies are in trouble, the biggest problem of all is that the central bank reserves of virtually every country in the world are stuffed with US government IOUs masquerading as tangible assets.

So, what happens when the world’s reserve currency enters collapse and the dollar turns into a hot potato? Don’t know, but I’m pretty sure we’ll find out in the not-so-distant future.

If you want your portfolio to be prepared for what’s ahead in the not-so-distant future, you’ll want to have the insights –including specific stock recommendations — the 31 speakers at the Casey Research Recovery Reality Check Summit gave. And you can have them: the Summit Audio Collection is available in either instantly downloadable MP3 format or CDs.

David Galland is the managing editor of Casey Research.

The Best of David Galland

The definition of fear seems obvious, but only because it is.

As a noun, it refers to “An unpleasant emotion caused by the belief that someone or something is dangerous, likely to cause pain, or a threat.”

Used as a verb, it references “Being afraid of someone or something as likely to be dangerous, painful, or threatening.”

Moving to the proverbial 50,000-foot view, we humans have an innate capacity to experience the “unpleasant emotion” of fear in myriad ways. While fear is an intensely personal emotion, it can sweep through entire populations, much the same as a herd of gazelles are sent into fearful flight by the scent of a lion.

Unlike a few dozen gazelles foraging on the plains of the Serengeti, however, the technological advancements made by the human ape can result in a population numbering in the hundreds of millions, or even billions, becoming almost simultaneously “afraid of something or someone.” While the flash-fire of fear usually won’t result in wholesale scampering for cover, la the always graceful gazelle, it can absolutely result in quick modifications in human behavior on even a global scale.

For example, an economic crisis can cause billions to clamp their wallets tightly shut and refuse to open them until the scent of danger passes.

That said, while fear can be experienced more or less simultaneously by the multitude, per my remarks just above, by definition the emotion is intensely personal and individualized. Simply, the level of fear experienced by each of us, and our response to that fear, will largely depend on the nature of the fear-evoking stimulus and our individual psychology. The aurophobic, for example, is frightened by the presence of gold whereas I suspect most dear readers will experience exactly the opposite emotion. (Think you know how many different phobias there are? You’ll think again after reviewing this list.)

With that bit of stage-setting, I will now proceed in what I hope will be a mostly methodical fashion on to the ways that these unpleasant emotions can affect us as a society and, more to the point, on an individual basis.

Institutional Fear

It is no secret to any thinking person that the institutions we humans allow to grow up above us on the societal org chart — governments and religions, to name two of the most prominent — long ago made the calculation that fear equals control.

It is not an accident, in my view, that in the history of most nations, there are no prolonged periods where there isn’t some sort of big threat dangling over the populace like the proverbial blade of Damocles.

And if, by some oversight, a government had allowed a lapse in its drumming up of mass fear, the gap is invariably filled by the “always there” threat of fire and brimstone, or its equivalents in the world’s many religions.

While it may seem cynical to accuse governments and religions of deliberately unleashing fearful scents into the herd, the historical record is clear on the matter. In fact, the record is so well documented that it must be taken as a standard operating policy. And it has only gotten worse in modernity as the fear-spreading operations of these institutions are made easy in the extreme by a combination of massively improved communications and a media without any ethical reservations when it comes to enthusiastically exaggerating the things we fear in order to gain eyeballs on their pathetic offerings.

But even if you were to take a kinder view toward the PIPs (Ponzis in Power) and assume that their constant concerns are sincerely felt as opposed to callously calculated, the net effect on society is the same. Case in point, Lyndon Johnson was, apparently, completely convinced that victory in Vietnam was the only thing standing between the free world and global communist domination. In his own words, following the end of his presidency:

“I was as sure as a man can could be that if we didn’t live up to our commitments in Southeast Asia and elsewhere, [the communists] would exploit the disarray in the United States and in the allies of the Free World.”

~ Former President Lyndon Johnson

Apparently, he was so convinced in his fears that he used a false report of an attack on US destroyers in the Gulf of Tonkin off the coast of North Vietnam as an excuse to ramp the Vietnam conflict into a full-blown war.

Whether Johnson was a part of the falsification of the report might be debatable, but what is not debatable is that on the very night he purported to have received the report, without waiting for any details, he went on national television and announced in terms evoking comparison with FDR following Pearl Harbor that “Aggression by terror against the peaceful villagers of South Vietnam has now been joined by open aggression on the high seas against the United States of America.”

The film of his televised speech is available on YouTube, and worth a watch in that he goes into some detail about the attack that never happened. And then, having secured his rationale, Johnson never looks back as he revs up the military-industrial complex to unleash near total war on the backward country, ultimately causing the death of 58,000 young US men, about 30% of whom were drafted against their will and made to serve, and another 300,000 wounded. Then there’s the death toll on the other side, which, while the data is debatable, almost certainly runs into the seven figures.

Coincidentally, this morning I received an email from an ex-military officer friend of mine on the topic of Vietnam. I am going to excerpt it here because (a) I found it interesting, and (b) hopefully it will help head off angry emails from those Vietnam vets who still think the cost and the carnage of the war was justified.

I replied to Doug on his Conversations with Casey interview on the new Kim in Korea this week. As it turns out, about twenty years ago, I had dinner with Aaron Bank, the founder of modern Special Forces.  

Pretty tough dude, even though he probably weighed no more than 150 lbs soaking wet in his prime. He had jumped into France during WWII to train the resistance and later went to Indochina to fight the Japanese. It was there that he met Ho Chi Minh, whom he got to know well and apparently found him to be agreeable and very intelligent.

While a communist philosophically, Ho Chi Minh seemed more an anti-colonialist than anything else. He shared with Aaron Bank that more than Marx and Lenin, his true idol was Thomas Jefferson. Furthermore, it was his hope that once the Japanese were drummed out of Indochina, the Americans would support him in getting the French to take their leave as well. Bank reported back to his American superiors that Minh was the likely leader of the inevitable insurgency that would be waged against the French by the Vietnamese, and given the diminishing viability for colonialism, Americans would do well to reach out to Ho Chi Minh and perhaps broker a deal.  

Well, they didn’t, and the rest is history, as the saying goes. For their arrogance, the French were rightfully rewarded with a bad case of Dien Bien Flu, and America went on to make every idiotic choice possible in dealing with that region. Watching Colonel Bank look at us (we were about 12 seated at the table) wistfully was a very powerful experience for me as a young officer starting his career with Special Forces. Those were eyes that said “what could have been and what could have been avoided.”

But my purpose is not to dwell on the past — because as unfortunate as Vietnam may have been, it is but a speck of dust in the historical record — but rather simply to make the point that not only are governments capable of deliberately propagating fear for their own purposes, they are susceptible to fears of their own… some warranted and some not. In either case, the result can lead to catastrophic miscalculations.

Given more time, we could go on and on evaluating the motives of those people in position to instill fear in the PIPs — for instance, foreign governments looking to hide under the US military umbrella or to protect steady streams of money and other concessions reserved for regional allies. Likewise, the people in the military-industrial complex — which is to say official military and the private concerns that profit so mightily from military operations — have a clear interest in protecting their turf and stirring the pot should they think it necessary to do so.

The fact remains, however, that each of us — including members of government, as hard as it is to believe sometimes — is a member of the same species, and that species is never more than an instant removed from a fear reaction. In other words, we are completely susceptible to becoming fearful at any time, and for a multitude of reasons. This condition does not fade away when a person assumes power. In fact, if anything, it is heightened.

Imagine, if you will, what sort of preparation the military now provides a newly elected president and senior members of his incoming administration, and the sort of fear that preparation might evoke.

On that point, following is an excerpt from the excellent Top Secret America by Dana Priest and William Arkin, describing a mock crisis meeting held for Obama’s national security team just before his inauguration.

As they all sat around a large conference table, Obama’s national security advisers during the campaign, Richard Clarke and Rand Beers, laid out the scenario: Israel was about to bomb Iran. Discuss.

While they debated next steps, Clarke announced some more bad news: al-Qaeda was carrying a nuclear bomb on a freighter headed for Manhattan. Discuss.

The team forgot about Israel and Iran, and called upon a clandestine U.S. rapid-response team to interdict the ship. But the scenario shifted again: the terrorists had slipped off the freighter and onto a boat. Al-Qaeda was now headed to Boston. Discuss.

Before the team could identify which boat carried the deadly device, they were informed it had been offloaded and detonated. Cities along the eastern seaboard were evacuating. Discuss.”

Far be it from me to rationalize the steady missteps of the PIPs, but after going through such an exercise, I’m surprised that the Obama administration’s first collective act upon assuming power wasn’t to just turn most of the Middle East into a glass-topped parking lot. Is it any wonder the US has a trillion-plus-dollar defense budget?

In my opinion, which will come as no surprise to regular readers, the way to greatly reduce these sorts of institutional fears is to stop running around the world taking sides with petty despots and starting wars. Isolationism? Maybe, maybe not — but it seems like things couldn’t get a whole lot more screwed up than they have by following the current policy of widespread meddling.

Pulling sharply back onto the tracks, the point I am trying to make is that fear as both a policy and a policy driver is of no small consequence. Continuing with the US-centric commentary that is an understandable consequence of the geographic accident of my birth, fear has rarely been as big a factor in US policy as it is today.

In addition to the massive military budget that provides funding to huge new entrenched bureaucracies that will resist every attempt at real cuts, I’ll also mention:

• The trashing of the Constitution. I have written enough on this topic — you and I both know the situation, so it doesn’t need to be repeated.
• Economic uncertainty. The policy of constant meddling in the Middle East is only causing things to get more uncertain and unstable. Sure, some of the ruling thugs in the area are being chased out — but only to be replaced by a new group of ruling thugs. Much of this is happening in and around the world’s fuel station, and the situation has the potential to get much, much worse if any one of the sparks now floating in the air of the Middle East — especially those around Iran — touches one of the many piles of powder that have been allowed to build up. At that point the price of oil is going to go ballistic — and if there is one thing a struggling economy can’t handle, it is another surge in oil prices. (You can click on the interactive graphic to get some sense of the relationship between oil prices and GDP growth.)

Interestingly, now that the fires of discontent in the Middle East are burning brightly, the Obama administration has announced that the Pentagon will be shifting its attention to Asia in order to counteract the threat from China. That should be fun.
• A steady increase in the public’s reliance on the government to protect it. A culture of fear inevitably leads to public support for government policies ostensibly designed to protect the citizenry from every possible bogeyman. One result of the ramp-up of fear following September 2001 has been the proliferation of massive new bureaucracies, as well as huge new bodies of regulation that hamper the free movement of people, materials and technology so essential to economic growth. At this point, things have gotten to the point where they are as ridiculous as they are concerning.  Case in point, we now have TSA “VIPR” squads setting up security check points here, there and everywhere. This video shows such a checkpoint set up to screen people getting off a train in Savannah, Georgia. Which makes me wonder what they would do to a citizen who refuses to play along? Force them back onto the train? And how is this different, I ask, from the iconic line associated with fascists the world over, namely, “Your papers, please!”? Ultimately, not only is 99% of this dangerous nonsense ineffective, but it is also emasculating to the character of the people. Hey, did you see the latest?

The spread of mandates and discussion of ignition interlocks will “prime the public” for the day when the government requires auto manufacturers to install even more sophisticated alcohol-detection devices as original equipment, Longwell said.

The Driver Alcohol Detection System for Safety, funded in part by automakers and the National Highway Traffic Safety Administration, says it is working on “potential technologies that could detect alcohol from air samples in the vehicle passenger compartment, through the driver’s skin using tissue spectroscopy, from emissions through the skin, from eye movements, and from driving performance.”

It matters not that drunken-driving fatalities have fallen by half over the last twenty years, the nanny-state meddling will continue apace. And while you could argue that a car that senses when you should drive based on what has been shown to be a largely artificial and dubious standard (a topic for another day) is a good idea, when you look to the government to provide total security in a world that is inherently insecure, you multiply the meddling to the point where you might as well just have the state plug you into the Matrix and be done with it.  

As you know, I could go on, but chances are good I’d just be telling you things you already know. The point, though, is that the build-up of fear-driven policies has been so extreme since September 11, 2001 that we now face the very real potential of a police state-caliber crackdown on the citizenry should another 9/11 occur. And, given the amount of meddling the USG does around the world, such an event could happen anytime.

At least that is my personal fear. Which, conveniently, brings me to the next segment of these musings.

Personal Fears

There is, of course, a feedback loop to the societal fears discussed above. For example, the stampede caused by self-serving NGOs’ over-inflated environmental concerns that resulted in a fearful public demanding that governments spend yet more money they don’t have on wasteful and often counterproductive subsidies, such as those involved with ethanol and Finland-built electric super cars. However, as mentioned, the need to assess threats and deal with fear is something that each of us have to deal with on a very personal level.

While there is literally no end to the fears that might torment the human mind, I’d like to tackle just a couple of the big ones that I know — from your letters and from your comments when we meet at our events — weigh heavily on the minds of many.

Fear of Government. In his client communications, libertarian defense attorney Marc Victor likens the government to a crazed ape, explaining that job number one for anyone who comes into contact with the crazed ape is to get out of its grasp as quickly as possible. This advice, Mark will tell you, applies to every interaction with the ape — including something as mundane as a routine traffic stop that, should you decide to be confrontational or think it a dandy time  to lecture the officer on your constitutional rights, could end with you bleeding out on the pavement.

Given the wanton trashing of the Constitution in recent years — and the trashing has been done by all three branches of government — you are entirely justified in fearing your government. The question, then, comes down to, “So, what can I do about it?”

Following Marc Victor’s advice, the decision tree is fairly simple.

? Stay within the easy reach of the crazed ape, but quietly tip-toe through daily life in the hopes of avoiding attention. Should a hairy hand be laid on your shoulder — or, in the case of a TSA pat-down, your groin — make appropriately supplicating sounds (thanking them for protecting you, or even a slight whimper may suffice) and hope they will let you go. Try your hardest to comply cheerfully with all the latest taxes and regulations (I say “try” because at this point, no one can even know what all the regulations say, let alone afford the bevy of legal counsel required for complete compliance) and get on with your life. ? Spread the risk. Having all of your assets, and all your personal support systems, within the boundaries of one political regime leaves you and all you own as so much chattel. Diversifying your assets and your life across jurisdictions, if you can afford to do so, will open up new intellectual and lifestyle horizons, as well as provide you with the peace of mind that should the crazed apes in one country become especially frenzied, you can more readily step out of reach.

There really aren’t any other options, making your decision on how to cope with this particular fear actually quite simple. So, make your choice and fall in line with it and stop worrying so much. Personally, I choose the latter.

Economic Outlook. We investors have any number of fears related to the economic outlook, many of which are overlapping. Again, these fears are justified, for the simple reason that serious bouts of inflation, deflation or depression can literally wipe out the personal assets we have spent a lifetime of hard work accumulating. Though the government is capable of taking abrupt actions that result in near instantaneous wealth destruction, the persistent effects of a serious economic crisis — which are almost always also the result of government meddling — can be just as devastating, albeit over a somewhat longer period of time.

How do you cope with fears over the future of the economy? For starters, by facing the facts. For example, while we here at Casey Research have a very respectable track record of forecasting economic trends — as often as not by analyzing the most likely actions a government will take, and the most likely consequences of those actions — the truth of the matter is that no one can predict the future.

Let that sink in, because it’s really important.

Thus, while we believe that the logical consequence of any fiat monetary system is the creation of excess debt leading ultimately to the wholesale currency debasement of the currency and, so far, that’s the way things have mostly worked out, tomorrow, literally, everything could change. Things could, in fact, get much worse, much quicker, than we expect. Or things could surprise us by getting much better. Who knows, maybe the US government will come to the conclusion that the path it is currently on is not going to be helpful in fulfilling its political agenda (i.e., to retain power) and make actual change, versus just flapping its collective gums about it. 

The key point I am trying to make is that no one can predict how any particular economy, let alone the rather wiggly construct of a “global economy,” will roll out over the next few years. So how can you and I personally manage the risk that the economy is headed towards a net worth-destroying outcome? After all, if we can’t get a handle on that risk, we can’t get a handle on our fear.

Some thoughts.

First, recognize that if you actually knew how things were going to unwind, you would be entirely justified in betting the house (literally) on the investments that would do well in the environment you expect. But given that none of us can really know how things are going to turn out, that sort of certainty will almost always cause you to end up being not just a loser but a bankrupt one.

Sad to say, a number of dear readers regularly tell us that they are “all in” on precious metals in expectation of elevated levels of inflation. If that sounds like you, then good luck… but given the vagaries of the future, you should give serious consideration to dialing back your allocation to something less than a “do or die level.”

Accepting that the future is immune to accurate prediction, what approaches can you take to avoid a life-changing wipeout?

• Diversify assets internationally. This diversification has to take a number of forms to be effective. For instance, the assets you invest internationally have to be denominated in a variety of different local currencies. And the assets should include gold, as that is the soundest form of money. Equity investors should also look to build a portfolio of common stocks of financially strong and profitable companies in foreign markets that are deeply undervalued. Even if you thought the US market were going to do well in 2012, you would need to approach the matter from the perspective that there are much cheaper markets elsewhere. For example, while the US stock markets were flat in 2011, the Brazilian market fell close to 20%. I would contend that when it comes time to go equity shopping, shopping for high-quality issues in the Brazilian bargain basement makes a whole lot more sense than sticking entirely to overpriced US issues. (On this general topic, gold stocks are now looking very undervalued, something addressed in the just-released Casey International Speculator (risk-free subscription details here). To put that contention in perspective, while gold bullion was up about 9% in 2011, the Toronto Venture Exchange index, which is dominated by junior resource stocks, was off 35%.) Sadly, it is a well-documented fact that most investors pour their money into stocks and markets only after they have had their big run-up, versus taking the run-up as a signal that the market is more likely to be overvalued and therefore it’s time to think about selling. Regardless, while the US government has been creating de facto price controls by implementing regulations that make few foreign institutions want to do business with Americans, there are entirely legal and prudent ways to open foreign bank and brokerage accounts and relationships with financially sound precious metals storage businesses.  
• Understand the true nature of risk, and operate your investment portfolio accordingly. If you ask the average investor to explain the meaning of risk as it applies to investing, the vast majority will get it wrong. They might, for example, say risk means that a particular market or markets could crash, or that this gold stock or another is risky because it could go down. Risk in terms of an investment, however, has to do with the probability that you will be forced to sell your investment at a loss. There are two facets to that concept. 1) Your personal balance sheet is in tatters. If you owe more than you own, or your outgoing exceeds your incoming, then the odds are pretty high you might be forced by circumstances to scramble for liquidity during a downturn in the market or the economy. Conversely, if your incoming exceeds your outgoing, and you have liquid assets tucked safely away in sufficient quantities to meet your reasonable needs for a year or more, then the odds of you being forced to liquidate at the wrong time — and therefore take a real loss, versus a paper loss (a misnomer) — are very low.  A good way to think about this is to think in terms of your home. If you plan on living in your home for an extended period of time and can easily handle the mortgage and attendant costs, then whether the housing market sinks or soars is largely of no consequence. Likewise, if you own good assets and have no foreseeable need for the money tied up in those assets, the price action of the markets those assets trade on will, in most cases, be irrelevant. 2) You don’t overpay for your investments. In the paragraph just above, I used the term “good assets.” So, what makes a good asset when it comes to an investment portfolio? Generally speaking, it is an asset with strong fundamentals that has some specific role to play in meeting a particular investment goal. Sometimes that goal will be to contribute to portfolio appreciation, sometimes it will be to generate yield, and sometimes it will be as insurance to protect against currency debasement. Regardless, there are no conceivable goals to be met by an overvalued asset. Put another way, overpaying for an investment is the quickest way to add risk to your portfolio. That’s because while an undervalued investment may get even more undervalued over some period of time, the inherent value in the asset ensures that it will return to fair value at some point in the foreseeable future. By contrast, the best an overvalued asset can do is to fall to its fair market value. More likely, given the nature of markets, it will almost certainly fall even further than that. Thus, paying too much for any asset you buy is essentially buying investment risk. Know what you own and why you want to own it… never chase a stock or a market after it has already had a big run-up (unless you know of an external reason why it almost certainly must go higher)… and even when you find a fair value, be patient in buying it (either with a stink bid or through buying it in a series of purchases to take advantage of dollar cost averaging).

Owning good assets, internationally diversified, will go a long way to reducing your fears over both the actions of your government and the uncertainties of the economy. While it may not be as easy as parking your money in CDs down at the local bank, it’s not brain surgery either. 

As I am, as usual, running late and long, let me try to wrap this up.

It is ingrained in all of our nature to worry about things. Objectively, there is no question that the US and many of the world’s largest economies have been misdirected by all-powerful governments into a state of heightened risk. Thus, we are correct to fear what’s coming.

But it is very difficult, and entirely counterproductive to a high quality of life, to mentally stay in crisis mode over a prolonged period of time. In other words, it’s not healthy or helpful to spend hours each day fretting over the future.

In these musings, I have tried to make what I believe are some commonsense suggestions for breaking the cycle of fear, at least as it relates to the big issues of governments that are increasingly willing to trample individual rights, and to the consequences of historic levels of sovereign debt that make the dead hand of the state on the economy especially heavy just now. As things are likely to get worse on both fronts before they get better, caution and taking active measures to mitigate the risks are certainly warranted.

But once you take those steps, then do yourself a favor and step away from the electronics and get on with whatever gives you the greatest pleasure in this life.

In the final analysis, no one gets out of here alive, and that makes time your most valuable asset — don’t squander it by spending even a minute longer than necessary in fruitless worrying.

And now I must move along.  Because I’m running so late, I’m going to skip Friday Funnies this week in order to ensure I have time to share a quick review of some items that came to my attention over the holidays that I think you might enjoy.

Entertainment and Apps

Never being particularly good at coping with excessive amounts of free time of the sorts normally accompanying year-end holidays, this year I did some casting about for diversions and found a couple I thought you might also find diverting, and maybe useful, in the new year. 

Cool iPhone Apps. There were two free iPhone apps that tested out over the holidays that I thought you might also find pretty cool. 

Dragon Go! I haven’t yet experienced the Siri feature that is built into the latest iPhones, as I have the previous-generation phone sans Siri, but my understanding is that the Dragon Go! app provides much the same, and maybe better, functionality. The app allows you to push a button and say what you want to know, or find, on the Internet — and in the proverbial blink of an eye, a page comes up with tabs for various website pages containing the information you are looking for. For example, if you say, “Chinese restaurant near here,” Dragon Go! might assemble a page with tabs for OpenTable, Trip Advisor, Maps, and Google… all of which would have used your phone’s location to hone in with the names of local Chinese restaurants, complete with ratings, reviews, contact information and the quickest routes to get there.

But it’s much more robust than that — and so far I have been hard pressed to stump the chump — despite periodically (and, admittedly, annoyingly) whipping my phone out in the middle of conversations throughout the holidays to ask it to produce arcane bits of information to settle a question or point of contention.

Why, I bet I could ask it, “What’s better, Siri or Dragon Go!” and get a prompt answer. So I will. (The answer, according to PCMag Mobile, is Dragon Go! If I wanted to watch a YouTube review, there were dozens of those, too.)

Not so long ago, I did a write-up of the Singularity conference presentation by the folks who designed the Watson computer that unseated a human Jeopardy champion. While that computer and programming are clearly a lot more sophisticated than Dragon Go!, it’s worth noting that it takes up a space the size of a cargo container and requires massive power inputs whereas Dragon Go! requires an undetectably small corner of your iPhone’s memory.

Though it won’t give you a single answer to your request and takes a few seconds longer than Watson might, the end result is that it is remarkably effective at getting you the information you are looking for in just seconds. Not only is it a great tool for quickly finding the answers to just about anything, it’s great party trick — although you might wear out your welcome at said party if you pull it out every couple of minutes to settle some discussion point.

Google Translate. Google Translate, which is also free, is just as much of a game changer. Those of you familiar with the books and TV series The Hitchhiker’s Guide to the Galaxy will remember the Babel fish, a small fish you can stick in your ear that automatically translates spoken foreign languages into your own. While you wouldn’t want to try to cram an iPhone with the Google Translate app on it into your ear, the functionality is much the same. Specifically, you speak any phrase you want, and it is immediately translated into text in any one of 60 languages, on many of which you can also then play back the audio. Thus, when you are lost in transition somewhere, you can talk your question into your phone and either show the resulting translation to a helpful local or even play it back. Of course, not all the translations will be perfect, though that they have come this far, this fast makes it a certainty it will only get better. But it sure beats waving your arms around and speaking louder in the hopes of being understood.

Damages. Changing mediums to entertainment, I will mention that while we caught a couple of decent movies over the holidays, none were particularly noteworthy. But we did stumble across a television series — Damages — running on the FX cable channel that very much was. The series is available as a Netflix instant download (we don’t have cable), and after watching the first episode of Season One, we were utterly hooked. The series is about a high-powered, high-stakes lawyer played by Glenn Close who, if memory serves, won an Academy Award for her performance in (wait a second… “Academy Award winner Glenn Close” I say. The World According to Garp, Dragon Go! helpfully answers). The show is designed so that each season is a single story, told episodically. And the story, much to our surprise given normal television fare, is very complex and intriguing. Once you start watching, it is very hard to stop.

Hope you find those diversions of interest.

David Galland is the managing editor of Casey Research.

The Best of David Galland

While I haven’t made a scientific study of the topic, I suspect the leading genre for popular entertainment — and for popular delusions of crowds, for that matter — revolves around magical worlds. As illustration, the Harry Potter series will serve.

The problem is that there is no such thing as magic, at least not in the mystical sense (versus sleight-of-hand variety). Rather, the physical world, and even the metaphysical world constructed by humans in their ancient and long-running quest for protection from the physical world, operates within the boundaries of certain irrefutable truths.

In the first instance, the laws of physics are only rarely found wanting; in the second, basic principles of economies are inviolate, or should be if you actually want an economy to succeed for any length of time.

This unblinking faith in an all-caring, omnipotent “Godvernment” is terrifyingly misplaced: it not only runs contrary to many of those truths but runs contrary to nearly every important lesson history has to teach. Look no further than the debts and deficits of Godvernments around the world to see the consequences of trying to keep this myth alive.

That this faith is on the increase, versus the opposite, should be very concerning… both to those who believe in the rights of individuals and to those trying to build and maintain a reasonable standard of living in this age of deep uncertainty.

Especially in that most, if not all, of that uncertainty, as well as active threats to the general well-being, emanates from the very Godvernments people look to for salvation and sustenance. The graphic shown here demonstrates this point vis vis US security policies soberingly well.

Now, I am sure that some of you view these remarks as just another libertarian tirade, and I guess to some degree, they are.

Yet, I think there is an important underlying point that requires serious reflection. Namely, with people the world over trapped in a delusional and self-destructive cycle of believing that the Godvernments can solve all that ails — even though almost all that ails is caused or made worse by those very same institutions — then things can only get worse from here.

It’s like all but the tiniest minority of the world’s population have been brainwashed into joining a dangerous cult. A cult whose leaders are unscrupulous about stripping their followers of their wealth, their dignity (see cartoon above) and their sense of individuality, while rewarding their most ardent supporters with pensions, tax breaks, a leg up over competitors and, if push comes to shove, hard cash in the form of bailouts.

Viewed through this lens, the thinking individual — you, for instance — should see the need to take certain self-protective measures. And since few things are as useful as a high net worth when it comes to protecting your independence, there are opportunities to chase down as well.

Some suggestions, a number of which you may have heard before.

1. Expect the latest eurozone patch-up job to come unglued. When you have the heads of the eurozone’s largest countries talking about levering up bailout funds or ringing up the Chinese to ask for money, you know the latest “solution” to the eurozone’s intractable problems is little more than a hastily concocted plan to kick the wine bottle just a bit further down the road. The problem is that nothing suggested begins to resolve the structural problems of the eurozone — because nothing can be done to resolve those problems. Thus, a heads-up speculator will look for ways of betting on failure and place those bets during brief flare-ups of euro-optimism.  
2. Likewise, expect the US government’s new Super Committee to fail. Sure, they may come up with some optics in an attempt to mask the dire nature of the situation (for instance, by pushing the impact of any proposed measures out for five or more years — time enough to ignore them), but the fundamental truth in this case is that the Godvernment is hopelessly broke, at the same time the population expects it to do ever more. On the prospects for the Super Committee, and how the bond markets are likely to react if it fails, Casey Research Chief Economist Bud Conrad sent me an email:

David,

What do you think will happen when the Super Committee fails with deficit reduction and S&P follows through with its promise for another debt downgrade? Probably not that much, as the last time it didn’t wreck the markets, but if rates rise, it would not be a good call to be long stocks.

We have had good auctions from the Treasury until a very bad acceptance today that drove the 10-year Treasury to 2.4%. When I wrote my recommendation at the end of September confirming that rates were too low (for the October edition of The Casey Report), the rate was only 1.8%. This kind of move up would normally take months, not days. Here is the pretty dramatic chart:

Rising US interest rates will be a stake through the heart of the US economy. Even just a return to more normal historical averages will skyrocket the costs of servicing the US Godvernment’s mountain of debt, wreak havoc in the bond markets, and simultaneously smash any prospect of recovery in the hugely important housing sector. The key point is that this is big, important stuff you have to be preparing for.

1. Reassess the risks to you or your business. Given the sense of extreme empowerment felt by the high priests of the Godvernment, you need to keep a very close eye on your personal vulnerabilities.

   A cautionary example are the Alabama farmers who failed to anticipate the tough new anti-immigrant legislation their meddling state government passed, and who now face sure ruin due to the lack of trained workers willing to do the back-breaking work of bringing in the crops or planting new crops for next spring. Is there personal or business risk that you can take steps to mitigate now, while you still can? Especially if you are on the wrong side of the populist mantras now being heard in the temples of Washington, you can’t afford to be complacent. For example, if you or your business are involved in or reliant upon the financial services, you might want to consider developing some new lines of business. On that front, we haven’t even begun to understand the implications and effects of the Dodd-Frank Act, other than that it was written by career politicians with zero business experience in a period of hysteria following the 2008 crash, and that it is very ambitious. Think Patriot Act for financial services — there will be consequences, and I doubt many of them will be good. Investors should consider doing some short-selling or using options strategies in betting on another big leg down for the banks and the financial-services sector. (In The Casey Report, we’re using a simple options strategy to bet on the failure of a massively overindebted regional bank.)  
2. Don’t expect anyone to help you. Actually, with the growing meme to soak the “rich,” namely anyone who pays more than a modest amount of taxes, you need to wake up to the reality that you are on your own. Put another way, if you have assets, you have a target on your back. Laugh at the OWS folks if you want (and it’s hard not to), but it is their world we’ll be living in going forward, not the ones our parents or we made (and, truth be told, screwed up pretty badly). If you think you’re going to be able to afford to retire on your Social Security, think again. If you’re lucky, it will buy you a hot cup of coffee to enjoy while you and your buddies stand around the burning oil drum on a cold winter’s night. If you don’t have a respectable net worth at this point, then learn useful skills — such as how to speculate in investment markets. Or how to program computers. Apparently, the youth of today like to use the stuff but aren’t so hot on actually learning how to program — they prefer liberal arts educations. Given that many of the iconic successes in the computing industries (Gates, Jobs, Ellison) never graduated college, it would be a mistake to consider that a prerequisite. There are many more directions you might go in, including internationally, the important point being that it’s time to get going.  
3. Internationalize. With the biggest threat to your wealth and maybe even well-being coming from your own government, it’s essential that you spread your wealth into other political jurisdictions. Don’t do it hastily, but do it nonetheless. InternationalMan.com, a new site that picks up where Doug Casey’s best-selling book International Man left off, may be of some help. Remember, once exchange controls are implemented (almost a certainty), your wealth is trapped and the government will be able to have its way with your assets.  
4. Front-run the mob. For example, with the mob against all currently viable forms of baseload energy production — and they are — careful bets on rising energy prices are, over a period of time, a sure thing. Let me say that again because it seems self-destructive madness to me, but a large chunk of the mob as well as the priesthood of Godvernment are actually dead set against all currently viable forms of baseload energy. You know, the stuff that keeps the lights on at night. Coal, oil, nuclear and now, thanks to the trumped-up fracking controversy, even natural gas! While the mob hasn’t yet overrun the barriers of sanity and pulled the energy plug — though many would do so in a heartbeat — they have been very effective at slowing exploration and development of energy resources to a crawl. Actions have consequences, in this case, higher energy prices. That’s what I call an opportunity… don’t miss it. Likewise, the mob is not going to stop demanding that the Godvernment provide succor and sustenance, and so deficit spending and debt has to continue to rise, leading to currency debasement. Buy tangibles, but especially gold and silver, on any setbacks. Those are just a couple of ideas for front-running the mob, but if you put on your thinking cap, I’m sure you’ll come up with many more.

Wrapping up, I’ll repeat my basic position on all of this… in the form of an excerpt from a lightly edited response to a reader who took offense at a recent article of mine.

The left and the right both have it wrong, as far as I am concerned. Both share equal responsibility for the big dislocations that have proven so damaging to the economy and society.

Thus, I can only conclude that who is in charge is far less important than what those who are charge are actually allowed to do. The size and scope of government, in my view, has to be very specifically spelled out and very limited so that the next gang to take control can’t just willy-nilly play to the prevailing mob sentiments.

That’s how we got here in the first place. Put another way, are many of Obama’s policies counterproductive and damaging to the economy? Of course. But so were those of Baby Bush. And, before him, Clinton (who allowed the government to grab Social Security funds so that he could claim a balanced budget). And before him, Bush senior… and before him… and so forth and so on.

Unless and until we stop the madness — stop the meddling — the path the world takes will remain perilous and, fortunately for us speculators, somewhat predictable.

Will you be well positioned to survive when your Godvernment’s time runs out? The Casey Report tells you what to expect and how to protect yourself. In the current issue, read investment legend Doug Casey’s outlook for 2012 — on the stock market, the US economy, the euro, gold and silver, the Middle East, China, and much more. Also in this edition: An in-depth analysis of the Fed’s battle for low interest rates, and how to add gold to your IRA and save taxes. For just a few days, you can get The Casey Report for only $98 per year… a staggering 72% off the regular price. Start your subscription today.

David Galland is the managing editor of Casey Research.

The Best of David Galland

Tune into CNBC or click onto any of the dozens of mainstream financial news sites, and you’ll find an endless array of opinions on the latest wiggle in equity, bond and commodities markets. As often as not, you’ll find those opinions nestled side by side with authoritative analysis on the outlook for the economy, complete with the author’s carefully studied judgment on the best way forward.

Lost in all the noise, however, is any recognition that the US monetary system – and by extension, that of much of the developed world – may very well be on the verge of collapse. Falling back on metaphor, while the world’s many financial experts and economists sit around arguing about the direction of the ship of state, most are missing the point that the ship has already hit an iceberg and is taking on water fast.

Yet if you were to raise your hand to ask 99% of the financial intelligentsia whether we might be on the verge of a failure of the dollar-based world monetary system, the response would be thinly veiled derision. Because, as we all know, such a thing is unimaginable!

Think again.

Monetary Madness

Honestly describing the current monetary system of the United States in just a few words, you could do far worse than stating that it is “money from nothing, cash ex nihilo.”

That’s because for the last 40 years – since Nixon canceled the dollar’s gold convertibility in 1971 – the global monetary system has been based on nothing more tangible than politicians’ promises not to print too much.

Unconstrained, the politicians used the gift of being able to create money out of nothing to launch a parade of politically popular programs, each employing fresh brigades of bureaucrats, with no regard to affordability.

Such programs invariably surged during political campaigns and on downward slopes in the business cycle when politicians hearing the cries of the constituency to “do something” tossed any concern about balancing budgets out the window of expediency. After all, the power to print up the funds for debt service whenever needed makes moot any concern over deficit spending.

Former VP Cheney, who fashions himself a fiscal conservative, let the mask drop when, in 2002, he stated that “Reagan proved deficits don’t matter.”

Those words were echoed just a few weeks ago, when both former Fed Chairman Alan Greenspan and Obama economic advisor Larry Summers, in separate interviews, said almost the same, paraphrased as, “There is no chance of the US defaulting on its bonds, not when our government can borrow dollars and print new dollars to meet any future obligations.”

Of course, Greenspan and Summers were referring to an overt default – of just not paying – and not to a covert default engineered by inflation. Unfortunately, like virtually all of the power elite, both miss the point that the mountain of debt that has been heaped up since 1971 is fast reaching the point of collapsing like a too-big tailings pile and taking the monetary system down with it.

Importantly, the debt shown in this chart whistles past the government’s unfunded liabilities, in particular for the Social Security and Medicare systems. Adding those would more than triple the US government’s acknowledged obligations – to over $60 trillion.

Given the role the US dollar plays as the world’s de facto reserve currency – with all major commodities priced in dollars, and dollars forming the bulk of reserves held by foreign central banks – the dismal shape of the US monetary system spells trouble for the global monetary system.

Making matters worse, following the lead of the United States, governments around the world long ago adopted similar fiat monetary systems. You can see the deficit contagion in this next chart. It is worth noting that the dire condition of the United States now leaves it in the same muddy wallow as Europe’s desperate PIIGS.

In a recent article in The Telegraph, Ambrose Evans-Pritchard referenced a paper out of the BIS that paints the picture using appropriately stark terms.

Stephen Cecchetti and his team at the Bank for International Settlements have written the definitive paper rebutting the pied pipers of ever-escalating credit.

“The debt problems facing advanced economies are even worse than we thought.”

The basic facts are that combined debt in the rich club has risen from 165pc of GDP thirty years ago to 310pc today, led by Japan at 456pc and Portugal at 363pc.

“Debt is rising to points that are above anything we have seen, except during major wars. Public debt ratios are currently on an explosive path in a number of countries. These countries will need to implement drastic policy changes. Stabilization might not be enough.”

Viewing the situation from another perspective, we turn to the work of Carmen Reinhart and Ken Rogoff, who studied the factors contributing to 29 past sovereign defaults. They found that default or debt restructuring occurred, on average, when external debt reached 73% of gross national product (GNP) and 239% of exports. Using the Reinhart/Rogoff findings, Casey Research Chief Economist Bud Conrad prepared the following chart showing that the US government is already far along on the path to bankruptcy.

It’s hard to argue against the contention that the situation is, to be polite, precarious. Given that the obligations of the US government, as well as most of the world’s other large economies, are now impossible to repay and that their reserves are just IOUs backed by nothing, the stage is set for a highly disruptive but entirely necessary do-over of the fiat monetary system.

“Preposterous!” say the lords of finance and masters of all.

Is it?

Of course, these very same mavens completely missed the looming housing crash and the depth and duration of the subsequent crisis – a crisis that is still far from over. In other words, listen to them at your peril, because in our view it’s essential in calibrating your financial affairs to understand that, if history is any guide, we are now well down the road to a collapse in the monetary system.

In fact, over its relatively short history, the US monetary system has come unglued time and time again thanks to politically expedient attempts to interfere with the workings of a free market in order to reward constituents or kick the can on the economic problems of the day down the road.

Thus it is our contention that while the mainstream media focus on the daily gyrations of equity markets or the futile political charade that is Washington, they overlook powerful tectonic rumblings indicating the world’s prevailing monetary system is about to fracture.

A Brief Timeline of US Monetary System Failures

Here’s a brief history of past disruptions here in the United States. Importantly, with the US dollar now the de facto reserve currency of the world, this time around it’s global.

1861 – When the Civil War begins, the dollar is convertible into gold and silver.

1862 – Congress passes the Legal Tender Act and authorizes the issuance of non-redeemable "Greenback" currency. Convertibility into gold and silver is suspended for all US currency.

1863 – National Banking Act authorizes the chartering of banks by the federal government.

1865 – A 10% tax is levied on the issuance of bank notes by state-chartered banks, effectively ending that practice.

1879 – The US Treasury resumes redeeming dollars for gold and silver.

1900 – Passage of the Gold Standard Act, adopting the gold standard by the United States and demonetizing silver.

Specifically, the act provided for "…the dollar consisting of twenty-five and eight-tenths grains (1.67 g) of gold nine-tenths fine, as established by section thirty-five hundred and eleven of the Revised Statutes of the United States, shall be the standard unit of value, and all forms of money issued or coined by the United States shall be maintained at a parity of value with this standard…"

But 33 years later, to gain the power to inflate the currency and collect the profit from doing so…

1933 – By executive order, Franklin Roosevelt prohibits the private ownership of gold. Congress passes the Gold Reserve Act, which enacts Roosevelt’s executive order, abrogates all gold clauses in all contracts public or private, past or future (which cancels the convertibility of Federal Reserve notes into gold), though it confirms the convertibility of US Treasury notes held by foreigners into gold. Eleven years later, the US government takes its show on the road…

1944 – Bretton Woods system adopted with signature countries agreeing to tie the exchange rates of their currencies to the US dollar, which itself is linked to a fixed price of gold. Foreign trading partners retained the right to swap dollars for gold, imposing a de facto restraint on printing more dollars. For all intents and purposes, the US dollar becomes the world’s reserve currency. But 27 years later…

1971 – Nixon abruptly closes the “gold window,” unilaterally reneging on the Treasury’s promise to allow foreign governments to redeem dollars for gold. Bretton Woods collapses. With no remaining tie to a tangible, the dollar is reduced to a paper token. The transition to a global fiat monetary system is complete.

Until 40 years go by and the inevitable consequences of giving politicians free rein over money creation become untenable…

Present day – Sovereign debt crisis. Desperate, debt-laden governments around the globe – the bulk of their reserves composed of fiat US dollars and euros at risk of going up in smoke – turn to the only thing they know, printing more money and issuing yet more debt. The global monetary system cracks and heads toward failure with no workable alternative on the horizon.

Governments, corporations and investors alike are caught unprepared in the downward spiral of failing fiat currencies and are wiped out by a combination of frantic currency debasements, higher taxation, exchange controls and worse. Social unrest spreads, with the public paradoxically demanding that governments do more, not less.

That’s because all the world’s major currencies are at risk, simultaneously, as the issuers engage in a dangerous race to the bottom. As the monetary system moves inexorably toward terminal debasement and collapse, the results will be catastrophic for the unprepared.

Importantly, while the list of historical attempts to re-jigger the US monetary system have, to this point, more or less succeeded in kicking the can a bit further down the road, the sheer scale of today’s government obligations has driven us into a box canyon, with no way out. As the government’s debt and spending obligations are mathematically impossible to resolve, it is now a certainty that a lot of people are going to wake up one morning to the reality that they are a lot poorer than they thought.

Fortunately for those now paying attention, the collapse of a monetary system doesn’t happen in a flash. It is a progression, like the spiral of water down a drain. Thus, while no one can predict exactly when the downward spiral will accelerate out of control, there is still time to prepare.

Dark though the lens may be, this is the lens through which we here at Casey Research view all our investments. Simply, being right or wrong about your investment decisions in the years just ahead will be insignificant if the currencies underpinning those investments shrivel to just a fraction of their current values.

The dismal state of the US economy and out-of-control government spending affects every American’s life and wealth. In our free online event, The American Debt Crisis – How Big? How Bad? How to Protect Yourself, five Casey Research experts were joined by guests John Mauldin, Mike Maloney and Lew Rockwell to discuss the potential for a breakdown in the monetary system, and specific ways to protect and build your assets. Watch the video now.

David Galland is the managing editor of Casey Research.

The Best of David Galland

The human ape has any number of qualities not often found in other species of mammalia, including opposable thumbs and the ability to fashion and use tools.

Continuing the list, I would add a tendency to form all manner of mental constructs and to then act in accordance with those constructs, even when those constructs have little or no connection to reality.

Thus, for instance, I stride confidently onto the golf course with the firmly held conviction that I am a solid striker when, in fact, on most days I am a wild-hitting duffer of the lowest order.

But an over-elevated opinion of one’s golf game is harmless compared to some of the delusions humans are capable of. For instance, the teenager who becomes convinced that by blowing himself up in a crowd of innocents, he is serving some sort of higher purpose… or that his reward will be an eternity highlighted by bedding virgins.

A more widespread delusion is a tendency to believe in the status quo. Simply, that tomorrow will be roughly on par with today, a construct that extends out as far as the mind’s eye can see.

This particular construct is entirely understandable – it’s this expectation that things will be more or less constant that allows us to make plans and take the steps necessary to execute those plans. In other words, it is a lynchpin to human progress.

Conversely, when the controlling force of the economy that sustains us in our businesses and lifestyles is ever changeable – and these days that controlling force is the government – sensible humans become wary and start squirreling away nuts in preparation for an uncertain future. This is, of course, not conducive to a vibrant economy.

What will Team Obama dream up next in their flailing attempts at reinvigorating an economy that more than anything needs certainty? It is literally anyone’s guess. Are we going all in on the whole carbon credit thing, or is that now a passing fad? Will the Dodd-Frank Act, with its 400+ new rules for financial institutions and everyday businesses, such as automobile dealers who offer financing, help or hurt? Will the government, having bailed out the big banks, now turn around and sue them out of existence… or just until they squeal?

Is it any wonder that the banks now have upwards of $1.6 trillion in reserves sitting on the Fed’s balance sheet? Sure, they are earning a whopping 0.25% interest rate while taking no risk, as they would do if they put the money out as loans to the public. But the real implication – at least to me – is that they are keeping their capital on hand against the uncertainty of future government action and to deal with the hundreds of billions in toxic loans still on their balance sheets.

Another large subset of the human herd has become brainwashed to the point of delusion by a combination of state education, misinformed college professors, mainstream media, religious leaders and high-talking politicos into believing that they as individuals are little more than pawns, knee-benders, set on this planet to follow a path proscribed by the power elite.

As a consequence, when social trials arise on that path, they look first to the government for solutions. And they cling stubbornly to false beliefs, such as the myth of anthropogenic global warming, even though the truth of the situation would be readily apparent if they trusted in their instincts and did some actual research.

And so it is that while the world is dominated by the human ape, the species is greatly hindered in its progress by stupid monkeys. Let anywhere near the levers of power, it is a certainty these stupid monkeys will start pulling madly, and keep pulling even as the machine begins to shudder and smoke.

Making the point, I would like to share with you – a more sensible species of simian, I am sure – a few examples of stupid monkeys at their dumb deeds; deeds that can only make one shake one’s head in dismay.

For example….

The stupid monkeys at the Justice Department decided to block a merger between AT&T and T-Mobile because it would “harm competition.”

“Gawd’s blood!” I cry out loud to no one. The whole idea of such a business combination is, of course, to “harm the competition” by enhancing profitability with a combination of larger market share and reduced redundancies. Maybe the Justice Department should require AT&T to shut down, because the very act of staying in business is clearly damaging to the competition. And while they are at it, the feds should also clamp down on the burgeoning Internet telephony companies that are now slashing into the market share of all the big telecoms.

A sub-species of particularly stupid and destructive capuchins in the California legislature appear poised to pass a bill that will effectively put an end to hiring an adult babysitter or anyone seeking casual employment doing odd jobs.

Here’s the state’s own legislative summary of the bill’s intent:

Existing law requires employers to secure the payment of workers compensation for injuries incurred by their employees that arise out of and in the course of employment. The failure to secure workers compensation as required by the workers’ compensation law is a misdemeanor. Under existing law, employers of persons who engage in specified types of household domestic service and who work less than a specified number of hours are excluded from that definition of employer and are therefore excluded from the requirement to secure the payment of workers’ compensation, as specified.

This bill would remove that exclusion and require all domestic work employers, as defined, to secure the payment of workers compensation and would make conforming changes. By expanding the definition of a crime, this bill would impose a state-mandated local program.

In lay terms, the bill – which already overwhelmingly passed in the Democrat-controlled assembly and just passed unanimously through the California State Assembly Committee on Appropriations, precedent to passage by the Senate and therefore into law – will require you as a parent (or otherwise casual employer) to follow formal employee reporting protocols and, among other disincentives to employ, provide your babysitter with worker’s compensation benefits, regularly scheduled rest and meal breaks and even paid vacation time.

Failing to do so will open you up to lawsuits from disgruntled help and being dragged into court by the nanny’s nanny (state).

Now, a monkey with even average intelligence might conclude that passing this law in the grips of an unemployment crisis – and California’s unemployment rate is over 12%, versus the nationwide average of 9.1% – would curb enthusiasm for hiring and so should be avoided. But not the stupid California capuchins.

Vermonters want to block the shipment of oil from the tar sands through the state.

This next example is particularly ripe, providing evidence of just how badly the US educational system has failed its pupils.

Quoting a supportive article in Vermont’s Burlington Free Press…

A tar sands oil developer might be planning to pipe its product to Montreal – and then across Vermont’s Northeast Kingdom in an existing pipeline to Portland, Maine, according to Canadian and American environmental groups.

That threatens the region’s air, water and wildlife habitat, the environmentalists say.

Egad, a reader might decide, the region’s environment is at risk. Break out the placards, fuel up the lawyers!

We are all aware, of course, of the principle of NIMBY – as in Not in My Back Yard. But even the most simple of simians might want to rethink the notion that Ft. McMurray, Alberta – the hub of the Canadian tar sands and source of the hateful oil – is in Vermont’s backyard. Unless one also considers, say, Phoenix, Arizona to be similarly a part of the neighborhood: Ft. McMurray is about 2,750 miles from Vermont, and Phoenix just 2,600.

And how is it that feeding processed oil into an existing pipeline constitutes such a dire threat?

Oh, what folly these enviro-monkeys are capable of. It it’s positively laughable, but only if you like laughing in the dark.

Then there’s this, from the Stupid-Monkey-In-Chief (SMIC)

This week, our own President Obama, the SMIC, has confirmed his intention to tune up his vocal chords in order to create the jobs that have so far gone missing in this crisis, and which, according to today’s again dismal unemployment data, remain nowhere in sight.

Said the SMIC:

“It is my intention to lay out a series of bipartisan proposals that the Congress can take immediately to continue to rebuild the American economy by strengthening small businesses, helping Americans get back to work, and putting more money in the paychecks of the middle class and working Americans, while still reducing our deficit and getting our fiscal house in order,” Obama said.

“We’re saved!” shout the staunch few that still believe the SMIC is cut from superior cloth. But even the stupidest of the stupid monkeys might be tempted, after so many disappointments, to raise their hands and ask, “What’s the plan, chief?”

In answer to which I provide the following preview of “the plan,” courtesy of Bloomberg…

Obama’s plans include more infrastructure spending, tax incentives to spur hiring, a reduction in the employer portion of the payroll tax credit and changes to unemployment insurance to subsidize worker retraining.

Did you just get an overwhelming sense of déjà vu? If so, it’s probably because the SMIC’s latest plan is pretty much the same as the previous plan, and the one before that. Sure, there are a few tax breaks here and there – but companies don’t hire people based on tax breaks. They do so because there is work to be done and people are needed to do it. And in the real world, a $5,000 tax credit for hiring someone – the amount being bandied about in the new plan – will be burned through in a couple of months of (now mandatory) health insurance payments.

Still in the real world, if the country is to pull itself out of the muck, the government needs to stop spending itself into a deeper and deeper fiscal hole. And it needs to undergo radical reforms in regulatory and tax regimes (to attract businesses and capital here, versus over there). And it needs to remake the monetary system on a foundation of something more tangible than political promises.

But first of all, the government has got to acknowledge the simple reality that it cannot meet its obligations and begin, in earnest, the restructuring of those obligations.

Of course, only a stupid monkey would look at the state of our degraded democracy – where half of the monkeys pay no taxes while complaining about the half who do – and believe that the government will willingly make any significant reforms, versus just handing out more bananas.

Therefore, smarter-than-average monkeys are actively taking steps to protect themselves from the coming currency debasement – the only way the government knows to reduce its debt in a politically acceptable way.

Back in 2001, Doug Casey and very few others were waving their arms and hooting about the need to buy gold – had you acted then, you would have outperformed even the legendary Warren Buffett. And as the chart here shows, you would have outperformed them, decisively so.

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Don’t let your future be at the mercy of the D.C. stupid monkeys. Register today for the upcoming Casey online, free video event – The American Debt Crisis: How Big? How Bad? How to Protect Yourself. Listen to Doug Casey, David Galland, Lew Rockwell, others from the Casey Research team, and some special guests explain how bad things are likely to get for the US economy and dollar… and learn how you can start to prepare and even thrive during it. The event will be held Wednesday September 14 at 2 p.m. EDT. Don’t miss it!

David Galland is the managing editor of Casey Research.

I am beginning to feel a bit like one of the French unfortunates stumbling through the fog in the Ardennes, circa 1914. Except that, instead of Germans full of deadly intent coming at me in the gloomy forest, it is a flock of black swans.

As it was for the French in the Ardennes, the number of problems – then Germans, now black swans – is becoming overwhelming.

Consider just a little of what we as investors, and as individuals looking forward to retirement in accommodations more commodious than a shipping box, must contend with:

• The Euro-Stone. Despite all the bailouts and bluster flying about Europe, the yields in the wounded “piiglets” of Greece, Portugal, etc. have failed to soften to more tolerable levels. Worse, yields in the fatter PIIGS of Spain and Italy are hardening. This is of no small import to the German and French banks, which together are owed something like US$2 trillion by the porkers. At this point, it is becoming clear that the eurozone’s systematic flaws doom the euro to continue trending down until it ultimately takes its place in the pantheon of failed monies.
• The Yen Has Lost Its Zen. This week the Japanese government again began intervening in currency markets because, remarkably, the yen has been pushed to highs against the dollar. This in a nation with a government debt-to-GDP ratio that is better than twice the also horrible ratio sported by these United States.

That ratio ensures that Japan’s long struggles will continue, burdened as it also is with the aftermath of the deadly tsunamis and the ongoing drama at Fukushima. Adding to its woes are the commercial challenges it faces from aggressive neighbors, and maybe worst of all, the demographic glue trap it is stuck in, with fewer and fewer young to pick up the social costs of the old. Toss in the waterfall plunge in Japan’s much-vaunted savings rate – formerly a big prop keeping Japanese interest rates down – and the picture for Japan is anything but tranquil.

China’s Crucible. There are many reasons for being optimistic about the outlook for China, including a large and hard-working populace. But there is one overriding reason to expect a big bump in the path to China’s emergence as the world’s reigning economic powerhouse.

Simply, it’s a capitalistic country with a communist problem.

Now, in the same way that some people believe in leprechauns or any of dozens of other magical beings, some people believe that an economy can be successfully commanded just as a captain commands the crew of a Chinese junk cruising along the coast. It’s a fantasy.

While the comrades in charge have done quite well – largely by getting out of the way of natural human actions – they are fast reaching the limits of their ability to navigate the shoals. As I don’t need to tell you, China is a massive country, with hundreds of millions of people capable of every manner of human strengths and frailties. But if they share one interest, it is in a job that allows them to keep their rice bowls full and a roof over their heads. Said jobs don’t come from government dictate – at least not on a sustainable basis – but rather by the messy process of free-wheeling commerce… and the more free-wheeling, the better.

In the July edition of The Casey Report, guest contributor James Quinn discusses the very real challenges facing China, not the least of which is that in the latest reporting period, official Chinese inflation popped up to 6.4%. Even more concerning was a 14% rise in the price of food.

Scrambling to keep employment high while also keeping inflation low, the Chinese government is throwing all sorts of ingredients into the mix – building ghost cities, raising interest rates, stockpiling commodities, clamping down on dissent, hacking everyone – but in the end, the irrefutable laws of economics must prevail. And so the Chinese government will have to atone for the massive inflation it unleashed in 2008, and for the equally disruptive misallocations of capital that are the hallmark of command economies.

While the blowup in China will wreak havoc in world markets, including many commodities, a bright side for gold investors is that the country’s rising inflation should help keep the wind in the sails of monetary metal. It’s no coincidence that the World Gold Council’s latest data show investment demand for gold in China more than doubling in the first quarter of this year.

Uncle Scam. Then there is the United States. Casey Research readers of any duration know the fundamental setup… The political avarice that dominates both parties… The fear and greed of John Q. Public and his steady demands that the government do more… The scam being run by the Treasury and the Fed to provide the funny money to keep the government running… The cynical attempts by certain politicians to stoke a class war… The cellars full of toxic paper at the nation’s financial institutions… The outright corruption and deceit of the various government agencies as they twist and torture the data to fool the people into supporting them in their scams.

But there’s a growing problem: An increasing number of people and institutions are coming to understand just how intractable the problems are. This has resulted in a steady move into tangible assets – gold, especially – that are not the obligation of any government. And it’s not just individuals and money managers moving into gold, but central banks as well. That is an absolute sea change from the situation even a few years ago.

Meanwhile, with the Treasury unable to borrow since May, a backlog in government financing needs has built up. Which begs the question: With the Fed standing aside (for the moment), where is the government going to find all the buyers for the many billions of dollars worth of Treasuries it needs to flog in order to keep the scam going?

If I were a conspiracy theorist, I might look at the sell-off in equities this week, triggered as it was by nothing specific, and see a gloved hand operating behind the curtain. After all, nothing like a good old-fashioned stampede out of equities to send billions chasing after “safe” Treasuries… which has been exactly the case this week.

Regardless, with the crossroads for hard choices now behind us, the global economy finds itself at the top of a long hill… with no brakes.

From here on, it will increasingly be every nation for itself – meaning a return to competitive currency devaluations and, in time, exchange and even trade controls.

And we will see a return of the Fed to the markets. On that topic, I will once again trot out a chart from an article by Bud Conrad that ran in The Casey Report a couple of years back.

I do so because it shows what I think is a very strong corollary between what occurred in Japan after its financial bubble burst and what is now going on here in the U.S. (and elsewhere). As you can see, as a direct result of the Japanese central bank engaging in quantitative easing, the Japanese stock market bounced back strongly. But then, when the quantitative easing stopped, the market quickly gave back all its gains.

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If I had the time and the resources to whip up a chart overlaying the quantitative easing here in the U.S. of late versus the equity markets, I would. But I don’t, and so will delve into that fount of all information – the Internet – and grab a chart constructed by someone else (in this case, Doug Oest, managing partner of Marquette Associates – thanks, Doug!)

As one can readily see, the Japanese experience is indeed a corollary to what’s happened here, with QE pushing the stock market higher. Conversely, until the Fed comes back in, equities could be in for a rough ride. Likewise, when the Fed returns with the next round of QE, stocks could put in a very nice rally.

(Click on image to enlarge)

Some conclusions:

1. The Fed will have to roll out another round of quantitative easing. And it will likely have to once again provide swap lines to the European central banks as it did in 2008 – though this time around, a belligerent Congress is watching the Fed’s every move, so it may not be able to move as quickly as it would have otherwise. In the end, however, given there is less than nothing being done on the front of fiscal policy, it will fall to the Fed to once again ride to the rescue. But it will do so on a lame horse.
2. A delay by the Fed to act could help the Treasury, at least temporarily. Per above, the U.S. government has to move a boatload of paper by the end of this year. If it wants to avoid the dire consequences of having to pay out higher yields in order to attract sufficient buying, it will have to find a lot of demand in a hurry. Should the Fed sit on its hands a bit longer, especially in the face of the escalating euro crisis, the resulting turmoil in global equity markets could provide the necessary demand to clean up the backlog and keep the U.S. government operating.?(In July’s Casey Report, Bud Conrad dissects the situation and comes to some startling conclusions… and an emerging profit opportunity.)?
3. The return of the Fed may signal the beginning of the end. In the face of broad weakness in the global economy and in most commodities, the fact that gold has held up so well is a clear indication that there has been an intrinsic change in the gold market. Barbarous relic no more, it has clearly been returned to its longstanding role as sound money – unique and increasingly valued when compared to the fiat competition.

This role will only become more crucial as the world’s desperate nation-states fire their currency cannons in the war to remain viable. The Fed’s return to Treasury markets will be, in the rear-view mirror of future history, seen to be a seminal event – the beginning of the end of the current fiat monetary system.

Simply put, too much of a good thing is too much of a good thing. And make no mistake, the decades of operating under a fiat monetary system have been a very good thing for the political classes and their pandering cronies.

Those good times are coming to an end.

Savvy investors can still make money in a crisis… often the returns are even greater when times are tough. Learn all about the smart money’s way of crisis investing and Bud Conrad’s profit opportunity mentioned above – with a risk-free trial subscription to The Casey Report.

David Galland is the managing editor of Casey Research.

The phrase “Greater Depression” was coined by Doug Casey a decade or so back as a way of describing the economic crisis he foresaw as inevitable, and which is now materializing.

Because I think it is important for every organization to constantly challenge its own assumptions, I’ve long acted as something of a devil’s advocate here at Casey Research. By constantly pushing our analysts to revisit their assumptions and calculations, it is my firm intention for us to spot the fork in the road that indicates it is time to shift strategies away from investments designed to do well in the face of a currency debasement and to something else.

Being attentive to that fork in the road is hugely important, because even though we urge our subscribers not to overdo their exposure to inflation hedges, we recognize that many do. Many a good person had their clocks cleaned in the early 1980s solely because they had become overly enamored of their precious metals – so much so that they stopped thinking of them as an asset class and began thinking of them more in the terms one might associate with an amorous dinner date. Thus these investors were utterly unprepared when said date stood up and broke a dinner plate over their heads.

With that brief setup, I want to make our views clear: While we correctly anticipated the recent correction in precious metals, this correction is but a blip in a secular bull market that is very much intact.

Doug Casey has often said that the unfolding crisis is going to be even worse than he expects (which is saying something), and the longer the rest of us at Casey Research study the tea leaves, it is hard to disagree that the Greater Depression is still ahead.

Consider:

• The eurozone is growing increasingly desperate. Watching the heads of Europe dither and debate over further bailouts to the unhappy Greeks and other troubled PIIGS – before ultimately reaching back into the pockets of the equally unhappy citizens in Germany and the decreasing number of still-functioning economies in the eurozone – reminds me of a down-on-his-luck blackjack player. He’s mortgaged his home to play the game but is now down to his last chips. He doesn’t want to risk his remaining resources but has no choice, because to walk away now will mean taking up residence in a cardboard box. And so, reluctantly, he shoves across another pile. The problem is that the game is rigged – and not in his favor. As the PIIGS start to default and either leave the eurozone entirely or are shunted off into some sort of sidecar organization, there will be great volatility in the euro and in the European markets.
• The U.S. debt situation is far worse than anyone in Washington is willing to admit. We keep hearing calls for more, not less debt creation. But if people would stop kidding themselves and tally up all the many demands the U.S. government has against it, the actual debt-to-GDP ratio rises to something on the order of 400% – and even that is likely understating things. The fundamental flaws in the U.S. monetary system – flaws that have given license to the bureaucrats to smash the limousine of state straight into a wall – have required a remaking every 20 to 30 years or so. The problem is that there is pretty much nothing else that can be done to save the status quo at this point, and so the monetary system is likely to collapse. That means big changes ahead, including – or perhaps starting with – a poisonous ratcheting up of interest rates.
• China’s miracle mirage. While having aspects of a free market, the hard truth is that China is run as a command economy by a cadre of communist holdovers. This is apparent in the cities that have been built for no purpose other than creating jobs and boosting GDP. It is also apparent in the growing inflation in China – the inevitable knock-on of the government’s decision to yank on the levers of money creation harder than any other nation at the onset of the Greater Depression. Meanwhile, signs of social unrest crop up here and there. Though so far they have been swiftly put down, there is no question that the ruling elite has to walk a very fine line. If the Chinese economy stumbles seriously, all bets are off. That we are talking about the world’s second-largest economy means this is not of small consequence.
• Japan is essentially offline. Reports from friends in Japan – including one who was initially skeptical about the scale of the problems at Fukushima – have now changed in tone by 180 degrees. You can almost feel the growing sense of desperation as the already massively indebted nation begins to slide toward an abyss. There is little standing in the way of the world’s third-largest economy’s slide.
• The Middle East is in flames. This, too, is far from settled. As usual, the U.S. government has been hopping here and there in an attempt to maintain its influence, but at this point pretty much everything is up for grabs. The odds of the U.S. retaining the same level of influence in the region that it has enjoyed over the last century are slim to none, especially now that even the Saudis are shipping more of their oil to China than to the U.S. Again, big changes are ahead.

I’m convinced that nearly everything about today’s world is going to change over the coming decade… much of it for the worse.

But that doesn’t mean that people – you – can’t come through this in more or less good shape, just as our parents and grandparents made it intact through the last Great Depression. Pay attention and take action, and you’ll do far, far better than most.

Some investment ideas…

First and foremost, protect yourself against the collapse of the U.S. monetary system. It is not as simple as ducking into the nearest coin store and loading up, though that should certainly be one part of your strategy. Between now and the endgame that leads into what we can only hope will be a new money based on something tangible, there will periodically be opportunities to make big moves with your portfolio.

I could give you a big pitch for our precious-metals-oriented services here, but won’t. I will say, however, that if you are new to the sector, do yourself a favor and sign up for our three-month no-risk trial to BIG GOLD – and do it today, so you can begin bottom fishing.

As Doug also likes to say, you should do whatever you want in this world, as long as you are willing to accept the consequences. If you are willing to risk going down with the ship, then do nothing.

Some other investible ideas…

• Everyday essentials. Energy is the classic essential. Sure, energy use and prices will ebb and flow with the economy, but ultimately everyone uses energy every day, and the people in emerging markets want to use a lot more of it. Carefully thought-out investments in energy, ideally bought on the dips, belong in everyone’s long-term portfolio.
• Breakthroughs to a brighter future. Throughout modern history, companies that make significant technological advances transcend bad economic times. Do you think that the company that finds a cure for a common variety of cancer will be weighed down, even by a stock market crash? Hardly. In cautious amounts, these sorts of potential breakthrough stocks belong in your portfolio.
• Investing in the inevitable. A ton of charts and data point to just how unusual and unsustainable today’s low, low U.S. interest rates are. When these sorts of baseline trends eventually change direction, they tend to move in the new direction for years, and even decades. No one can pick the bottom, but anyone who is paying even a little attention can and should be getting positioned to profit from a sea change in U.S. interest rates while they still can.
• One foot over the border. History has shown that having even one foot over the border can make the difference between losing everything and coming out just fine. Internationalizing your assets is not always easy or convenient, but that doesn’t make it any less urgent that you do so.

As for crisis investments, no one has been focused on that longer or better than Doug Casey and the team here.

The bottom line is that while the scale of the crisis is beginning to become more widely apparent, and reading and thinking about it can become fatiguing for those of us who have been on this story from the beginning, the base case for a Greater Depression is fully intact. We need to gird our loins and continue to take active measures to prepare – with the caveat that even in this base case, there are prudent measures you can take to ensure that not all your eggs are in one basket.

Gold and silver are still the best protection for any portfolio… especially now that China and other countries are getting ready to dump the U.S. dollar. Read more on how dangerous the situation is, and how you can come out ahead – free report here.

David Galland is the managing editor of Casey Research.

Recently by David Galland: The U.S. Monetary System and Descent into Fascism an Interview With Dr. Edwin Vieira

Terry Coxon worked side by side with best-selling author Harry Browne for years and is a rare expert in the arcane study of monetary systems. His remarks at this juncture in time, a time that might end up labeled in the history books as “Money Runs Wild,” are especially germane.

David Galland: You were involved with Harry Browne during the last great inflation in the U.S. How does the increase in the money supply that kicked off in 2007-2008 compare in terms of scale to what went on leading up to the inflation in the ’70s?

Terry Coxon: The comparison is pretty muddled. In terms of the M1 money supply – the total of checkable deposits and hand-to-hand currency – we haven’t yet gotten near the persistently high growth rate that occurred in the 1970s. But the growth in the monetary base has been far more rapid than what happened in the 1970s. There is some time delay between growth in the monetary base and growth in M1, but to make the picture really cloudy, I’m afraid the comparison turns out not to be very useful. Unlike in the 1970s, the Federal Reserve is now paying interest to banks on their reserves.

In other words, the effect is that much of the increase in the monetary base gets locked up and sequestered because banks want to earn the interest on the reserves rather than lending the reserves out or buying investments and increasing the money supply.

DG: You are referring to the excess reserves banks have left on deposit with the Fed?

TC: Yes.

DG: Why do you think that the Fed is paying interest on those reserves? With policy makers and pundits saying that the economy needs a shot in the arm and a dose of inflation, why would the Fed continue to encourage banks not to lend or invest, by paying them interest to leave the money on deposit?

TC: If the Federal Reserve didn’t pay interest on those reserves, the result would be inflation rates far beyond anything the U.S. has ever experienced. The monetary base has more than doubled, and without the Federal Reserve paying interest on the recently created boatload of reserves that is essentially keeping them immobilized in accounts at the Federal Reserve Bank in New York, the M1 money supply would more than double and we would have inflation rates that would make the worst days of inflation in Brazil and Argentina look tame.

DG: I know you can’t give a real number, but what general level of inflation are you talking about?

TC: Close to a doubling in the CPI in a year’s time. Doubling the CPI over the course of a year would be an inflation rate of 100%.

DG: But on the other side of the equation, a deflationist would say that even if they stopped paying interest on those excess reserves, there is no loan demand, so the banks can’t find anybody to loan to. If that’s the case, how does the money get out into the system?

TC: If a bank has excess reserves and the Federal Reserve stops paying interest on them, if the bank can’t think of anything else, it will buy Treasury bills, even if the yields on those Treasury bills are only 0.5% a year. Then the seller of the Treasury bills has the cash.

Whoever the seller of the Treasury bills is, we can safely assume he sold his T-bills because the cash was more attractive to him. And if the cash is more attractive when it’s earning zero, that means the person who sold the Treasury bills wants to use the cash to buy something else, and that’s how the excess reserves would move from the banks to the general economy.

DG: What about the role the carry trade plays in all of this? If banks can’t get a return in the U.S., might they take the money and spend it elsewhere or invest it in countries where interest rates are higher? That seems to be going on today, in which case, wouldn’t we effectively export our inflation?

TC: It does have an inflationary effect all around the world, and it also puts the markets generally on a very fragile footing when you can borrow U.S. dollars at an artificially suppressed rate of 0.5% and buy New Zealand dollars and earn 2%. That has the effect of propping up the New Zealand dollar. And it promises a profit for the carry trader of 1.5%, but actually collecting that profit depends on exiting the trade at the right time.

The carry trade is in just about every market at this point. People are borrowing dollars at ultra-low interest rates in the hope of earning a higher return in something else and also hoping to exit at the right time. Virtually all markets have been propped up by the carry trade, and all the carry traders are telling themselves they are going to jump ship at just the right time. When the time comes, the rails of the ship are going to be crowded, and markets likely will move down very rapidly.

DG: Discuss the effect of the carry trade on the dollar. As you said, at this point in time there is a robust dollar carry trade, with people borrowing dollars and using them to buy, say, New Zealand bonds or whatever. So, what effect does this have on the dollar?

TC: The carry trade is the proximate cause of the decline in the dollar in foreign exchange markets. If you look at the whole process, it starts with printing by the Federal Reserve, but the step that occurs just before the price of the dollar goes down is the decision by traders to borrow dollars and buy other currencies. When the carry trade comes to an end, the process will go into reverse, and the dollar will rally.

DG: So this would again tie back to interest rates. If U.S. interest rates start moving up, then the carry trade begins to unwind.

TC: It wouldn’t even take that, just an expectation that interest rates on dollars are about to move up. That would do it.

DG: Yet, historically gold and interest rates and inflation all tend to move up together. Not to get all tangled up, but if interest rates in the U.S. move up and the dollar starts to strengthen, shouldn’t gold then start moving down? But again, that’s not the historic case.

TC: It’s not as tangled as you think. The answer you are going to come to for gold depends on what is causing interest rates to move up. If interest rates are moving up because the expectation of inflation is moving up, then that won’t hurt gold, it will help gold. On the other hand, if interest rates are moving up because the Federal Reserve is tightening, then that is bad for almost everything that people have been borrowing to buy, which includes gold and silver and stocks generally.

DG: And New Zealand dollars.

TC: Yes, foreign currencies as well.

DG: With the carry trade, the interest rate differential is an important thing to understand, and right now the U.S. is clearly behind the curve in terms of its interest rates. So the question is… could this situation continue for quite a while, with the dollar kept cheap by the carry trade? Can the dollar just keep going down until it evaporates, or are you seeing signs of an alternative outcome?

TC: The road to perdition has zigs and zags and loopbacks, and what causes the loopbacks is a shift in what the Federal Reserve currently perceives as its worst nightmare. For example, in 2008, 2009 and into 2010, the Federal Reserve was worried primarily about a deflationary depression, so it turned on the printing presses.

More recently, inflation has returned as a worry, and that can turn into worry number one on any given day, at which point the Federal Reserve will slow down the printing or just sit on its hands for a while. That’s when interest rates will start moving up, and that’s when the carry trade will get unwound, triggering a big downdraft in virtually all markets. But the prominence of inflation as a worry will eventually be replaced by renewed concern about the economy contracting, and then the Federal Reserve will shift its weight again from one foot to the other.

DG: Which brings us to the 8,000-pound gorilla in the room: the debt. Our readers, and pretty much everyone else, knows that the U.S. government is sitting on the largest pile of debt in history, and that much of this debt has been generated for no real useful purpose.

James Rickards made the point at our spring summit that the last time government debt was anything close to this as a percentage of GDP was in World War II. And he pointed out that the money spent back then essentially bought a victory in World War II, leaving the U.S. with a very strong economy and leverage over other economies. But those advantages have been squandered. Now in exchange for all the debt that has been rung up, Rickards points out that the country has little more than a lot of flat-screen TVs.

I think it was probably our very first meeting after you joined Casey Research, sitting around the table in San Francisco, that I asked, "Is there any way out?" This was back in 2004, and Doug Casey and Bud Conrad and you took turns answering, with the answer being essentially the same, "No, no way out and the situation is going to end badly."

And here we are seven years later, and the government’s debts have only grown. Obviously, inflation is the standard approach the government is likely to use to relieve itself of its debt over time, but I wouldn’t rule out an overt default of some sort. Regardless, it seems like the country’s economic future is going to be determined by the debt.

So, let me ask you the same question, do you see any way out? Are there any options left to the government that don’t lead to economic chaos?

TC: If by some miracle the people who run the government decided that Big Government was a bad idea and small government was a much better idea, and so they set about ending government programs and pushing the level of federal spending way down, along with the level of regulation over the economy, then there would be a way out.

But how likely is that to happen? The time horizon for people in politics is maybe one or two years, just about the same length of time there is before the next election. Their goal is always to survive the coming election. That means what is rational for the politicians looks irrational to everyone else, and I don’t see any reason to expect that to change. The purpose of a politician examining a problem is not to solve the problem but to find a way for someone else to get blamed for it.

DG: Doug and I have both written about the fact that we are living in a steadily degrading democracy at this point, with the public voting itself all manner of benefits from the public trough. Personally, I don’t see how we get to the point where politicians, where the voters, decide that a much smaller government is a much better way to go. At least not unless and until we’re forced to. Do you think this situation can drag on, or will the size of the debt and deficits force a change sooner rather than later?

TC: That’s a political question. At some point, the situation may become so catastrophic that people are forced to learn new habits and consider new ideas, but things have to get pretty bad before that happens.

DG: And how would you rate the odds of it getting pretty bad before this is over?

TC: Very high.

DG: And the time frame? You typically say these things are variable and unknowable, but can you be a bit more specific?

TC: It takes a long time. It’s not going to happen this year. It’s probably not going to happen next year.

DG: But hasn’t this been a long time coming?

TC: Yes, it has, and that should tell you that the process is a slow one.

DG: So in your view, what are the one or two most important things that readers need to be doing to protect themselves at this point?

TC: I think the most important thing someone can do is to understand what’s going on. That’s what will give the individual staying power when the markets are temporarily moving against them. The worst thing you can do is to just pick a leader and do whatever he advises without thinking it through and understanding it. What makes that a bad approach is that no matter which intellectual leader you might choose, there are going to be periods when he is wrong and when his advice is not working for you. And even if he is right in the long run, you may not stick with him for the long run if you don’t understand why his advice makes sense. So I think job number one is to understand what’s going on, so that you’re not blindly relying on anyone’s advice.

DG: What’s job number two?

TC: Job number two, if you see the world as I see it, is to make sure that a substantial share of your wealth is in precious metals and perhaps in foreign currencies, but without any leverage.

DG: Thank you very much.

Contributing Editor Terry Coxon is the author of Keep What You Earn and Using Warrants and the co-author (with Harry Browne) of Inflation-Proofing Your Investments. He edited Harry Browne’s Special Reports for its 23 years of publication and all of Harry Browne’s investment books since 1974. Terry was the founder and for 22 years the president of the Permanent Portfolio Fund, a mutual fund that invests in precious metals as well as stocks and bonds. He is currently president of Passport Financial, Inc., and for over 30 years has advised clients on legal ways to internationalize their assets to optimize tax, wealth protection and estate planning goals.

If you aren’t worried about inflation yet, you should be. Because this insidious parasite keeps eating away at your assets and portfolio gains – probably without you noticing. Read on to find out how to beat inflation and come out ahead of the game. Free report here.

David Galland is the managing editor of Casey Research.

Edwin Vieira, Jr., holds four degrees from Harvard: A.B. (Harvard College), A.M. and Ph.D. (Harvard Graduate School of Arts and Sciences), and J.D. (Harvard Law School).

For more than thirty years, he has practiced law, with emphasis on constitutional issues. In the Supreme Court of the United States, he successfully argued or briefed the cases leading to the landmark decisions Abood v. Detroit Board of Education, Chicago Teachers Union v. Hudson, and Communications Workers of America v. Beck, which established constitutional and statutory limitations on the uses to which labor unions, in both the private and the public sectors, may apply fees extracted from nonunion workers as a condition of their employment.

He has written numerous monographs and articles in scholarly journals, and lectured throughout the county. His most recent work on money and banking is the two-volume Pieces of Eight: The Monetary Powers and Disabilities of the United States Constitution (2002), the most comprehensive study in existence of American monetary law and history viewed from a constitutional perspective.

He is also the co-author (under a nom de plume) of the political novel CRA$HMAKER: A Federal Affaire (2000), a not-so-fictional story of an engineered crash of the Federal Reserve System, and the political upheaval it causes.

His latest book is: How to Dethrone the Imperial Judiciary… and Constitutional "Homeland Security," Volume One, The Nation in Arms.

We first met Dr. Vieira at our Casey Research Boca Raton Summit and were sufficiently impressed to want to hear more, and to share more, of his work with readers of The Casey Report.

DAVID: Before kicking things off, I’d refer readers to Dr. Vieira’s in-depth and excellent paper, "A Cross of Gold," as that provides a more detailed analysis on how the corrupt U.S. monetary system might transition into something more honest and effective.

Getting started, from a big-picture perspective, technically speaking, is the current U.S. monetary system actually constitutional?

EDWIN: Well, technically speaking, factually speaking, legally speaking, no. In a word, no.

DAVID: Why not?

EDWIN: There are two levels to consider. First, there’s the straight currency level – what is supposed to be the official monetary unit. Then there is “other,” which I distinguish as different from the official monetary unit because the Constitution doesn’t prohibit private parties from creating media of exchange for their own uses, as long as those media of exchange are non-fraudulent and they’re operated in an otherwise honest commercial fashion.

But the official unit of currency is supposed to be the dollar, and I’ll tell you exactly what a dollar is – it’s 371.25 grains of silver in the form of a coin. That was determined as a historical fact in 1792. Actually the dollar was adopted before the Constitution was even written. It was adopted by the Continental Congress under the Articles of Confederation, the so-called Spanish milled dollar, which was the actual unit that was circulating then, because there had been essentially no coinage under the various colonial regimes in colonial America. So that’s the dollar unit.

Well, do we have that now? The answer is, "Well, essentially, no." First, obviously they are not coining a true dollar, they coin a Liberty Silver Dollar, but that’s 480 grains, not 371.25 grains. And you have various gold coinage with dollar denominations on it, but those dollar denominations have no real relationship in terms of market exchange ratio to a silver unit of 371.25 grains.

So the short answer is that within the coinage system we don’t have what we’re supposed to have. We have silver coins, we have gold coins, but they’re not properly weighted or regulated. And then, of course, we have these base metallic coins, which have no constitutional status at all – at least with respect to being legal tender for their face values. So on the coinage side, we have a mélange and a mess. At least there is some silver and gold coinage, but it doesn’t meet the constitutional requirements.

On the other side, the so-called official paper money side, the Constitution does not provide for official paper money. What it does address are two provisions; the first, dealing with the states, specifically says, "No state shall emit bills of credit." As a word of explanation, bills of credit were the founding fathers’ terminology for paper currency.

This is interesting because the paper currency they actually used and emitted were bills of credit that promised to pay something, typically gold and silver coins, specified on the face of the bill. So even those types of paper currency, fully redeemable paper currency, were outlawed for the states because the states had emitted them in vast excess. That was the historical basis for the outlawry.

Now, turning our attention to Congress, you need to recall that Congress only has the powers that are granted to it. You don’t look in the Constitution for prohibitions on Congress’s authority and assume that it can do everything that isn’t prohibited. You look for delegations of authority, and you assume that anything that hasn’t been delegated is prohibited.

If you look at the original draft of the Constitution in the Constitutional Convention, the Federal Convention of 1787, it said, "Congress shall have the power to borrow money and emit bills on the credit of the United States."

That language was taken from the Articles of Confederation. The Congress operating under those articles had the power to borrow money and emit bills – emit paper currency – and they did it. They emitted the so-called continental currency from which came the phrase "not worth a continental" because they emitted so much of it that it depreciated very close to worthlessness.

At the Constitutional Convention, you had people in attendance who had been members of the Continental Congress. They had been members of various state legislatures. These were the leading political figures in the country. They had to a large extent been the ones who had emitted continental currency or had emitted various state bills of credit. So this was a question that wasn’t in some way alien to them as they had been involved in it only a few years earlier.

So the first draft of the Constitution was put forward with the same power that the Continental Congress had, and there was a debate. You look at Madison’s notes, and it was a rather vociferous debate, and they threw out the words "emit bills," so that now that provision of the Constitution says, "Congress shall have the power to borrow money on the credit of the United States." It says nothing about emitting bills.

Well, by hypothesis, if the power is proposed and then stricken from the final version, it doesn’t exist, right? You don’t need to be a Harvard law school graduate to understand that.

So we look at those two provisions of the Constitution: One explicitly prohibiting the states from emitting bills of credit, because otherwise the states would retain that power. And the other with respect to Congress, where they didn’t grant the power, even though the power was proposed to be granted and that proposal was overruled, and so it wasn’t granted. Based on that it is clear, I would say, that there is no power in Congress or in the states to issue bills of credit.

What we have now is something I think goes almost beyond the bill of credit, though it’s not really fiat currency because the Federal Reserve note, according to the statute, is supposed to be redeemed in "lawful money." So in principle one could go back to the Federal Reserve Bank or one could take it to the Treasury – both have the obligation of redemption – and you could exchange a Federal Reserve note for one of these base metallic coins now in circulation. So, I guess it still could be called a bill of credit in the sense that you can actually receive some coinage, but what is the coinage that you receive?

Interestingly, we had an example of this type of problem in the period around the Civil War. During the Civil War and just after, the Union Government issued “greenbacks” – legal tender U.S. Treasury notes – and that was the first time that the government had purported to issue any kind of paper currency under the Constitution.

They did it once again under a wartime emergency – and for a short time, those things were not redeemed because the government was not paying out gold except as interest on bonds. They had to suspend specie payments during the war, but the Supreme Court upheld the constitutionality of that issuance of those greenbacks, I think erroneously, but they upheld it specifically on the basis that the greenbacks were to be redeemed in the constitutional currency of gold and silver.

All right, so even the furthest extent of error that has been made by the judicial system, with respect to paper currency, was premised on that paper currency being a true bill of credit in that it would be redeemed in the constitutional coinage of the country.

Well, if you look at the Federal Reserve note, you have a number of problems with it: Number one, it’s not issued by the Treasury. It’s issued by this banking cartel. No Federal Reserve note can come into existence unless one of the 12 regional banks, each of which is a private corporation, goes to the Board of Governors with certain assets defined in the statute and asks the Board of Governors to generate Federal Reserve notes.

The Board of Governors can’t generate Federal Reserve notes on its own, neither can the Treasury. So these things are being generated by a private corporation, and they’re not redeemable as a matter of law in the official constitutional silver or gold currency of the country. So they probably have four or five constitutional strikes against them. Especially if you look at the difference between U.S. Treasury notes and Federal Reserve notes. Treasury notes were always the product of some specific statute enacted by Congress, where Congress would say that so many millions of dollars’ worth of these notes are to be emitted.

DAVID: Right, and emitting those notes obviously falls within their right to borrow money.

EDWIN: Well, assuming that that’s what they’re doing – and that was the Supreme Court’s decision in the legal tender cases after the Civil War – they said, well, that’s a form of borrowing money. It really isn’t because it’s a form of generating money. You don’t borrow money when you generate money – the concept is nonsense – but even assuming that that’s the case, Congress has the power to borrow money and they specify a certain amount of money.

Well, they haven’t specified a certain amount of money to come out of the Federal Reserve system ever. There’s absolutely no specification – that’s all left to the whim of the Federal Reserve banks. So assuming that Congress had the power to generate Treasury notes, they would do it in a controlled fashion by telling us exactly how much is supposed to come out with each emission. Here they have purported to delegate this power to a consortium of private bankers, so this is like six or seven strikes. This is worse than baseball.

DAVID: And at this point, you really cannot redeem your Federal Reserve notes for anything anywhere. I mean, you can trade them with other people for other goods, and then you can take them to the bank and redeem them in base metal coins worth a fraction of their face value.

EDWIN: Well, initially Federal Reserve notes were required to be redeemed in gold, and then that was removed in ’33 and ’34 with the gold seizure. So now we have notes that, as John Exter used to say, are an IOU-Nothing Currency – because with respect to the banks and with respect to the Treasury, they owe you nothing, and if you go into the marketplace, you may be able to get whatever someone will give you for them, but you have no legal right to demand any particular amount of anything.

A redeemable currency, by law, is a currency that has a requirement that the issuer redeem it in something that is specified, a certain weight of gold, a certain weight of silver, whatever. So at one time, Federal Reserve notes were redeemable currency.

Now, I suppose, as I said, they’re not a fiat currency because you can get this base metallic stuff for them, but the constitutional requirement, assuming that you could have a bill of credit at all, would be that it had to be paid in the constitutional coinage unit. So this is the problem. Constitutionally, the thing is a first-class mess.

DAVID: So you’ve got eight strikes or so against this currency, constitutionally speaking, and yet the situation persists. Why hasn’t there been a successful challenge to the system in the courts?

EDWIN: Looking at challenges that have come up over the years, I would start by looking back to the ’30s, because in the ’30s you had two events. The first was a gold seizure followed by the second, the prohibition of gold clauses in contracts.

You had one set of cases that came up to the Supreme Court dealing with the prohibition of gold clause contracts, and one can only look at those and shake one’s head and say, "Well, this is just, you know, fraud, complete double talk, nonsense." And interestingly enough, they never took on the gold seizure. They never decided a case on the gold seizure, even though cases were brought to them. They refused to hear them, and I think the reason was even they knew they couldn’t figure out how to justify that one, how to rationalize that.

Subsequently, you’ve had attempts by people to challenge the Federal Open Market Committee in particular, because the Federal Open Market Committee of course is composed not only of the members of the Board of Governors of the Federal Reserve System.

Now, arguably, because they’re appointed by the president and confirmed by the Senate, you could say they’re officials of the government, although that’s an open question that’s never really been decided. But the other members of that committee are representatives of the private Federal Reserve regional banks, about which there have been a number of challenges brought on the ground that you can’t allow private parties to participate in that kind of a committee – a committee that is essentially making governmental monetary policy.

Every one of those challenges has been thrown out without reaching the merits. They’ve been thrown out on some kind of standing ground – either the courts have refused to hear them at all, or they’ve thrown them out on what I would call tangential grounds, really not getting to the merits. I think the ultimate reason for that is probably out of fear or prudence, depending on how you want to characterize it.

I mean, if I’m a judge and somebody comes to me with one of these cases and says, "I want you to overturn this entire monetary structure by knocking out this important provision or that important provision," I say to myself, "Well, yes, I guess I could do that, legally speaking. I can write an opinion saying that this provision of the law is unconstitutional and it’s no longer effective."

But then what happens?

I can’t write, in my opinion, an order to Congress to pass a particular statute to correct that situation, so although I can throw a judicial monkey wrench into the gears, I can’t do anything to prevent the disaster that will then occur as a result of blowing up that mechanism. Ergo, wearing the hat of a judge, I’m going to stand back and not get involved but rather leave it to Congress to solve, if possible.

DAVID: But once you start down that path where you have, let’s say, a certain amount of elasticity on when you follow the Constitution and when you just look the other way, doesn’t that set the stage for all sorts of gyrations and further miscarriages of justice and even fraud? As Doug Casey has commented on numerous occasions, at this point the country is being operated on a very corrupt basis.

EDWIN: Well, I agree with him 100%. After the Civil War, in the Knox v. Lee legal tender case, the Supreme Court could have said, "Yes, we understand this was done during the Civil War, but it’s unconstitutional, and you can’t continue with this. And so any contracts that were made in this illegal money will be revalued in constitutional money." If they had taken that position back then, they could have worked it all out because they did just that for the confederate states.

The confederate states were considered to be an illegal operation entirely, a criminal rebellion. The confederate states generated a huge amount of paper currency, and a number of cases came to the Supreme Court after the Civil War dealing with the enforcement of contracts in the confederate states that had been made implicitly or explicitly in confederate money. What were we going to do with these contracts?

And the Supreme Court said, "Well, to the extent the contracts were for an illegal purpose, such as supplying arms to the Confederate Army, then they were void, but if it was a contract to buy wood or something from a farmer or whatever, these people were forced into using that currency because that’s where they were, they had no choice, and we will simply revalue those contracts and enforce them for their fair worth, that’s just simple equity."

They could have done the exact same thing with respect to the greenbacks of the Civil War – saying that the greenbacks were unconstitutional and let’s never do this again. But they didn’t, and as a result set a precedent, and one precedent leads to another, and that’s precisely why we’re here.

The same thing during the 1930s with the gold clause cases: They could have declared that statute unconstitutional right then and there because nothing had yet happened, but they played this game in the Supreme Court.

DAVID: So, the Supreme Court ducked crucial issues and allowed precedents to be set for the creation of a monetary system that is clearly unconstitutional and, importantly, unsound. So here we are today, with everything totally screwed up. Do you think the monetary system now operating in the U.S. – and around the world, for that matter – can survive as is? Or is it going to have to change, and relatively soon?

EDWIN: Well, it’s going to have to change, raising the questions, “In what direction and under whose control?” Historically, the United States has seen each one of these faulty systems go into self-destruction mode, followed by the government ratcheting things up to the next-higher level.

Thus the First Bank of the United States was followed by the Second Bank of the United States, neither of which was really a central bank. They were just private banks that operated as fiscal agents for the government. And there were a lot of state banks, and these all went into some kind of failure mode.

Along comes the Civil War, and they come up with the National Banking System, which was a cartelization of banks tied into the U.S. Treasury, so they moved it from the level of individual banks – that might have been state chartered or chartered by Congress but were nevertheless essentially separate private entities – into a cartel structure that had a direct connection to the Treasury.

Now that direct connection to the Treasury was that those banks had to buy U.S. Treasury bonds, and then they would deposit those with the Treasury, and they’d get 90% of the value of the bonds back in currency, which they could then use for their own private purposes. That system didn’t work because at that point in time, people were not interested in amassing ever greater federal debt, and the expansion of that banking system depended upon amassing ever greater amounts of federal debt.

Well, that system goes into crisis and what do they do? Do they correct it? No, they go to the next level and give us the national lender of last resort, the Federal Reserve System. Essentially improving the cartel structure. That thing lasts only from 1914 to 1932, about 20 years, before it collapses. Does Roosevelt solve this problem by dealing strictly with fractional reserve? No, he raises it to another level by expanding the powers of the Federal Reserve System and taking gold away from the American people.

That lasts until after World War II, at Bretton Woods, when the United States Federal Reserve System and the Federal Reserve note become the World Central Bank and the World Central Reserve Currency, as a matter of fact, and how long does that last? Until 1971, right? By then, so much gold has left the country because of the profligate policies of Congress, especially the war in Vietnam and Johnson’s War on Poverty, that Nixon finally has to stop gold redemption in 1971.

Which brings us to the present, and we are again back in crisis mode, and what are they telling us? "Oh, we’ve got to go to the next level. We’ve got to create a New World Central Bank." Maybe this will be the IMF or whatever, but we are going to expand the thing to the next level until we have the final blowout. Because this is what they’ve always done.

DAVID: It seems to me that once the U.S. government starts talking about a global currency that Americans will finally say, "No, enough, we’re just not going there.” For a lot of reasons, nationalism and because of the negative examples being provided by the failing experiment with the euro?

While I have long been shocked at the depth of the apathy of the American people, I have a hard time believing they would turn our currency over to the IMF or any international body. If you agree, doesn’t that mean that we could be at the point now – in this crisis – where it’s not going to go any further? That the madness stops here?

EDWIN: Yes, I was not saying that their plan will work, rather I was just restating what their plan is. I don’t think it’s going to be successful. The euro gives us a good example of why it’s not going to be successful. Also, they have another difficulty; to set up a system of this kind, they’re going to have to pass some serious legislation to tie us into some kind of world currency system.

DAVID: Which will never happen.

EDWIN: That’s right. Can you imagine what the deadlock would be in Congress over that? So actually we have an opportunity here. The door has finally opened for some serious monetary reform because the other side has come essentially to a dead end.

DAVID: Because they can’t keep amassing ever-increasing amounts of national debt. We’re reaching the limit on that.

EDWIN: That’s right. So here we are, and now the question really comes back to whether there are enough people in America who understand this and are willing to take the appropriate steps to start putting in some alternative?

I don’t think this can be done from the top down. I don’t think Congress is going to solve this problem, and certainly the bankers are not going to give them the right legislation to solve this problem. It has to be solved from the bottom up.

DAVID: Bottom up?

EDWIN: The beauty of the constitutional system is, we have these intermediate political bodies called the state governments that have certain reserved constitutional authority. They haven’t been exercising it for a long time, but it’s there, and part of that is monetary, and interestingly enough this has already been decided by the Supreme Court. It’s not as if I’m inventing this idea.

After the Civil War, we had a similar situation. Before they went back to gold redemption, you had depreciating legal tender Treasury notes circulating, and there was gold and silver circulating as well. That had not been withdrawn from circulation, so in the first case of this kind, the State of Oregon had a law that required that its taxes be paid in gold and silver coin and someone tried to pay in legal-tender Treasury notes on the theory that Congress has made these legal tender for all debts and therefore that overrides the laws of the State of Oregon requiring payment of taxes in gold and silver.

Well, the case gets all the way to the Supreme Court and the Supreme Court says "No, wrong. The states have residual sovereignty.” They are sovereign governments, except to the extent that they’ve surrendered certain powers to the national government, and one of the powers they have not surrendered is the power of taxation – one of the basic governmental powers. I guess you could include borrowing and spending, so forth and so on, but they have the right to perform basic governmental functions, taxation being one of them.

If a state determines for its own purposes it needs to tax in gold coin and silver coin or bullion, then the state can do it and Congress has nothing to say about it. From which it would follow that step number one would be for a state to start saying, "We’re going to tax or spend or borrow," or whatever, in gold coin, silver coin, gold bullion, silver bullion.

DAVID: Recently there was legislation in Utah defining gold as being legal for settling debts and so forth. Correct?

EDWIN: Well, there’s a statute that just came out in Utah, which I would call more of a “making a statement” statute than a substantive statute, because they recognize the United States gold and silver coin as legal tender. Well, they have no choice – it is, that’s constitutional. The statute merely recognizes that people can make contracts, enforceable contracts using gold and silver coin, and that’s also their right. But it’s the first time that a state has actually stood up and said something about monetary policy. Even so, a journey of a thousand leagues begins with a single step, right?

DAVID: Looking at the descent of the dollar and its steep downtrend since 2002 – against other currencies and, of course, gold – one can’t but wonder, how much further can it fall before you get a real crisis? One that the government won’t be able to deal with?

Based on the historical precedent you mentioned, it just continues to go down until it reaches the point they have to come up with something else. Given the strong probability that, in time, the Fed is going to have to step back in with another round of quantitative easing, do you think that could be the trigger for the bottom falling out from under the dollar?

EDWIN: I think so, because of the large percentage of debt required to finance the government at this point – I think it is now running around 46%. Victor Sperandeo has done some work on hyperinflations and found that apparently once that number gets over around 40-41%, that’s the end.

According to his work, in every big example of hyperinflation since the French Revolution, that number is apparently the tipping point on the rollercoaster. You’ve gone over the top, and now gravity takes over and down you go to the bottom. They can’t stop the thing. So we’re now at 46%, at least it was on the 12th of May, 46%, and it doesn’t seem to me there’s any will or intelligence in Congress to correct this, and it’s not going to be the Federal Reserve that corrects this, it’s going to have to be done legislatively.

Of course, the government could do something radical to correct the situation – there is always the “if-then” type analysis, but assuming that they don’t take radical steps to correct it, which seems a safe assumption, that’s the direction we’re heading in.

DAVID: So we could already be over the top on this, as far as this is concerned.

EDWIN: Yes, that’s the fear – and once we’re over the top, that’s the end of the game. The rollercoaster goes to the bottom. There’s no stopping it.

DAVID: Interesting in this whole discussion is that the U.S. has been the driver in the global adoption of the monetary system we now have, starting with Bretton Woods and then when Nixon stopped gold redeemability. At that point, everybody just sort of went along, continuing to use the U.S. dollar as a de facto reserve currency. But all of a sudden, today, you look around and can’t help realizing the problem is global in scale, leaving none of the paper currencies as a viable alternative. Are there any conceivable solutions to a crisis of this scale?

EDWIN: If you want to go back to a sound currency system and a sound political system – and by sound political system, I mean one in which the political powers can’t manipulate money – then it has to be tied to some free-market commodity, right? Historically the two that have worked have been gold and silver, and that actually is the constitutional standard, so unless we want to change the Constitution, we have to work with that.

Fortunately it will work, so we can do that. The mechanism for doing it is the question, and as I say, it’s got to come through the states. Looking at this from the investor’s point of view, I don’t know if there are good investments in the collapse of Western civilization. Which is what we’re facing.

DAVID: A lot of people think that if you own gold, enough gold, that you’ll come out of this okay. What is your general view on that?

EDWIN: In the hyperinflationary event, if you held something like 15% or 20% of your total portfolio in gold and the rest of it goes to zero, you won’t gain anything but you will not lose anything. That said, my interest has never really been in this from an investment point of view, except investment in a political sense.

Looking down the road in an attempt to see what this country will look like if we go through a hyperinflationary event – and if out of that doesn’t come a sound currency and restrictions on the government’s power to manipulate money and credit – it appears to me that what could emerge is a first-class fascist police state.

DAVID: Because restricting the government’s ability to manipulate the money also restricts their ability to do everything that they are currently? Putting in those restrictions would then limit them from being involved in so many parts of the economy, as they now are. Obviously, in a monetary system built around sound money, they couldn’t keep spending money at this level.

EDWIN: That’s right. If you have a system based on real money, we would not have this elephantiasis of government. So that was the great failure of the Supreme Court not asking, "Wait a minute, if we let them have this, where will that lead?" They didn’t look down the road. Maybe they did. Maybe that’s what they wanted. Maybe they were extreme nationalists of the Hamiltonian view of "The more power the better," but an intelligent person will look and say, "Wait a minute, we can’t put these powers into the hands of mere politicians."

DAVID: So do you really think a collapse of the Western civilization is avoidable at this point?

EDWIN: No. That’s what I’m worried about.

DAVID: It seems avoidable if the politicians acknowledged the reality of the situation and dealt with it accordingly, but do you see any hope that it’s politically likely?

EDWIN: Well, I’m going to give it a year or two to see what the states start doing here. We’re seeing more and more resistance, at least verbally, coming out of state legislatures and even out of some state governors to various encroachments by the people in Washington. We’ve seen some push-back in the healthcare area, TSA, and then there’s this business with illegal immigration, and now some states are beginning to talk about monetary reform.

There’s not too much the states can do about TSA. There’s probably not too much they can do about healthcare, because that would have to be decided in the courts, and god knows that’s a wasteland. Immigration is kind of back and forth/up and down, but on monetary reform, if a state passed the right statute, they could potentially bring that about within 30, 60, or 90 days. Especially if they put in one of these electronic gold/electronic silver type systems, which is off-the-shelf technology.

DAVID: How could it work?

EDWIN: Within 90 days of the passage of the statute, you could have everybody in that state with electronic gold debit cards dialed into the price structure in all of the supermarkets and so forth. People could essentially opt out of the Federal Reserve System if they wanted to.

DAVID: So watching the states for a hopeful plan is something we can do.

EDWIN: That’s right, and if they don’t do it within the next year or 18 months, then I would begin to become very pessimistic.

DAVID: Since we’re talking about being pessimistic, let’s talk a bit about the real dark side of all of this – namely that it appears to many that the U.S. is in the early stages of becoming a police state. Supporting that view, there are things I thought I’d never see in my lifetime, institutionally sanctioned renditions and torture, Guantanamo, the recent Supreme Court ruling that police can kick down your door based upon hearing what they consider to be a suspicious noise – the list of things the government is doing these days goes on and on, including the current blatant attempt to assassinate Gaddafi. So where do you think we are on the scale from 1-10, 1 being perfect liberty and 10 being full-on police state?

EDWIN: About 6-1/2 to 7, because they’ve set up the principles for it. You don’t have to have the police breaking in every day to have a police state, you simply have to have the judiciary saying, "If they break in, we’ll let them do it." It’s the principle of the thing. The NKVD didn’t arrest everybody in Stalin’s Russia, but the principle was in place so they could arrest anybody, and that’s the problem.

If you type “police brutality” into Google or some other search engine, how many YouTube hits do you think you’ll get? Huge number, right? And they become more grotesque every day. If I were a Supreme Court justice, I might look at this and say, "This is the real problem in the country," but of course those people live in an ivory tower, so they don’t know or perhaps care about reality. If they did, they would know enough to know this is becoming a real problem.

So, as a Supreme Court justice, would I want to give them a principle that allows the police to solidify and expand that kind of oppressive behavior? And the answer would have to be, "No, I don’t." The Constitution could never have foreseen this or allowed for this, right?

DAVID: Right.

EDWIN: And yet they allow for it. Now, either this is the biggest bunch of idiots that has ever been assembled in judicial robes in the history of humanity, or there’s some other agenda going on here.

DAVID: Assuming that they are not complete idiots, what could that other agenda be?

EDWIN: In my view, and I’ve written about this for years, the people at the top levels of government understand that their monetary system is inherently flawed. That we’re on the Titanic, in a sense, and they know that this ship is going to sink. They don’t know when, but they know when it sinks, they’re going to have a huge amount of economic dislocation, social crisis and civil unrest to the level of revolt.

So they started developing this police state mechanism in the hopes of keeping the lid on the garbage can when the monetary system breaks down. The upper echelons of the judiciary have been going right along with this because they know what the program is. This is obvious. No one in his right mind would stand by and allow the sort of excesses we’ve seen.

Just the other day, the Indiana Supreme Court ruled that the Fourth Amendment doesn’t apply at all because you can sue the police after they’ve mistakenly broken into your home. But when they break into your home and they kill you, then what?

DAVID: Not a lot of recourse then.

EDWIN: Right, like that poor ex-marine that was shot 60 times in Arizona, and he’s dead – now what, can he bring a lawsuit? Have we lost our minds? I mean, you don’t have to be a Harvard-educated lawyer to know that this is insanity. This does not rise to the level of just mere error. No one in his right mind can write these kinds of opinions, which means that either they’re insane, which I don’t believe, or they have another agenda, and the judicial opinions are simply camouflage – they’re propaganda to convince us that "Oh well, this is all right" because Judge Flapdoddle told us that it’s all right.

DAVID: Likewise, when you look at what’s been going on with the government’s spending, which is clearly insane, I mean, who would have thought they could even conceive of running a $1.5 trillion annual deficit?

EDWIN: And going up.

DAVID: And going up, and planning on this continuing well into the future. In your paper "A Cross of Gold," you mentioned that all told, the U.S. government’s total outstanding obligations at this point add up to something like 200 trillion dollars?

EDWIN: Yes, that’s Professor Kotlikoff’s, at Boston University, figure, not mine.

DAVID: So it’s hard to draw any other conclusion than that the government is operating in a complete fantasy. That everything is completely off the rails. Then you look at the judiciary and some of the things they have approved and looked the other way on, and it sure begins to look like fascism to me.

You and I see it, a lot of our readers look at it, but most people are so passive about it. Everybody is so quiet, and there is nobody making any waves – is that because it’s too late? Before you answer, I’ll give you just a quick anecdote that I think makes the point.

I was at a party not too long ago with a bunch of young people, and we were talking about some topic that was mildly controversial, and one of them said, "I’d love to look up more about that online, but I don’t want it to be part of my permanent search record.” So, the youth of America already have it in their heads that anything they do online is being monitored and will be in their search records forever and accessible to the government.

Back to my question, have we reached that stage where people are quietly huddling behind the doors of their houses, trying to keep a low profile so the government will leave them alone?

EDWIN: Given the current state of things, I’m sure there are a lot of people deliberately deciding to adopt a low profile, politically or socially. A lot of this has to do not so much with politics but what your neighbors or your coworkers will say about you, right? If you tell them something that is actually happening in the world, you will be labeled a conspiracy theorist; they’ll look at you as if you’re crazy.

But what about the activists? At a certain stage, the great mass of people will look around for leadership figures. When the economic crisis comes, they’re going to want someone to tell them how to get out of it. They’re not going to know the answers themselves. The question is, will there be activists, leadership figures, proposing the right solutions – and how soon will they come along?

That’s why I look at this Tea Party Movement, using that in a generic sense, an indication of the ground swell of discontent that’s out there. There’s a huge amount of that, but at this point it’s not particularly directed. Of course the establishment is trying to co-opt it, with Gingrich and others trying to claim that they’re leadership figures in this movement, and that deflects it from the direction in which it ought to go.

By contrast, you do have the Ron Paul-type movement. I mean, look at Ron Paul as an example. This is not a charismatic figure. He’s a very diffident individual, a very shy individual, not someone that you could possibly imagine as a man on a white horse in a political sense. He certainly has had very little real effect in Congress. He’s been the gadfly, he’s been the critic, but he hasn’t put in any legislation of consequence that has been passed. He’s made a lot of noise about the Federal Reserve, but he’s constantly being blocked by the real power structure in Congress in terms of getting anything done there. Yet nevertheless a whole political movement has essentially crystallized around him.

I look at him as the surfer on the wave. The surfer is not the important thing, the wave is the important thing. The surfer would be nowhere without the wave. That wave is out there, and it’s just waiting for the right surfer. He’s the first one that’s come along, but there will be others, perhaps some state governor who is actually competent, and he looks at this monetary system and he says, "To hell with this. Here’s what we have to do," and they put in that alternative currency statute, the proper one, not the kind of statement that was made in Utah, but a proper functioning one. In which case he will become the next president of the United States, and then we will see what will happen.

DAVID: Any time the states try to go their own way on issues that the federal government doesn’t like, the federal government starts to threaten them with losing their highway funds or education funds, or whatever. Isn’t that part of the problem?

EDWIN: Well, it certainly is part of the problem, and that’s why you’re going to have to have some real leader in the state who is going to say, "We have priorities, and our first priority is correcting the monetary problem, the currency problem, and we’ll worry about those federal education funds later. In fact, what we may do is stop paying some money to the federal government."

Unfortunately, once you allow the federal government to have the kind of influence they now have over the states, the states have essentially rolled over. So, at some stage, they have to say no.

That’s why I say that at some point down the line, if we see nothing happening on the state level – if we see these bills being put in and being constantly defeated, and no one comes forward to take leadership on these issues – well, I’ll throw up my hands and say, "We just don’t have the leadership group, we don’t have the Patrick Henrys, we don’t have the Thomas Jeffersons, we don’t have the Sam Adams, we just don’t have those people anymore, and that’s the end.”

But I don’t believe it will come to that. We have over 300 million people in this country, we can’t find a few hundred?

DAVID: Well, we will certainly keep an eye on the states for somebody to show up one of these days. Governor Christie in New Jersey seems like a pretty sound guy.

EDWIN: I want to see just two things, because there are two things of real consequence right now in terms of the major powers of government historically and in terms of political philosophy. Those two things are the power of the purse and the power of the sword. In order to continue spending at the levels it now is, the government has to maintain control over the monetary system, and it has to have some kind of control over military and police force.

Under our Constitution, those two powers are supposed to be ultimately in the hands of the people. We’re supposed to have a free-market-oriented and -controlled monetary system based on gold and silver, so the politicians really do not have control over the purse. They have to come to us and ask for taxes. They can’t manipulate the money and use inflation as a hidden tax. We’ve lost that. We failed to assert it – let’s put it that way.

On the other side, we see this police state developing, with a centralized Department of Homeland Security in Washington that has tentacles reaching down into every local and state police force. This is completely contrary to the Constitution because the Constitution tells us that the thing that’s necessary for the security of a free state is what? A well-regulated militia. And what is a well-regulated militia? It’s composed, as the Virginia Declaration of Rights in 1776 said even before the U.S. Constitution, of the body of the people – the people organized in a certain way. Think of Switzerland.

Well, we’ve lost control over those two key elements, and until we get them back, we can only continue down this road to the full-blown police state. So in sizing up any politician, I’d start by asking them these two things: “What are you going to do in the state to return us to a system of constitutional currency with an alternative system in this state because we can’t do it in Congress?” And, number two, “What are you going to do to revitalize some kind of state militia structure, perhaps using Switzerland as the model because they’ve been very successful over the years, so that we are no longer under the control or answerable to Janet Napolitano?”

If the states can’t regain control over those two things, the rest of it is a waste of time. If you don’t have control over the high ground, as the military people would say, then you’ve lost the battle. Education funds, transportation funds, all the rest of this stuff is not even icing on the cake if you let the federal government continue to have those two powers.

They took power over the money a long time ago, and they have been systemically organizing this police state since well before 9/11; in fact, the plans for the Patriot Act were drawn up before 9/11. They understand where the high ground is, and that’s why if you are a state politician and you can’t answer those two questions – if you don’t tell me that those are your number one and number two priorities – forget it, we’ll look to somebody else for leadership.

DAVID: It seems to me that unless and until there is some sort of a push-back on the state level, the situation is going to grow increasingly dangerous, looking for a trigger, so to speak. Much in the way the Arab Spring blew up almost overnight. People looked at that and said, how did that ever happen? These are some of the most oppressed people in the world, ignorant and backwards and everything else, and all of a sudden they are in the streets, risking their lives for more freedom. So, it would seem that it’s just a matter of time before we see something akin to an American Spring here.

EDWIN: Oh, I think so, yes. It’s just terrible to think that we have to take second seat to the Egyptians in the promotion of liberty. Not to criticize the Egyptians, but Egypt has never been considered to be a country that philosophically was in the forefront of that area.

DAVID: Speaking of Egypt, I think the jury is still out on whether the military will allow the freedom movement there to take power. The Saudis are falling all over themselves to give the Egyptian military money, as is the U.S. government, so it would appear that we’re now trying to solidify their power.

EDWIN: Please don’t say “we” when referring to the people in Washington. Don’t include me in that list.

DAVID: (laughs) Doug Casey often says the same thing. And on that note, I’ll sign off by thanking you very much for your time. Let’s do it again some time.

For those of you who wish to hear more from Dr. Vieira, James Turk of the GoldMoney Foundation recently posted a video interview that you may find of interest. Here’s the link.

Quoting James Turk on the video, “This video could be described as a teaching guide to sound money at the state level. I think this video can be helpful in getting out an important message about sound money at the state level to bring about meaningful change. All it requires is state legislators spending 40 minutes to become educated on this matter. If they do that, I don’t see how any of them could reasonably deny the power of Edwin’s logic and discussion of the law.”

If you are interested in reading more fascinating interviews, controversial articles, and mind-boggling analysis of the economic “state of the union,” as well as the best ways to crisis-invest like the pros, try The Casey Report risk-free – with 3-month money-back guarantee.

David Galland is the managing editor of Casey Research.

I just had a conversation with constitutional lawyer and monetary expert Dr. Edwin Vieira. I first became acquainted with Dr. Vieira, who holds four degrees from Harvard and has extensive experience arguing cases before the Supreme Court, at our recent Casey Research Summit in Boca Raton, where he spoke on how far off the constitutional rails the nation has traveled. Here is a summary of what he told me…

Dr. Vieira and I covered a lot of ground in our lengthy conversation, most of it related to the U.S. monetary system – its history, nature, and likely fate. But in between the details and analysis of how it is that the nation’s fiscal and monetary affairs have deteriorated to the current dismal state – and how the global sovereign debt crisis is likely to be resolved – a couple of deeply concerning truths emerged.

Concerning because, taken together, these truths have set the stage for a full-blown police state.

The first of these two truths has to do the nature of today’s money. To set the stage, I present the following excerpt from Dr. Vieira’s paper A Cross of Gold related to the original Federal Reserve Act.

Section 16 of the Act provided that:

Federal reserve notes, to be issued at the discretion of the Federal Reserve Board for the purpose of making advances to Federal reserve banks are hereby authorized. The said notes shall be obligations of the United States, and shall be receivable by all national and member banks and Federal reserve banks and for all taxes, customs, and other public dues. They shall be redeemed in gold on demand at the Treasury Department of the United States, or in gold or lawful money at any Federal reserve bank.

Observe: From the very first, Federal Reserve Notes were denominated “advances” and “obligations” – that is, instruments and evidence of debt. True “money”, however, is the most liquid of all assets, not a debt that might be repudiated, and certainly not a debt that has been serially repudiated.

And if Federal Reserve Notes were from the start to be “redeemed in gold or lawful money”, they obviously were never conceived to be either “gold” or “lawful money”. So, because by definition the only “money” the law recognizes is “lawful money”, by law Federal Reserve Notes were never (and are not now) actual “money” at all, but at best only some sort of substitute for “money”.

The monetary conjurers’ trick has been, slowly, steadily, and stealthily, to reverse this understanding in the public’s mind. That is, to make the substitute pass for the real thing, and then remove the real thing from the operation.

This subterfuge was not overly difficult to put over. After all, in the term “redeemable currency”, which is the noun and which the adjective? When people deal with a “paper currency redeemable in gold”, the natural uninstructed inclination is to treat the paper currency as “money” and the gold as something else. The paper currency, as the saying goes, is merely “backed” by gold – but of course is not itself gold. And because the currency is not itself gold, the money-manipulators can remove the gold “backing” farther and farther into the background, without affecting the nature of the paper as “currency” (at least nominally).

Thus, a “redeemable currency” can be converted into a “contingently redeemable” or “conditionally redeemable” currency, through temporary suspension of specie payments (as happened repeatedly during the Nineteenth Century); and then into a full-fledged “irredeemable currency”, through permanent suspension of specie payments, as with Federal Reserve Notes after 1933 domestically and 1971 internationally.

Yet, to the average citizen (whose most serious liability is mental inertia), even though a paper currency’s promise of redemption has been dishonored, it nonetheless remains “currency”.

Thus one grasps that the so-called “right to redemption” attached to any paper currency is actually a liability, inasmuch as it exposes the holders of that currency to repudiation, because they possess only the paper, not the gold.

Even in the best of times, the holders of redeemable paper currency are not economically and politically independent. Rather, they depend upon the honesty and the competence of the money-managers.

This is why America’s Founding Fathers, realists all, denominated redeemable paper currency as “bills of credit”. They knew that such bills’ values in gold or silver always depended upon the issuers’ credit – that is, ultimately, the issuers’ honesty and ability to manage their financial affairs.

The unavoidable trouble with “bills of credit”, though, is that they can (and usually do) turn out to be “bills of discredit”, when the holders discover that the money-managers are dishonest and incompetent – or worse, as is the situation today, highly competent at dishonesty. Then the holders of the paper currency (if they are sufficiently astute) realize how unwise it is to allow the gold to be held by the very people with the greatest incentive, and the uniquely favorable position and opportunity, to steal it.

But when the money-managers refuse to redeem their currency, what can the holders of that currency do to protect themselves? Well, what were they able to do in 1933 and in 1971? Nothing. If the holders of Federal Reserve Notes had enjoyed an effective, enforceable “right” to the gold that the Federal Reserve System and the Treasury of the United States promised to pay in redemption of those notes – that is, if the currency had been “redeemable” in the only meaningful sense that redemption was absolutely assured as a matter of law and especially fact – the gold seizures of 1933 and 1971 would never have happened.

Thus, the ostensibly “redeemable” character of paper currency of the pre-1933 and pre-1971 type did not protect the holders of that currency. Instead, it turned out to be the very device used to deceive, defraud, divest, and dispossess them of gold – proving in the most palpable manner that a society’s acceptance of “redeemable currency” is the product of confusion and the invitation to inevitable economic and political disaster.

In our conversation, Dr. Vieira ticked off eight specific ways in which the current monetary system is unconstitutional. While I won’t go into the specifics here, the important thing to understand is that, as currently operated, the federal government has managed to manipulate things to avoid any constitutional restrictions on its ability to spend.

This, of course, gives the government free rein to reward favored voting blocs with expensive social programs, buy fleets of limousines, launch expensive overseas adventures, bail out well-connected donors, and otherwise spend the country into ruin.

To understand why this is so important as a precedent to the evolution of fascism, view the matter in reverse by considering how different things would be if the constitutionally mandated requirement that the government’s currency be redeemable in good money – gold or silver – was still enforced. In that case, the government’s ability to spend would be effectively limited by what it collected in revenues. That, in turn, would have greatly curtailed its ability to grow into the bloated juggernaut it has.

In other words, the American ideal of a limited government would have been hard wired.

As it stands, though, exactly the opposite has been allowed to evolve – unchallenged by anyone, including the Supreme Court. Why has the nation’s highest court chosen not to tackle this clear breach of the Constitution?

According to Dr. Vieira, it is likely because if they were to void the current system as being unconstitutional, they would effectively blow apart the U.S. and global economy. But as they have no authority to even suggest an alternative system, they are faced with the reality that while they have the power to do great damage, they have no power to cushion the blow. And so, the Supreme Court does nothing.

As a result, the ability of the federal government to continue its insane spending and rolling out new initiatives designed to win over voters continues with no legal restraints – the latest example being the health-care initiative.

Put another way, in cahoots with the Fed, the federal government is able to wage war, bail out the banks, foster socialism, and otherwise bankrupt the nation – to do whatever it wants – largely thanks to its continued operation of an unconstitutional monetary system.

It Gets Worse…

The second fundamental truth is that the Supreme Court has been a co-conspirator and instrument of the government’s degradation of individual liberty.

Dr. Vieira and I spent a fair amount of time on this topic – of how the nation’s highest court could let stand the egregious excesses of recent decades; the Patriot Act, Guantanamo, institutionalized torture and renditions, domestic spying, eminent-domain abuses, warrantless searches, etc., etc. In his view, there can be only one of two reasons that the Supreme Court has been so accommodating – one is that the justices are incredibly incompetent, and the other is that they are working within the context of an unseen agenda.

Ruling out the first, his final conclusion is that they are operating with an unseen agenda in mind. In his view, that agenda revolves around the rising potential for widespread social unrest emanating from the nationwide monetary Ponzi scheme. Doing its part to prepare, the Supreme Court has been establishing the precedents necessary for the government to cope with that unrest.

Too radical a thought? Returning to Dr. Vieira’s point – ask yourself how else to explain the Supreme Court’s actions. Are they collectively of low intelligence, or otherwise so stupid as to be unable to understand the Constitution? Or do they now view the Constitution and the Bill of Rights as dead letters, freeing them up to respond to the government’s overheated demands for new and previously unimaginable new “emergency” (read “fascist”) powers?

Is there an alternative explanation?

On this general theme, Dr. Vieira correctly points out that, in order for a fascist state to exist does not require the government to actually arrest anyone – but only that they can arrest anyone. Do you think you broke a law over the past week? I can assure you that every one of you dear readers broke a lot of laws. Sure, you may not have realized you were breaking a law – but, as the old saying goes, “Ignorance of the law is no excuse.”

The Stage Is Set

Unrestricted in its growth by any constitutionally mandated limits on its ability to create and manipulate money – the official currency now being nothing more than IOUs redeemable in nothing more tangible than coins made out of base metal alloys with inflated face values – and supported by a Supreme Court that has unequivocally demonstrated a willingness to ignore or sign off on egregious tramplings of the Constitution, the stage is set for the U.S. government to evolve into something far more dangerous on the domestic front.

All it requires now is a triggering event, and it would be naïve to think that such an event won’t occur. Maybe not tomorrow, maybe not this decade – but when it inevitably does, the federal government already has all the precedents it needs to do “whatever it takes.” This absence of legal restrictions on its actions is the very foundation of fascism.

When I asked Dr. Vieira how the nation has progressed on a scale from 1 to 10 towards becoming a police state, with 10 being a full-blown version, he put us currently at about 7.

There really is no investment angle to be derived from this situation – well, at least nothing new. Owning tangible investments that will hold up in the face of a continued currency debasement continues to make sense – but with the caveat that FDR’s unconstitutional gold confiscation of the 1930s was let stand and there is zero reason to think that the accommodating Supreme Court wouldn’t go along with it again. One would hope to see straws in the wind before any moves toward confiscation would begin. Until those straws start flying, the precious metals – as well as other tangibles – belong as part of your portfolio.

And I’d be remiss if I didn’t mention the importance of politically diversifying your life and your money as one of the few steps you can take to avoid the serious risk that comes from being “all in” in a single jurisdiction.

Some readers have berated me for often writing on what might be considered gloomy topics. To which I would respond: If you are sitting in a theater and see a fire breaking out, would you fail to make others aware of it, because you didn’t want to interrupt their entertainment?

Well, we can see a fire blowing up – the kindling for which has been piled up deep by a series of out-of-control governments. Unless and until there is something akin to an “American Spring.” this fire is going to spread and consume even more of the accumulated wealth of the broader public – and maybe worse.

Do what you can to protect yourself and your families – then get on with your life. You may not be able to do much about the bigger-picture trend, but you can certainly take steps on a personal level to mitigate the ill effects.

Hope for the best, plan for the worst… but then live life to the fullest.

Limited-time special offer: Hear Dr. Vieira’s complete speech at the Casey Summit (along with those of 34 other world-class experts) PLUS receive a fresh-off-the-presses, lengthy interview with David and Dr. Vieira in your inbox next week. It’s all in your discount Double-Dip Crisis Bundle – including the complete Summit CD set and a subscription to The Casey Report. Full details here.

David Galland is the managing editor of Casey Research.

Recently, I read a book titled The Good Soldiers that also serves as an object lesson in the disconnect between what’s going on in Washington D.C. and reality. It was written by David Finkel, a Pulitzer-winning author, and it came to me via a friend who is going through a stage where she feels drawn to books about war, mostly about World War II. Showing flexibility, her interest has expanded to the ongoing conflict in Iraq – the theater of operations that serves as backdrop for The Good Soldiers.

Despite it going solidly against my literary preferences, I dragged the book along during a quick trip to Florida – a spur-of-the-moment thing to attend a golf school (I figured it was either that or get thrown off the local course for energetic exclamations of elaborate expletives resulting from my golf shots constantly flying off in unexpected and unwelcomed directions). Out of courtesy if nothing else, I figured I’d read a few pages of the book before putting it down – and so was surprised when it sucked me in, and kept me in, pretty much until I was finished.

The background story is that the author of the book traveled to Iraq with a battalion of U.S. soldiers sent as part of the “surge,” then lived with them for the 14 months of their deployment. As far as I can tell, he approached his topic with no overt political intentions – rather, he just wanted to document the war as experienced by a battalion operating from a small base in one of the worst corners of Baghdad.

As one might expect, as they departed from the United States for Baghdad, the soldiers and their brigade commander, Col. Ralph Kauzlarich, were full of fight, patriotism, and the confidence that only a chosen people can possess. It was, in their view, a just war and they deeply believed that in no time at all they’d use their superior war-making capabilities – supported by the sure knowledge that they held the moral high ground – to clean the bad guys out of Dodge and get the whole mess straightened out pronto.

Reality, however, turned out to be significantly different, starting with the fact that rather than being welcoming, the population was overtly hostile – so much so that almost every time the soldiers drove off the base (which was part of the daily routine), the locals would try to maim and kill them. And they had considerable success at it.

In addition to trying to kill them, the community’s leaders seemed uninterested in the outreach efforts the colonel was instructed to make, including an initiative to rebuild the sewers and fix the power and water delivery systems in the area around his command. Of course, it didn’t help that it was the blunt-force approach used by the U.S. military in capturing Baghdad that destroyed so much of the infrastructure in the first place. Regardless, all attempts at doing “good works” were stalled and disappointed at every turn, with billions of dollars wasted in the process.

As the book progresses, the author juxtaposes President Bush’s and General Petraeus’ rosy comments about how well the surge is working with the on-the-ground realities. And those realities are presented as raw and graphic as they are – with the tops of soldiers’ heads being taken off by IEDs, or burning to death in Humvees while friends watch helplessly.

So successful was the military and political leadership in convincing Congress and the media that the surge was a winning strategy that, to this day, its acceptance as a fact has become a meme throughout the body politic. Back on the ground in Iraq, however, the daily grinding down of the front-line forces continues apace.

During the period of time covered in The Good Soldiers, the Iraqi insurgent attacks lightened up only slightly – but only because the ruling mullah in the battalion’s area of operation unilaterally called a cease-fire. The resulting dialing-back of attacks on U.S. forces was immediately pounced upon by the military leadership and the Bush administration as proof that the surge was working.

That that wasn’t the case became clear the day the same mullah called off his cease-fire and hell opened up. One minute the area was relatively quiet – the next, the streets were filled with armed gunmen and snipers, and bombs were going off on what seemed like every corner.

One of the more remarkable aspects of the war, an aspect that largely goes unreported, was just how sophisticated the Iraqi opposition became in their attacks against the occupying forces. Not only did their roadside bombs become murderously powerful – so powerful that they could almost evaporate a fully armored Humvee – but the Iraqis began attacking the U.S. bases using everything from mortars to rockets and even homemade missiles.

The lob bomb, for example, was created out of propane tanks, filled with ball bearings and shrapnel, with a triggering device welded to the nose, and a rocket on the rear. In one instance, two large dump trucks drove near the base; after tilting up their backs to drop their loads, they revealed rails which were then used to guide a barrage of lob bombs, resulting in millions of dollars of damage to the American base.

By the end of the battalion’s stay, the soldiers were mentally and, in many cases, physically ruined. One chapter near the end of the book, which recounted Col. Kauzlarich’s visits to some of his wounded soldiers back in the States – soldiers who suffered truly catastrophic injuries – I had to skip after just a couple of pages. It was just too painful to read.

Lessons from The Good Soldiers…

There are a number of important lessons that can be derived from The Good Soldiers, including:

• The on-the-ground commanders and soldiers being sent into places like Iraq and Afghanistan have only the best of intentions. Though their reasons for joining up may vary, as they head off for war, most believe their leaders wouldn’t deploy them unless there was good reason to do so. Thus when it becomes clear to them just how ill-used they have been – that they have lost friends and limbs for no discernable purpose – it creates a deep sense of disillusionment. The odds of another Timothy McVeigh emerging from the crowd of returning vets are very high. Despite the U.S. government spending tens of millions of dollars a day in Iraq – with the total spent now approaching $1 trillion – the mission has accomplished nothing other than antagonizing the Iraqis whose doors the U.S. troops kick down regularly. When I say “accomplished nothing,” that is actually an overstatement. In fact, other than toppling Saddam, the outcome of the mission has been to create an everlasting antipathy between many Iraqis and the United States, blowing wind into the sails of the most radical elements of Iraqi society. What a mess. The U.S. occupation has turned into a very effective laboratory for the insurgents. At the beginning of the conflict, the resistance fighters were relatively weak – but as time has gone by, the natural ability of humans to adapt and improvise has led to the development of an array of inexpensive but seriously lethal antipersonnel weaponry. That these technologies are now spreading throughout the region can be seen in the recent death of eight U.S. soldiers in Afghanistan, in a single blast. Short of staging a scorched-earth form of warfare – turning these cities into parking lots – the U.S. cannot possibly ever win one of these conflicts. There is no fixed enemy that the U.S. can target with its superior weapons. And it’s unrealistic that the military can hunt down all of the opposition by going door to door. The U.S. political and military leadership is straight out lying to its troops and to the public at large. It is hard to comprehend why, but I dare you to read The Good Soldiers and come away with any other conclusion. Maybe they continue the tragic farce because to cut and run – as we ultimately did in Vietnam – is just too embarrassing. Maybe it’s because they are so effectively lobbied by the war profiteers – may they eventually rot in the hottest corner of hell. Maybe it’s because they are allowed to wage war from a safe distance (no politicians visited the forward operating base where Kauzlarich and his battalion were based during their stay there, and Petraeus only made a single, quick stopover).

Meanwhile, the U.S. continues to bleed billions in these misguided wars, while the soldiers just bleed.

Someone, and probably a lot of people, should be held accountable for this travesty – as in being brought up on serious charges and, if found to have propagated lies resulting in the loss of lives and the wasting of hundreds of billions of dollars, sent to jail for a very, very long time. Or, better still, turned over to the Iraqis to punish. I’m sure they’d figure out something appropriately medieval.

Why This Is Important to Us as Investors

Given the urgency of addressing the U.S. debt and deficits, the bloated U.S. military budget is clearly the most obvious place to start making cuts that will actually matter. Yet Congress made no such cuts when passing the $690 billion budget requested by the Defense Department – doing so last week by an overwhelming margin.

That budget includes another $119 billion to flush down the toilets of Iraq and Afghanistan. Showing that it has learned no lessons, the Obama administration – encouraged no doubt by new friends in the military-industrial complex – has already managed to spend $750 million in the undeclared war on Libya.

There is a way to use this understanding that the bankrupt U.S. and its allies are doing little more than breaking furniture and making enemies in the Middle East to one’s advantage. Simply, unless and until the U.S. politicians muster enough spine to pull out of Iraq and Afghanistan and slash the military budget, the government’s massive budget deficits will continue.

And if the budget deficits continue, then the trend for the U.S. dollar is sharply downward (though I remain convinced we’ll see a rally in the near term, a topic we’ll be tackling in greater detail in the upcoming edition of The Casey Report).

That is not conjecture, but the unavoidable conclusion uncovered by a number of objective analyses done on past sovereign debt crises by folks such as Kenneth Rogoff and Casey’s Chief Economist Bud Conrad.

To those readers who think that cutting the military budget, or pulling out wholesale from the Middle East, will increase threats to the continental United States, we will have to agree to disagree. In my view, destroying our economy to wage war – in the process squandering the huge commercial advantage of providing the world its reserve currency – is far more destabilizing. As is making yet more enemies by continuing to lob bombs and kick in doors here, there, and everywhere.

Unfortunately, the U.S. leadership and, I guess, some significant swath of the voting public who supports that leadership are suffering from some sort of mass psychosis (or maybe it’s paranoia), that actually has them thinking that it is somehow in the country’s interest to continue flinging billions of dollars and the lives of its good soldiers into lost causes overseas.

But don’t take my word on the topic – do yourself a favor and pick up a copy of The Good Soldiers today. As I can’t know where you stand on these wars, I can’t say whether or not reading the book will change your mind. But I can guarantee you that its on-the-ground perspective will enlighten you as to the true and disturbing nature of what’s really going on, and the futility of it all. It is anything but entertaining, but is very well written and very illuminating.

Meanwhile, use the military budget as a proxy for the seriousness (or lack thereof) of the government’s intent to reduce its spending by any significant amount. And, absent any serious cuts in that spending, continue to take measures to protect yourself against wholesale debasement of the currency.

Every month, David Galland and his co-editors – among them Doug Casey – of The Casey Report research and analyze significant events in the U.S. and global economy, as well as in politics and the markets. Their goal is to recognize the trends in the making that will directly or indirectly affect investors… and to provide the best profit opportunities, even in a time of crisis. Learn how you can outpace rampant inflation by crisis-investing like the pros in this free report.

David Galland is the managing editor of Casey Research.

While there are many reasons that gold and silver are going to keep moving higher as the fiat currencies trend lower, at our recent Casey Research Summit in Boca Raton, faculty member Mike Maloney pointed out a fact that, while obvious in hindsight, I had never heard mentioned previously.

Namely that during the last major precious metals bull market in the 1970s, only about 10% of the world could own gold – either due to legal restrictions or a lack of liquid capital.

Today, few countries prohibit gold ownership, and a far higher percentage of the world’s population has transitioned out of poverty.

China provides the most germane example, having legalized gold and silver ownership for private citizens in 2004, and through the explosive growth in national GDP that has caused Chinese gold purchases to skyrocket.

Confirming the point, the following is an excerpt from a recent Wall Street Journal article:

Chinese investors are snapping up gold bars and coins, buying more than ever before in the first quarter of 2011 and overtaking Indian buyers as the world’s biggest purchasers of the metal.

A growing middle-class in China is raising the appetite for gold there.

China’s investment demand for gold more than doubled to 90.9 metric tons in the first three months of the year, outpacing India’s modest rise to 85.6 tons, the World Gold Council said in its quarterly report on Thursday. China now accounts for 25% of gold investment demand, compared with India’s 23%.

The report underscores the rising appetite for gold among the growing middle-class in China. Fears of the country’s soaring inflation, as well as a search for new investments, is luring investors to gold, and marketing of the precious metal has also increased in recent months.

"I think people will be surprised by the strength in the Chinese demand, but we think this is a trend that is set to continue," said Eily Ong, an investment research manager at the gold council.

Notoriously active savers, stashing away on the order of 50% of their income, the Chinese are increasingly opting for gold over the renminbi to stash their wealth.

For those wondering just how big a development this is, consider that in 2007, just before investing in gold became “the thing to do,” gold demand in India was 61% of the world’s total while China’s gold demand was only 9%.

In other words, India is no longer the only elephant in the gold vault. And they are not alone – investors around the world are now able, and willing, to buy gold as a way of protecting their wealth from the inevitable decline of the fading fiat currencies.

I still don’t think we are out of the woods on a commodities correction, but there are so many black swans floating overhead that literally anything can happen, at any time. Thus buying in tranches on pullbacks over the next four to six months still makes a lot of sense.

But in the longer term, gold has almost nowhere to go but up.

The current edition of BIG GOLD tells you how to take full advantage of corrections in gold and silver – and how to get the most bang for your buck. Try it now for only $79 per year… for 3 months with 100% money-back guarantee.

David Galland is the managing editor of Casey Research.

A Casey Report Interview with Richard Maybury

With everything going on in the world today, we thought it a good time to catch up with the views of longtime friend Richard Maybury, a low-key but highly respected author, lecturer and analyst. In addition to his work consulting with businesses and high net worth individuals on strategic planning, Richard is the editor of the U.S. & World Early Warning Report, a monthly service that helps readers see the world as it is, versus how the media and the officialdom would like you to see it. Richard is widely regarded as one of the finest free-market writers in America today. His articles have appeared in the Wall Street Journal, USA Today, and other major publications.

David Galland: You’ve been steadily warning your readers for years about the coming chaos in what you call “Chaostan,” yet another forecast of yours that is coming true today. Before we get to current events, could you define Chaostan for readers who aren’t familiar with it.

Richard Maybury: In Central Asia, the word "stan" means "land of." Therefore Kazakhstan is the land of the Kazakhs, Kurdistan is the land of the Kurds, and so forth. I coined the word Chaostan in 1992, the land of chaos, to refer to the area from the Arctic Ocean to the Indian Ocean and Poland to the Pacific, plus North Africa.

To understand why I call this area Chaostan, you have to first understand the two fundamental laws that make civilization possible. The first being “You should do all you have agreed to do,” which is the basis of contract law. The other is “Do not encroach on other persons or their property,” which is the basis of tort law and some criminal law.

Where you find these laws most widely obeyed, especially by government, you find the most peace and prosperity and economic advancement, especially peace. In areas where they are less obeyed, you find chaos.

The area that I refer to as Chaostan never developed legal systems based on those two laws, at least not legal systems that the governments feel obligated to follow. I should point out those two fundamental laws provide the foundation for the old British common law, which was the basis of our Declaration of Independence and Constitution – essentially the legal documents that make America what it is or, rather, what it was.

So that’s the essential thing, that Chaostan is the primary area that never developed rational legal systems, or at least not rational legal systems that governments are required to obey. As a result, throughout history they have suffered, and will continue to suffer, political, economic and social upheaval… chaos.

DG: Which brings us to the present, with a real flare-up going on in Chaostan. As Doug Casey has often said, "The thing that gets you is the thing you don’t see coming." Other than you and Doug, no one else I’m aware of anticipated the current trouble in places like Tunisia, Egypt and Libya. One day, things are quiet, the next we’ve got all sorts of major oil-producing countries – countries that people believed would never really change – up for grabs. What are your general thoughts on the situation?

RM: Since you’ve read Early Warning Report for so many years, you know that there is nothing going on today that surprises me or my readers. That’s the direction I thought Chaostan would go. I’m just surprised that it took as long to get to this point as it did. In that regard, I have often used a quote from Doug…

DG: "Just because something is inevitable doesn’t make it imminent”?

RM: That too, but I was thinking of this quote to the effect of, "The nasty things that you think are coming always take longer to arrive than you think they will, but once they get here, they make up for their tardiness by being worse than you thought they’d be."

I think that’s a fantastic observation, and it sure does apply here. I’ve always been convinced that this mess was going to happen, but will confess to being amazed that it is all happening at the same time, and that it’s occurring in such a short period of time.

DG: What do you attribute the upheaval to?

RM: There are two big things going on: One is the fall of the U.S. Empire, and that is leading to the second, which is the breakup of the geopolitical matrix. In the case of the latter, I am referring to the many relationships the governments of the world have with each other and with their own people.

This matrix of relationships and political structures are called countries, most of which have existed for a long time, but that’s breaking up now, in part because, in most cases, the borders between these countries were drawn a long time ago by people who knew nothing about the local populations.

While the breakup is starting in North Africa, I think it’s going to spread across most or all of Chaostan. And it will have effects even in North America and South America. While it’s almost impossible to predict exactly how, it’s my view the world that we grew up in is going away, and it will be replaced by some new political matrix.

These changes will only be exacerbated by the fact that the U.S. Empire that we grew up with is crumbling very fast. As the U.S. Empire collapses, all sorts of relationships will die, leading to yet more chaos. You can see this with Obama calling up Mubarak and ordering him to resign, so I think chaos is the only word that fits.

As far as I know, nothing on this scale has ever happened before in world history, and for people who don’t understand it and are not paying close attention, it’s going to be hell. But for those who do understand it, it’s going to be one of the biggest money-making opportunities in all of world history.

I don’t know what to say other than just look out.

DG: We’ll get back to the money-making opportunities momentarily. First, however, a bit more on the crumbling U.S. Empire, an assessment we agree with. The administration was clearly caught flat-footed by what happened in Egypt. First it supported Mubarak’s regime and then, as you noted, it flipped and Obama demanded he go. It seems like right now the U.S. government really doesn’t even know whom it should be talking to, let alone supporting, in these various countries.

This is no small matter seeing that for decades much of U.S. foreign policy has been directed at ensuring a steady supply of oil by creating relationships in the Middle East, including setting up and supporting various despots. With these relationships now at risk, the U.S. government has to be seriously concerned that it will see a steep degradation of its influence in the Middle East. Would you agree?

RM: Yes, I think U.S. government influence in the area is probably almost completely gone. The only real influence they have is within, let’s say, a hundred miles of any given aircraft carrier. I don’t think Washington is taken seriously by anybody anymore, except for its military power.

The simple fact is, and you saw this in the Bush administration as well as in the Obama administration, it’s clear to everybody that they don’t know what they’re doing. They have absolutely no understanding of the things that they’re meddling in.

I remember watching a television interview with Condoleezza Rice right after 9/11, when she said "Nobody in the White House knew where Afghanistan was." And that after the Twin Towers came down, they all gathered in the Oval Office and had somebody bring in a globe so that they could all find out where Afghanistan was.

DG: Of course the region really only matters to the U.S. because of its oil, and I think right now something like half of Libya’s production is off line. Do you see the situation region-wide affecting supplies on a sustained basis?

RM: Let me push back a bit on your comment that "The only reason it’s important to the U.S. is because of the oil." I would modify that a little bit by saying, "The only reason the region is important to you and me is because of the oil."

But to the U.S. government, the region is a place they have exerted their power, and that is what drives the U.S. government – a lust for power. You have a whole lot of people who spend their adult lives trying to acquire power, and once they get it, they want to use it on somebody, and one of the groups of people that they have used it on are those in the Mideast.

The American founders understood that. It’s why they created the Constitution as they did, as an attempt to limit the use of power, but the Constitution stops at the border. So U.S. politicians, almost right from the beginning, have gone outside the country to exert their power because it’s a whole lot easier to do it in other countries than it is to do it in this country, and we have to keep that in mind.

While the oil is definitely a big factor, more of an excuse, for the U.S. government’s involvement over there, it’s the exercise of power that they draw satisfaction from and that’s the reason they have meddled in these countries for so many decades.

Now as far as what’s going to happen with the oil, my guess is that there will be more uprisings, and Washington will try to establish new relationships with whatever regimes rise up out of that. In the end, as you know, fundamentally whoever owns the oil can’t do anything with it except sell it, and so they will sell it and we will buy it.

DG: Might the Chinese, for example, move in there and take these opportunities to redirect more oil in their direction?

RM: Sure, but you’ve got to pay for the cost of the extraction, and there will be all sorts of governments, probably already are, sending agents in there to try to steer things in directions favorable to them, and they will try to use whatever oil they get control of as a weapon against their enemies.

I’m not talking about anything that hasn’t, in essence, been going on for centuries. That’s how governments behave. I have no idea how it’s going to shake out in the end, other than to say that ultimately whoever owns the stuff is going to sell it to somebody. They may not sell it directly to the United States or to U.S. oil companies, but they’ll sell it somewhere in the world, and that will increase the general world supply, and the U.S. will then buy oil from somebody.

I think that a whole lot of politics will be tangled up in these transactions, but I guess maybe the main factor to keep in mind is how much of the oil infrastructure is going to be destroyed while these governments are maneuvering against each other over there. While it’s too early to say, if a lot of that infrastructure isn’t destroyed, I’ll be very surprised.

DG: With the U.S.’s long relationship with Israel and support for all sorts of despots in the region, is the guy on the streets in the Middle East anti-American at this point?

RM: I’ve heard of a few incidents here and there, but the impression I get is that people around the world generally like the individual American, because we are a personality they have never run into before.

In most countries, if you tell an insulting joke about the government, everybody looks over their shoulders to find out if somebody overheard. An American never looks over his shoulder when he tells a political joke, and they find that fascinating. We speak with confidence and openly and about subjects that they will never talk about in public. So they’re captivated with our personalities as individuals, but they really hate and fear our government, just like many Americans do.

To illustrate that point, just think about the sick feeling you get in your gut when you go to your mailbox and find a letter with a return address for the IRS. Now imagine what it’s like being, let’s say an Iranian, and looking out your kitchen window and seeing an American guided missile cruiser sitting out there in the water.

DG: I remember when I lived in Chile being shocked to see U.S. soldiers jogging in double lines up the roads. This was a regular sight. It doesn’t take much imagination to figure out how people in the U.S. would react if Iraqi troops were a regular sight in their towns.

Back to the question of oil, the big players in the region are Iraq, Iran and Saudi Arabia. Do you think Saudi Arabia, in particular, will be in play before this is over?

RM: They already are in play in the sense that they’re trying to steer events in directions that are favorable to them. Maybe we should explain to the readers where Saudi Arabia came from. This is not a natural country. It is a country created by the government of Britain. Britain went into Arabia and picked the Saudi tribe as the one that ought to run the place as a surrogate of the British government. They supported the Saudi tribe so the Saudi tribe could conquer the other tribes, and that’s essentially what Saudi Arabia is today.

It’s as if someone went into Texas and picked the Jones family to run Texas and renamed the place Jones Texas. That’s what Saudi Arabia is, and the other tribes don’t enjoy being dominated by the Saudi tribe, so there is inherent tension in that country all the time. The way the Saudi tribe tries to avoid violence is by buying off the population. They just keep pumping money into the population in an attempt to keep them fat, dumb and happy, but the population is getting tired of the whole scam, and that ancient hatred of the Saudi tribe is always there, just under the surface. There is a horrible resentment in the population.

When the ocean of oil is poured into the mix, yielding unimaginable riches for the Saudi rulers, it’s a nitro and glycerin combination that people have been writing about for decades. I’m one of them. I’m amazed Saudi Arabia is still there. I thought it would have blown up a long time ago, but it could be the uprisings spreading all across the Islamic world now that light the fuse on their overthrow.

Saudi Arabia is the big prize, and this means a lot of people want it and they’ll be likely to fight over it – and where it is going to go, I don’t know. This may be the greatest level of uncertainty since World War II.

DG: It would be logical that the U.S. military-industrial complex is going to use all this instability as an excuse to rationalize continuing with the huge levels of military spending, which is a big problem in terms of reducing the deficit. Do you see the U.S. military remaining as big as it is, or is there a change coming as the empire continues to dwindle down?

RM: I think there will be some token cuts to the military, but I can’t see anything serious because all you need to do to get the American people to support a larger military is to just scare them a little bit. And that’s easy to do – in this present situation it is very easy to do.

So I would tend to think that all you’ve got to do is announce that we need more aircraft carrier battle groups, because the oil supply is threatened, and the typical American on the street is going to say fine, build more aircraft carriers.

A point here to keep in mind is that, yes, the U.S. has by far the largest military force in the world, but Washington has taken unto itself the largest military obligation in the world – namely the responsibility of policing the whole planet. There is no other country that thinks it has the obligation to police the earth, so in terms of fire power versus territory that is being controlled, Washington is actually very weak and its enemies know this.

DG: Recently the U.S. Secretary of Defense Gates told cadets at West Point that we may never fight another large ground war. Do you believe that? I mean, if Saudi Arabia gets really unstable, do you think we are going to put boots on the ground there?

RM: Yes, definitely. This idea that you can fight a war without the use of ground forces is ridiculous. It shows a lack of understanding of what government is. A government is an organization that has control over a given piece of territory, and to control it you’ve got to have infantry standing on the ground. The phrase "boots on the ground" is a very good one for that.

The place has to be occupied by soldiers with rifles, and if you don’t have the ability to do that, then you can’t control the place. You can just bomb the heck out of it, but eventually you’ve got to put troops on the ground.

DG: Yet in his speech to the cadets, Gates said that wars like Afghanistan are not likely and in fact he would advise against it. I have a copy of the article here, and I quote; "In my opinion, any future defense secretary that advises the president to again send a big American land army into Asia or into the middle of Africa should have his head examined."

RM: What he’s saying is absolutely true, that you should not get involved in foreign wars, but I think it’s a naïve idea to assume that they won’t do it, because after all it’s a government. It wants to use its power. It’s going to use its power on somebody, and it will get into more wars, because the people who run the government are power seekers and they want to use their power. Until there is an amendment to the Constitution that says the U.S. government can’t meddle in other countries, we’re going to have wars in other countries.

DG: Speaking of foreign entanglements, Israel has got to be watching all this stuff with great concern.

RM: Yes, if I were the Israelis, I’d be pretty scared, and certainly they are also working secretly to try to steer events in directions favorable to them. I don’t know what to say about it other than the old phrase, "The situation is fluid."

It sure is fluid, no doubt.

DG: Returning just for a moment to your contention that governments need to exercise power. Is this just a psychological aberration amongst power seekers, or is there more to it than that?

RM: I regard it as a mental illness. People such as you and me and our readers are generally wealth seekers. We want to live a prosperous, comfortable life and we seek wealth in order to do that. By contrast, people who rise to the top in government are power seekers. They get their satisfaction from forcing other people to do what they want. They are essentially bullies.

Let’s offer a little proof here. Practically every piece of legislation enacted in the last 100 years has involved the use of force on persons who have not harmed anyone. Anybody who wants that privilege has to have something wrong with them, so I think it’s a given that when you’re dealing with a high-level politician or a high-level bureaucrat, you’re dealing with somebody who likes to push other people around, and that’s the fundamental factor that the American founders were looking at when they created the Constitution. They understood that political power corrupts the morals and the judgment.

DG: A moment ago, you mentioned that one way the government can get people to go along with its schemes is to scare them, and history supports that this isn’t a new tactic. Yet, a lot of Americans look at 9/11 as proof that Muslim extremists are after us and we have to defend ourselves, and see that as sufficient rationale for the U.S. military to take action in the Middle East. Even from our readers, we hear things like "Kill them all and let God sort them out." How would you respond to that?

RM: I know a lot of people that seem to need somebody to hate, and when the government gives them somebody to hate, they’re grateful. I’ve known a lot of people like that. They enjoy despising whole classes of people, painting them all with the same brush, even the children.

DG: Yet people would argue that the U.S. government did not give us the Arabs to hate. They blew up the World Trade Center. There is clear evidence that in fact somebody does hate us, and so we should hate them back.

RM: Yes, well, as Ron Paul has pointed out, and I think this is a direct quote from Ron, "They didn’t come over here until we went over there."

DG: And we’ve been over there an awfully long time at this point.

RM: That’s right. You can go back 200 years, if you want, which I do. The original war between the U.S. and Muslims was the Barbary Wars back in the early 1800s, and that was essentially an extension of the Crusades. The Europeans were fighting the Muslims, and the Europeans hoodwinked the American politicians into joining the war on their side.

When you hear the Marine Corps hymn "From the Halls of Montezuma to the Shores of Tripoli," to the shores of Tripoli refers to the Barbary Wars in which the U.S. came into the Crusades against the Muslims on the side of the Europeans.

So you can go back 200 years when the Europeans manipulated us into this thing, or you can count the modern onset as being in the 1940s when Roosevelt made an agreement to support the Saudis. There has never been a case where an Islamic government sent armies into the United States, but the U.S. has done it in the Mideast numerous times.

DG: Speaking of being manipulated, it is always remarkable to me how the British were up to their necks in Israel, as were the French in Vietnam, and presto chango, they’re out of the picture, replaced by the Americans. How we ended up as Israel’s number one benefactor is amazing, just as it is amazing to me that we ended up losing 50,000 men in Vietnam after the French left. It makes no sense to me, but I guess it’s to be expected once you start getting drawn into foreign adventures.

What else are you following for your readers? What sort of themes are you getting into?

RM: In terms of economics, we’ve been writing about the decline of the dollar for years now. But actually, as of the March issue, I’m making a turn and going back to a much deeper geopolitical orientation, because I think what’s going on in the Islamic world now is going to be at least as dominant as the fall of the Soviet Empire was back in the 1990s.

Jim Powell has made an interesting point. He said that it won’t be very long and we will all be looking back and referring to life before Tunisia and life after Tunisia, and I think that is true. The Tunisia uprising will be viewed akin to the attack on Pearl Harbor or the assassination of Archduke Ferdinand in 1914 where life was totally different after that incident happened. I think we’re in that situation now.

DG: And I take it for granted that you think oil is going a lot higher.

RM: Yes, not that it isn’t going to have corrections along the way, but I’ve been predicting for a long time we are going to see oil at $300 a barrel. I don’t know when, but I’m sure it’s coming.

DG: And gold is a core holding at this point?

RM: Absolutely, gold and silver. I think they still have a long way to go, which is to say the dollar still has a long way to fall.

DG: Any other quick investment ideas that you would share?

RM: I still like Fidelity Select Defense and Aerospace Fund. The symbol is FSDAX. I think the military industries are going to be selling a lot of weapons, and so why not invest in it?

Our newsletter is based on what I regard as the two carved-in-granite long-term economic trends; one of them being the decline of the dollar and the other one being war. I think those are locked in, and so I recommend people buy investments that do well during wartime or during periods of currency debasement, which we have. Those two trends – war and currency debasement – are essentially what Early Warning Report’s whole strategy is at this point. Buy whatever does well during war and currency debasement.

DG: A final question. Do you see the government pulling out of Afghanistan more or less on schedule?

RM: I doubt it, but given how fluid the situation is, who knows? Gates’ comment was very revealing. It is amazing he would admit in public that it was a stupid thing to go into Afghanistan. If U.S. officials can divert the public’s attention enough with what’s going on in North Africa, maybe they can pull it off – maybe they can cut and run, and let the Afghan government fall without the American public noticing the lives that were wasted propping it up.

The one thing I can tell you for sure is that if you want to keep track of what’s really going on in the world, you have to watch the aircraft carriers. The U.S. has 10 aircraft carriers – the big super-carriers – and they are always an indication of what Washington is really serious about.

DG: So when you read that a carrier is being moved into a certain area, then that’s a tip-off that something’s about to go on?

RM: Yes. The position of carriers is a tip-off. Google “Positions of U.S. Aircraft Carriers.” Secondarily, Washington uses amphibious warfare ships as substitutes for the big carriers, so you want to keep an eye on those as well.

Every month, The Casey Report dissects current U.S. and geopolitical events, economic and market trends – using in-depth, big-picture analysis to discover the best profit opportunities for investors. Learn all about crisis investing, and how to beat rampant inflation by acting smarter. Free report here.

David Galland is the managing editor of Casey Research.

In the last few weeks, I’ve become particularly “attentive” to the intentions of Fed policy makers following the scheduled June end date for QE2.

This is no small matter; an actual shift in Fed policy – as opposed to the smoke and mirrors sort – could temporarily play havoc on equities and commodities markets alike. How could it be otherwise, when under QE2 the Fed has been writing checks to the Treasury in amounts of upwards of $100 billion a month since last November?

As a point of reference, at the end of April 2007, the monetary base of the U.S. was $822 billion. At the end of April 2011, it will be $2.5 trillion, a three-fold increase. Call it what you want, “quantitative easing,” “stimulus,” “political payola,” “madness,” but monetary inflation is the correct term. And monetary inflation on this scale invariably leads to price inflation on a similar scale.

It is this “money,” steadily ginned out of thin air, that provides the fuel to keep the spendthrifts in Washington spending and props up the wounded economy.

It is also this “money” that sends equities and commodities soaring as investors look for higher returns and things more tangible to hold ahead of the rising inflation.

Removing the stimulus, therefore, will almost certainly have consequences.

Yet, because the politicos and their pets at the Fed have taken things so far beyond the pale at this point, so would a decision to keep the monetary pedal to the metal past June. As you can see in the chart below, technically speaking, the dollar is breaking down.

This steep downward slope of the dollar’s trend line over the last year begs for the Fed to attempt something to slow the dollar’s descent. Were they to signal a continuation of the same level of monetization now underway, past June, can anyone doubt that the dollar’s steep fall would only worsen, risking even collapse?

To my way of thinking, therefore, the logical starting point is for them to let QE2 expire in June, as planned, in order to show the world some monetary spine.

That is not to say that the Fed will leave its seat empty at Treasury auctions post-June – various members of the inscrutable institution have already made clear the intent to continue reinvesting the proceeds of maturing securities in the Fed’s portfolio back into Treasuries. Yet, even with that ongoing action – resulting in Treasury purchases to the tune of $17 billion a month – the net result will still be a monthly gap on the order of $80 billion.

All Eyes on Interest Rates

The dialing back of the Fed’s monetary machinations increases the possibility that interest rates will need to rise in order to attract buyers in sufficient quantities to fill the gap. And if there’s one thing we know, it is that rising interest rates would be devastating to an empire of debt such as the United States circa here and now.

One typically doesn’t like to see the empire in which one lives crumble into lesser states, as that is usually accompanied by a flagging quality of life and social unrest. Though there is bupkis that I, or any of us, can actually do at this point to rearrange things on the larger stage – it does behoove us to look after ourselves. Which, in the current case, requires a quick detour on the nature of interest rates.

We humans don’t really like change. And so we tend to embrace scenarios involving only gradual change – the soft sort that are easily coped with, with small and measured adjustments to the riggings.

The risk in such a passive perspective can be seen in the chart here showing the benchmark 10-Year U.S. Treasury rates from 1945 to 2010. While it is worth noting that over that entire 65-year period rates have never been lower than they are just now, a clear sign that today’s low, low rates are anomalous – and doubly so given the amount of outstanding debt – my primary purpose for presenting this chart is to narrow your focus to the period between 1975 and 1977.

As you can see, in 1975 – a period associated with a temporary calm before heading into a final inflationary blow-off – interest rates were actually on the decline and had fallen below the levels of 1970. Then, in the blink of the proverbial eye, 10-year rates started accelerating upwards, moving from just over 6% to over 15%, driven by the raging inflation and, in time, a Fed policy shift designed to crush that inflation. While rates subsequently peaked and began to ease, in fits and starts, it took a full decade before they returned to the 1975 level.

Unfortunately, the situation today is worse, which is saying something. As you can see from the next chart here, in 1977, U.S. federal debt was a third of where it is today as percentage of GDP, and this doesn’t reflect the coming ramp-up of trillions of dollars in additional debt that is now baked into the federal government’s spending plans.

Should we see a similar spike in interest rates to, say, 15%, it would create a black hole that wouldn’t just suck in all the government’s revenues, but pretty much the entire economy. This is a very real risk.

But back to the Fed and the crossroads it is soon arriving at. In the absence of any substantial reduction in government spending – a reduction on a scale that isn’t even being whispered about in the halls of power – the Fed is damned if it dials back its monetization (jacking up the potential for rising interest rates), or if it doesn’t (dooming the dollar and in time triggering higher interest rates as well).

The politicians and their friends down at the Fed can pretend, as they do, that the overhang on the economy of some $14 trillion in debt, and another $50 trillion or so in longer-term entitlements, is much ado about nothing. This view of theirs is confirmed by the current budget discussions that talk of slashing $4 trillion out of federal spending over the next 12 years – but ignore that this slashing still anticipates annual deficits on the order of $1 trillion. There are facts and fictions in this universe of ours, and it’s a fact that the notion of spending our way to better days is a fiction.

And so, in my mind, there is no question that the Fed will ultimately be forced to unleash QE3, and that will be followed by QE4, QE5 and so on through QE15 – or whatever number is in force at the time of the dollar’s collapse.

In the meantime, though, given the current ill health of the dollar, I remain convinced that the Fed will pause in its blunt-force monetization, come June. And that is likely to provide a shot in the arm for the dollar – versus the equivalent of a shot in the head to the dollar, should they reverse themselves and attempt to continue monetizing at the same elevated levels, past June. Among other consequences, a rising dollar could spell trouble for overheated commodities, at least over the short term.

The big unknown, of course, is what will happen to U.S. Treasury rates. And for reasons discussed a moment ago, this is a really important unknown. We shouldn’t have to wait overly long for some answers. But while we wait, a few scenarios to ponder:

• Best Case: For a time, post-June the Fed becomes a relatively less important player at the Treasury auctions, buying about $17 billion in Treasuries, vs. the $100 billion or so they are buying now, and the market responds favorably to the policy shift. The gap left by the Fed is filled in by institutions, and by friendly governments, looking to roll back their diversification into the euro and the yen – given the poor outlook for both. For a while Treasury rates remain relatively stable. And that encourages the U.S. government to continue spending willy-nilly and keeps the party for equities continuing for awhile longer, albeit with the participants on edge and watching the exits for any movement.

  A rebound in the dollar, one result of an inflow of renewed foreign buying, would hit the commodities, causing them to underperform until it becomes obvious to all down the road that the Fed will have to once again begin monetizing.

• Medium Case: Post-June, participation at the Treasury auctions weakens, but not disastrously. Rates rise, but also not disastrously. The economy teeters on the edge, but doesn’t fall. Neither does the dollar rise overly much, and something akin to a twitchy status quo continues as people wait for the other shoe to drop, as it inevitably must given that the overarching problem of sovereign and household debt has not been resolved. Volatility in equities and commodities increases, but there is no sustained move one way or the other. Yet.

• Worst Case: Post-June, auction participation falls significantly, and interest rates begin to accelerate to the upside, sending equities markets into a tailspin, dragging commodities down with them. The Fed quickly reverses course and begins writing the big checks to the Treasury, stabilizing interest rates but sending shock waves through FX markets as the dollar hits the floor and discovers the floor is made of glass.

The precious metals and other commodities soar. With nowhere else to run, investors begin bargain shopping for fallen equities – which are linked to tangible businesses, after all – and they bounce relatively quickly as well. Meanwhile, as the dollar collapses, the cost of everything begins to soar, crushing the unprepared and triggering real hardship. Unable to push interest rates higher to head off the price inflation, the Fed heads retreat to a hidden bunker and begin looking for friendly countries willing to give them sanctuary.

Of course, no one can see the future – but I think all three of those scenarios are likely to materialize in the relatively near future, one after the other from Best to Worst.

If I am right, then the way to play it is to expect a near-term rally in the dollar. While the U.S. dollar is toilet paper, it is of a better quality than the euro or the yen. Which is not to say that it doesn’t deserve its ultimate fate – the fate of all fiat currencies – but rather that, as long as the Fed shows some restraint here, it may be able to stave off that fate a bit longer.

And that could put some serious pressure on commodity-related investments, especially the more thinly traded junior exploration stocks. The chart here shows the relative performance of the Toronto Stock Exchange Venture Index – the index offering the best proxy for micro-cap resource stocks – against the price of gold.

As you can see, there can be quite a divergence in the performance of these small stocks over the price of bullion. While gold’s rise has been remarkably orderly, the rise in the stocks has occurred in fits and starts, with some breathtaking setbacks along the way. Of late, the stocks have had a substantial run-up, which again gives me pause. I think it is a fairly safe bet, therefore, that if gold were to correct 15% or so, the juniors would again go on sale.

In time, however, because interest rates are so low and the sovereign debt problems so acute, the worst-case scenario – of rates spiking – followed by the Fed quickly reversing course, is a certainty.

Which is to say that, in the now foreseeable future, all things tangible will do the equivalent of a moon shot.

Again, you have to make your own decision as to which scenario we are most likely to see. In my view, from a risk/reward perspective, as long as you have a core portfolio in precious metals and other tangibles (including energy), then selling some of your more speculative positions (you know the ones) to raise cash can make a lot of sense. That way you’d have the ready funds available to snap up the bargains that will be created during the Fed’s brief attempt at slowing the dollar’s current fall.

The way I figure it, at this point you can find all manner of analysis that will tell you it’s all blue sky from here for the commodities. Thus, a cautionary note seems justified.

Be careful, at least for the next couple of months. If I’m right, then there is a helluva buying opportunity right around the corner.

If David’s right about what’s coming next, then cashed-up investors will be positioned to capture some truly exceptional profit opportunities, maybe as soon as within the next month. Which makes this the perfect time to take advantage of the 3-month, 100% money-back-guaranteed, no-risk trial to the Casey International Speculator – dedicated to well-managed junior gold and silver companies with triple-digit upside potential. More here.

David Galland is the managing editor of Casey Research.

Editor's Note: David Galland, Casey Research partner and managing editor of The Casey Report, sees a major shift in Federal Reserve policy ahead and has advice on how to invest accordingly. Time is short, so we've asked David to share his thoughts with us.

L: David, in recent editorials you've warned of what could be an important shift in Fed policy — can you fill us in?

David: Sure. The purpose of The Casey Report is to keep subscribers well positioned in powerful, long-term trends — the kind of trend that will keep giving and giving. The trend in precious metals — gold and silver — which we've been heavily recommending for ten years is a good example. The overarching goal of The Casey Report is first and foremost to identify those critical larger trends and then closely monitor them until they play out — which is another way of saying that we aren't big about market timing or jumping in and out of trades. I mention this to set the context for the coming shift in Fed policy.

L: And that context is?

David: That the shift, and it is imminent, will not change the larger trend, but it has the potential to be quite disruptive over the short term.

L: Explain.

David: In terms of the larger trends, the fundamentals that have caused so much pain and economic woe over the last ten years or so remain intact. If anything, they've gotten worse. We've gotten currency debasement, not just in the U.S., but especially in the U.S. dollar, which is not just any currency, but the world's reserve currency.

We've got a truly mind-boggling expansion of the reach of government into all aspects of society and the economy, with all that that implies in terms of regulation, taxation, controls over investments and finance, impact on personal liberty, and so forth. By recognizing this destructive trend for what it is, investors can position themselves to avoid the worst, and to profit by betting on things like the continuing debasement of the dollar.

So that's the big picture.

There is growing evidence that in the next month or two, we will head into a very dangerous period. The Fed has been extremely supportive of the U.S. government's insane spending, polluting its own balance sheet by buying up toxic loans by the hundreds of billions and by pumping enormous quantities of cash into the money supply.

You don't have to look very hard to understand why we have seen some small recovery in the economy, much of which has been driven by the financial sector that has been the recipient of so much largess — it was bought and paid for by the government, working hand in glove with the Fed.

But there is about to be a fundamental change in this arrangement. It appears that the Fed has decided that it's time to take a step back from its monetization — or quantitative easing (QE), as they now term it — in the hopes that the market will step in to fill the large gap it will leave.

They can't know how that's going to work out, but if they don't stop pumping money into the economy, they never will know if the quantitative easing has worked.

Based on a lot of statements from a number of the voting members of the Federal Open Market Committee, the change just ahead is that they are serious about stopping QE in June.

As they won't wait until the last minute to confirm the end of their Treasury buying, I would expect their intentions to be made clear following their end-of-April meeting, the full minutes of which should be released in early May.

L: To be clear, do you mean no QE3, or that they cancel the portion of QE2 they haven't spent yet?

David: They may leave themselves a bit of wiggle room by holding back some of the funds slated to be spent as part of QE2, in the hopes of demonstrating a high level of confidence in their decision to stop the monetization.

That would also give them a bit of powder to use should the need suddenly arise, without exceeding the mandate of QE2. The important point is that I am increasingly sure they won't just roll out QE3, and that will have consequences.

L: Are you saying, no QE3 at all?

David: No. I think there will be a QE3, but it won't materialize until after a relatively lengthy period during which the Fed stands aside in order to give the market the opportunity to adapt and adjust to their exit from the Treasury auctions. In other words, once they stop, I wouldn't anticipate them jumping right back in at the first sign of trouble — say, if the stock market crashes.

In time, however, as the ponderous problems weighing on the economy come back to the fore and return the economy to its knees, the Fed will be forced to reinstitute the monetization, though they will likely try to come up with a moniker other than quantitative easing to describe it.

L: You're as cheerful as Doug. Why are you so sure there will be a QE3?

David: Because the problems that made the economy stumble in 2008 have not been solved. As I said before, most have gotten worse. Have the impossible levels of sovereign debt and trillions in unresolved bad mortgages embedded in the balance sheets of Fannie, Freddie, the Zombie Banks and even the Fed been resolved? Hardly.

Is there any real sign coming out of Washington that the deficits will be substantively tackled? You don't have to be as active a skeptic as I to understand that the deepest spending cuts being discussed don't even scratch the surface of the $1.5 to $2 trillion deficit. As for the $60 trillion or so in debt and unfunded obligations, forget about it.

The U.S. government and the governments of most large nation-states are fundamentally bankrupt. In time, they will have to default on their obligations. While there will be some overt defaults, I expect most of them to follow the path of least resistance, which is to try to inflate the problem away. And that means QE3.

For now, however, the Fed will claim victory over the economic crisis and follow suit with many other central banks — switching to a less accommodative monetary policy.

L: They've done their job and now it's time for back-slapping and cigars.

David: Yes.

L: Consequences?

David: If you look at a chart of the dollar, you'll see that it has been bumping along the bottom recently. Logically, if the Fed stops monetizing the Treasury's spending, we should see a rebound in the dollar. The big traders — the big institutional money out there — are going to use the change in Fed policy as a clear signal that it's safe to get back in the U.S. dollar.

It would be wrong to underestimate the amount of money that needs to find a home, and the liquidity advantages offered by the U.S. Treasury market. If the river of money redirects into Treasuries, it could — at least for a time — offset the Fed's exit and push the dollar up, maybe significantly so. And if the dollar comes roaring back, commodities, including gold and silver, would likely take a fairly hard hit.

Again, this is a short-term view. The longer-term trend for the precious metals is absolutely intact, because the fundamentals are entrenched — namely that the sovereign debt and spending is out of control, and politically uncontrollable.

L: Let's talk about that for a moment. These people — the big money — are financial types. Bankers. They know about all the bad debt they have, even if the ever-so-convenient new reporting rules allow them to keep some of their problems off the books. They must know that a so-called jobless recovery is not a recovery.

They are well aware of all sorts of dirt they don't discuss in public — how could they be stupid enough to let the Fed convince them the economy is healthy when their own information tells them it isn't?

David: First off, u201Ctheyu201D are not one guy. They are a lot of people with a lot of different perspectives and a lot of different objectives. Right now, for example, people look at the lack of yields in bonds and the potential for inflation in bonds, so they've been easing back on bonds and getting into equities more, in the hope of generating some kind of return.

If you're a fund manager or a large institutional trader, you're not paid to sit on your hands. You've got to u201Cdo something,u201D even though there are times — and I think this is one of those times — when doing nothing is exactly the right thing to do. So, I wouldn't say they are being stupid–

L: Doug would: u201CAn unwitting tendency toward self-destruction.u201D

David: Yes, he would — but these guys are not stupid; it’s rather that they've made their own calculations and concluded that U.S. equities are still safe — a position that is supported by the very low levels of volatility. Even the troubled financials have seen strong gains of late, even though nothing has been fixed. Of course, if you look under the hood, you find they've benefited substantially from the cheap money and rigged deals the government has orchestrated to bail them out.

While no one can say when the shift out of equities and back into Treasuries and lower-risk assets will begin, in my view the Fed's exit from quantitative easing sets the stage for that to happen. After that, it will just be a matter of time before traders are going to wake up and decide equities are not safe, and they'll start leaving in droves.

Remember, however, that the stock market and the economy are by nature very complex systems. There are so many variables, you just can't know which variable is going to rule the day at any given time. But given the importance of the Fed's intervention and the government spending that has helped engender, its policy shift is certainly a variable to keep an eye on.

L: I find the capacity of bankrupt financial companies to defy gravity truly amazing. Disbelief sustained for such lengths of time makes me dizzy.

David: You're not alone. The vast ocean of bad debt out there is just as big as ever. Everything I hear from people in the financial industry is that the banks' debt profiles are not getting any better. People are not getting on top of their debts. They are not paying down their mortgages. Default rates are still astronomical…

L: How could it be otherwise? Unemployment is still high.

David: Unemployment is still stubbornly very high, though if you buy into the government's figures, it is moving steadily in the right direction. Of course, the government has no reservations about jiggering the data to suit itself. That makes it important — if you want to get a more realistic picture — to look at the topic from different angles.

One telling statistic is unemployment as a percentage of the employable population, which screens out many of the government's self-serving adjustments to its official figures. Looked at that way, you can see that unemployment is continuing to rise, even though the government is reporting that it's falling markedly.

L: No! You can't be suggesting good old Uncle Sam would lie to us…

David: You could say we have another deficit, one in government accountability. Clearly, it's very politically important that unemployment be perceived as declining, therefore, voil, it is.

L: u201CAlas, Bartleby.u201D Okay, let's back up a bit to the debasement of the dollar. You mentioned that as a given, almost in passing, but there are a lot of people who don't see it. Inflation is low, Uncle Sam assures us, so the dollar has not been debased. Q.E.D.

David: Well, anyone who can see beyond the tip of their nose can see that inflation is going up. Just pull up a chart of the CRB Index for commodities — the real stuff required for life — and one can see it has been on a steep upwards trajectory. Inflation is very much here and alive.

L: John Williams' Shadow Stats chart shows inflation at nearly 10%, while the Bureau of Labor Statistics is reporting 2.1%.

But even Williams' statistics don't report real inflation; they just report what it would be if the government reported inflation the way it used to, before it started u201Cimprovingu201D its reporting in the 1980s. It's still an incomplete view, because the government's original reporting was flawed to begin with.

David: Right. And one of those flaws is the way they weigh housing. It plays a big, big role in CPI, and in 2008 housing was dealt, if not a death blow, at least a blow that put it in the hospital. And it will be there for a very long time, because government policies encouraged bad decisions on the part of both lenders and borrowers. This has left trillions of dollars of bad debt hanging out there.

The retracement of housing prices, as a component of official CPI, pulls the official inflation figures down, even though those figures don't sync up with the actual cost of living. Of course, a low CPI gives the government cover for continuing to monetize its debt.

Inflation problem? What inflation problem?

L: The net of this for inflation is that the crushing of the housing sector makes the CPI drop, making it look like life is getting cheaper, whereas the reality is that people's hard-earned wealth put into real property has taken a beating at the same time as the things they consume on a daily basis cost more. Life has gotten a lot more expensive even as savings have been wiped out. Not good.

David: Right. And the government is trying to get people to ignore the signs of inflation, saying everything is all right. But recently, several Fed governors have been saying outright that there is a problem and that they need to cool off the money creation and start dealing with inflation. This is why I think there isn't going to be an immediate QE3.

L: So, what happens next?

David: Consider Japan as an example of an advanced economy that has been struggling to deal with the aftereffects of a collapsed bubble in real estate and stocks for many years — well before the recent earthquake.

If you look at what happened when they did their equivalent of QE after the initial stock market crash, the spending stimulated a fairly significant recovery in Japanese equities, taking the market back up about halfway to the bubble's top; but the rally didn't last.

Once the Japanese government put an end to its quantitative easing, the Nikkei plummeted. The government resisted reinstating quantitative easing for two years before throwing in the towel and once again cranking up the money engines in an attempt to break the economy out of the doldrums.

The long-term result is a Nikkei still well below the crash level (even before the earthquake), and all the spending has caused Japanese government debt to rise to 200% of GDP. While no two situations are identical, I think the U.S. is following a very similar script.

L: If the Fed decided to hold off on QE3, do you think it could take as long as two years for them to feel forced back to it, forced to do something?

David: It could. It would depend on how sharp the downtick is. There are so many factors at work here that it's really unknowable at this point. Nearer-term, all the signals are that the Fed will hold off on QE3 at their next meeting. And, as I have tried to make clear, that will have consequences — for equities, for the dollar, for the commodities sector.

L: Can you give those readers not familiar with The Casey Report some reason to believe your crystal-ball gazing? What's your track record with these sorts of predictions?

David: Well before the current financial storm hit, we were forecasting that the Fed would begin monetizing the government's debt, and we were writing about a credit crisis leading to a currency crisis, which is exactly what's happened. We absolutely nailed it, and our subscribers made a lot of money on some of our recommendations — and safeguarded a lot of their wealth with others.

L: That's true, though back then, before The Casey Report separated out the big-picture writing from the International Speculator our portfolio did take a temporary beating — along with everything else at the end of 2008.

David: Yes, but everything we said about the debasement of the dollar and its consequences for gold was borne out. Further, we made a bold move, counseling people to go a third in gold and gold-related assets, a third in cash, and a third in other assets that could do well in an economic crisis. Subscribers who actually followed this allocation suffered very little in 2008.

L: Isn't it a bit contradictory to recommend that people keep 33% of their wealth in cash, if you think the dollar is being destroyed?

David: The dollar is being destroyed, as one can see by how much gold, oil, wheat, cotton or any other number of things one can buy with it. However, while it's not dropping day to day and the markets remain extremely volatile, cash is not a bad thing to hold — especially in relatively safer currencies, like the Canadian dollar and the Norwegian krone.

So, again, the big trends remain intact. Our question now is what's going to happen next, in the short term. And in that context, the Fed's switch in policy is a big deal. When you go from the Fed showing up every week and buying Treasuries, to the Fed stepping back and saying u201CNo more,u201D it can send major shock waves through the economy.

L: So, if the Fed does what you think it will, by June, how do readers invest accordingly?

David: [Laughs] This may not be a popular answer, but I think the correct answer is that the best thing you can do in the near term is to increase your cash position. I would be very cautious about moving into any other asset class at this point, including gold.

L: You wound me.

David: I know. Listen, if you own high-quality gold stocks, such as those you recommend in the International Speculator — companies that have the goods and can weather the coming storm — you can certainly just ride right through what's coming. But if you're not quite confident enough to avoid panic selling in a correction, or if you have some mutts in your portfolio that haven't performed and you're not sure why you own them, I'd get rid of them fairly quickly.

Remember: the time line on the Fed's decision is quite near-term. That doesn't necessarily mean there would be an immediate stock market crash, but it certainly would have an effect on the commodities sector.

On the other hand, as I've said, markets are complex. Saudi Arabia could go up in flames, sending oil and gold both way up. So I'm not telling anyone to get out of the markets. There's no way to predict such events — but what we do feel confident about predicting is that the Fed will not roll right into QE3.

L: Agreed. And if you're wrong, having cash to deploy into new opportunities won't be a bad thing. Anything else?

David: If you're of a mind to play in the currency markets, you could take a leverage bet on the dollar rising against competitive currencies. But right now, personally, I'm inclined to do nothing, except maybe to lighten up on some investments and go to cash.

That sets you up for the real play. If I'm right, and commodities — including precious metals — sell off, and mining stocks sell off even more, there will be some fantastic opportunities to take advantage of. The people who are paying attention will be able to clean up.

L: Now you're singing my song: short-term cash, and get your shopping list ready.

David: That's the way I see it.

L: Okay then, thanks for your predictions — I look forward to seeing how they bear out.

David: It was fun. We should do this again sometime.

L: I'm sure Doug won't mind, especially when you get a strong sense of where the markets are going, like this one.

David: Until next time, then.

David Galland is one of the editors of The Casey Report — a monthly advisory analyzing big-picture trends that every investor needs to know about. Try a one-year subscription today for 20% off the retail price… plus 3-month money-back guarantee. And don't forget to sign up for FREE to have u201CConversations with Caseyu201D delivered to your inbox every Wednesday.

David Galland is the managing editor of Casey Research.

A Casey Report interview with Dr. Andrew Bogan

Dr. Andrew Bogan is a managing member of Bogan Associates, LLC in Boston, Massachusetts. He has spoken at many international investor conferences – his specialty being global equity investing – and has been interviewed on live television for CNBC’s Strategy Session.

In an attempt to understand the relatively new but wildly popular Exchange Traded Funds (ETFs), Dr. Bogan did extensive research into the structures used by ETF operators, with a special focus on the potential risks that might arise should they be faced with large and sudden liquidations. Given that there are about 2,000 ETFs in existence, with assets totaling over $1 trillion, we thought it appropriate to find out what Dr. Bogan has learned in his research.

David Galland: Our primary goal today is to give readers a better understanding of exchange-traded funds (ETFs) and the risks that come with them. Speaking personally, I’ve been in this business for a long time, and I find anything that grows as quickly as ETFs have a bit worrisome.

To begin, maybe you could just talk a little about the difference between an ETF and a traditional stock or bond mutual fund.

Andrew Bogan: Yes. Shares in a traditional mutual fund, whether it’s an index fund or has a managed portfolio, don’t trade in the open market. If you want to own shares, you buy them from the fund. If you want to get rid of your shares, you sell them to the fund.

A traditional mutual fund takes its shareholders’ capital and invests it directly on a one-to-one basis in stocks or bonds and holds those securities in custody. Thus it’s always 100% reserved, meaning that the securities it owns correspond exactly to the shares its investors own. If you want your capital back, the fund can deliver it to you either in kind or in cash, depending on market conditions.

That’s not the case with an ETF. Shares in an ETF trade in the open market, which is where retail investors buy and sell them. An ETF also issues and redeems shares every day, like a mutual fund. But, unlike a mutual fund, it does so only through "authorized participants," which are brokers, market-makers and other institutions.

DG: Jumping right to the point, has there ever been a problem with an ETF?

AB: ETFs have operated pretty well historically, but the mechanics of share issuance and redemption also creates some unique differences that we believe may lead to unintended consequences.

There already have been a few problems with ETFs, some more significant than others. The Flash Crash on May 6 of last year showed some structural issues with ETFs and perhaps with our whole market system for equities as well. It’s hard to decide where to draw the line, but a lot of securities departed from their perceived value during the Flash Crash by very large amounts. The reasons are still not completely understood, although the SEC has made a reasonable effort to understand what happened.

Another incident occurred in September 2008, when the Lehman and AIG mess was upon us. The commodity ETFs run by ETF Securities, Ltd., in London halted trading when AIG’s solvency came into question. The funds were investing in derivative contracts, including swap agreements, some of which were with AIG. It was only the Federal Reserve pumping in tens of billions of dollars that prevented those products from going. Bailing out AIG averted a disaster for the funds, and they continued to trade the next day.

DG: So, the issue with the ETF securities fund was more around the derivatives the fund held, not the structure of the fund itself?

AB: In that particular case, it was around the derivative contracts that underlay the fund, although that kind of arrangement is very common with European ETFs. Even equity index ETFs in Europe tend to be structured that way, and that’s also not uncommon with a lot of the foreign stock ETFs as well – including some of those traded here in the United States.

I think it’s a clear example where you have a counterparty risk wrapped inside the fund that could be very significant in bad circumstances.

DG: In the case of the Flash Crash, your research paper pointed out that even though ETFs represent only 11% of the listedsecurities in the U.S., 70% of the canceled trades during the Flash Crash involved ETFs. Is there an explanation for that?

AB: Some clarity is starting to emerge from work done by the SEC and others. But from our perspective, those statistics are quite alarming. There’s no good reason 70% of canceled trades would be in ETFs while only 11% of listed securities are ETFs. And even though ETFs trade more actively, they don’t represent 70% of all trading volume. So any way you look at it, they were badly overrepresented among the canceled trades, i.e., overrepresented among the most extremely off-priced trades.

From the perspective of financial theory, that makes absolutely no sense. ETFs are meant to be index-fund trackers. They’re meant to represent a whole basket of shares, and yet these very securities that are meant to be diversified actually fell more than their underlying stocks during the Flash Crash, more often and more deeply.

That’s quite worrisome; it tells you that in a crisis environment ETFs don’t behave the way financial logic suggests they ought to, which suggests to me that the theory is incomplete. People haven’t really looked closely enough at what the unintended consequences of ETF issuance and redemption mechanics are, and what the realities are in stressful market conditions.

DG: At this point, more than half the American Stock Exchange’s daily volume is ETFs, which is quite a number. These things have only been around for, what, less than 20 years. Yet from everything I’ve read, it seems they’re not very well understood, even by you guys. Which is saying something because you’ve spent a lot of time looking at them, and there are still blank spots in your knowledge about how they actually operate.

AB: Absolutely, and I think that’s an important point. We understand the mechanics of how an equity trades and from where it derives its value and how it’s priced in the market. The mechanics for mutual funds are well understood also. The challenge with ETFs is that the process of issuing and redeeming shares that also are trading is much more complicated than a lot of people want to talk about. It allows for some unintended consequences, particularly in connection with short-selling, which became an important factor only in the last decade.

DG: Let’s talk about the process of creating new shares. If I’m running an ETF that is designed to mimic the S&P 500 index and I have a lot of people who want to own my fund, I can simply issue new shares based upon the flow of stocks into my fund, right?

AB: Shares can be created at the end of any day if someone delivers a basket of underlying stocks to the ETF through an authorized participant. And shares that are not wanted in the marketplace can be redeemed in kind for the underlying stocks – or in some cases cash. That’s all been carefully structured and works smoothly. The issue is what happens when short-selling dominates the trading.

People have been short-selling ETFs up to shocking levels, like 100% short, 500% short, sometimes over 1,000% short. That’s in a world where stocks like Apple are 1% short, or IBM is 1.4% short, or General Electric is 0.5% short. You really don’t see traditional stocks with short positions anything like this, so clearly something is fundamentally different. The difference is that ETF short-sellers – including hedge funds, dealers and arbitragers – are confident they can always create the shares needed to cover, so they see less risk of being squeezed.

DG: But in a traditional short-selling situation, you typically have to borrow the shares before you can short them.

AB: Yes, and that’s true here too. But if you look at the Securities Settlement Failure data, ETFs are very oddly overrepresented, so it does look like there is some short-selling that happens before the shares are borrowed. But that’s a small matter. The problem is that there is no limit to the amount of short-selling you can theoretically do while still having borrowed the shares. It simply requires the same share to have been borrowed, short-sold, borrowed from the new owner and short-sold again down a daisy chain. That’s how you get these arbitrarily large short interest figures.

The short-selling involves new buyers coming in without the shares being created at all, and that’s the fundamental asymmetry in the short-selling that we’re most concerned about.

DG: Let’s get to that, because you have retail investors, for lack of a better word, and you’ve got the hedge funds. I suppose they could both own the same fund, but for completely different reasons; a hedger to hedge another bet, and a retail investor to pursue a certain goal, but the net result is that the short interest is still way out of whack from what you’d expect to see in a traditional stock. I suspect this is something that most of the retail investors are unaware of. So, where is the potential for the ETFs to get into trouble?

AB: The trouble could come from a number of different angles.

One concern is that the huge short interest building up essentially leaves the ETF as a fractionally reserved stock ownership system. If you have a fund, for example, that is 500% net short, then for every one holder of an actual share there are five other investors who own IOUs for the shares. Their real shares have been lent out and short-sold to someone else – usually without the original owner’s knowledge, unless they read and still remember the margin agreement they signed when they opened the account 10 years ago.

For the ETF itself, it means that the fund holds only 15% of the underlying securities implied by the gross number of fund shares that investors think they own. The other 85% isn’t totally missing, it just isn’t held by the fund.

Morningstar commented that the money is all there, it’s just in hidden plumbing in the financial system, and we agree with that exactly. The question is, how many investors understood they were storing their money in the hidden plumbing?

DG: So walk us through what might happen if there were large-scale redemptions. Let’s just say that for whatever reason, people decided this was the time to get out of a particular fund. How do things get unwound?

AB: Redemptions have to flow through an authorized participant, which is usually a broker or market-maker, and it’s only that institutional layer that can actually redeem. If for some reason a significant portion, say, half or 80% or so, of the total fund ownership wanted to redeem and get the underlying stocks from the ETF through the authorized participant layer, you would fundamentally have a crisis in a fractional-reserve system.

The ETF could not deliver the underlying stocks to all the would-be redeemers. The investors who really owned just an IOU on shares that had been lent to short-sellers wouldn’t have a direct claim on the fund, so their demand to redeem would force an unwinding of the short-sales.

DG: So it seems that it’s not so much the fund that might have a problem. The fund is only liable for the shares it has issued. The risk seems to lie in the counterparties – the brokers or the investors that brokers lent shares to.

AB: Right. Essentially you have just that. You have quite a bit of counterparty risk here, because if you think your shares can be redeemed and then the fund halts redemptions because they’re running out of the underlying stocks, you’re stuck. Normally ETF shares are redeemable through the authorized-participant channel, but an ETF or any other institution that issues something that is redeemable but fractionally reserved could be hit with a run, like a bank run.

Now the big question is, in practice, would this happen? It’s up to everyone to form their own conclusion, but interestingly the first argument we heard when we began looking into ETFs was that this was just a theoretical topic and that there would never be a really big redemption in a large ETF. But we have since learned that’s actually not the case, because a giant redemption in IWM, one of the largest ETFs, occurred in 2007.

Now we think that 2007, being one of the best markets for equities since maybe the late ‘90s, was a pretty forgiving time to test the crashworthiness of an ETF that runs into a massive, unexpected redemption. But IWM was redeemed from millions of shares outstanding down to something on the order of 150,000 shares, and in one day, and that’s because somebody tried to crash the fund.

DG: Was that a really lousy fund, and somebody just said, "Enough, I’m going to punish you guys and get out of it,” or –

AB: Oh, no, no, IWM is one of the largest and most liquid ETFs in the entire market. It’s the Russell 2000 iShares ETF. It is the poster child of why ETFs are great. But even so, what’s interesting is that the first argument we got from industry insiders was that our misgivings are nonsense, growing out of some theoretical conversation about what might happen but is never going to happen, and now we’re being told it already has happened and nothing broke too badly, so what are we worried about.

DG: Let’s stick with this potential problem of a huge bunch of redemptions. People say, "Oh my god, I’ve got to get out of my ETFs," and there is a wholesale run on the funds. Because of the way ETFs are structured, it would seem that if they post net redemptions for a day, that the broker that had lent fund shares to short-sellers would just force the borrowers to buy back and cover their obligations.

AB: That’s exactly right, but remember, for an ETF to create units requires someone to deliver the underlying stocks, so there’s somebody who’s on the hook to buy those stocks en masse all at the same time.

DG: No matter what has happened to the price in the interim.

AB: Yes, which gives rise to the question of who’s on the hook and what’s their creditworthiness when they get put on the hook. Have their prime brokers really been keeping appropriate track, as they’re required to do and on most days have done, of the creditworthiness of those, say, hedge funds or other kinds of short-sellers?

DG: Because you’re not talking about small amounts of money.

AB: No. In fact, in one ETF, IWM again, short positions recently amounted to 14 billion dollars. That’s not an enormous amount for the capital markets, but it’s a pretty significant amount with respect to 2,000 small stocks. If there were a run, actually doing that unwind and getting those 14 billion dollars’ worth of extra ETF shares would require buying 14 billion dollars’ worth of Russell 2000 stocks. If you didn’t want to be more than, say, 10% of volume, it would take 40 trading days to buy all you needed.

So we think that if you actually had a very sudden redemption run on IWM, there is a real likelihood of a short squeeze occurring in the Russell 2000. We don’t expect that at any particular time, it’s just something that could happen if enough things went wrong.

The short position in an ETF like IWM being over 100% means that a large amount of the money investors think they have placed in Russell 2000 stocks has in fact been lent to hedge funds and other short-sellers. You take that across the entire ETF industry and you’re looking at about 100 billion dollars in short interest – money that did not go into the underlying shares or gold or whatever the ETF represents. It was instead lent to hedge funds. It has been deposited in a shadow banking system where ETFs allow short-sellers to borrow money from institutional and retail investors.

DG: And what are they doing with that money?

AB: Well, no one knows. Presumably they invest it in what they think is going to make a better return than what they shorted, because you can’t score the 10% or 20% those guys are all trying to make every year by buying the index. So it’s anybody’s guess.

DG: One question that Terry Coxon asked as I prepared for this interview was whether there is any way for the marketplace to let the fund’s share price deviate for long from NAV?

AB: The tracking of an ETF’s price with the fund’s NAV, which historically has been extremely close, is totally dependent on an arbitrage mechanism. The arbitrager can make money by continuously pushing the price of the ETF toward its NAV. The question is… what NAV? What they mean by NAV is a value per share outstanding of the fund’s underlying stocks. But of course you have this huge implied ownership through short-selling, and the short-sellers’ shares are not being counted in the shares outstanding number.

DG: A lot of our readers have money in GLD, which is the ETF that invests in physical gold. You’ve looked at GLD, and it’s based upon the premise that as investors pour money in, the operators of GLD turn around and buy physical gold and store it. And likewise with redemptions, they just sell the gold. My understanding is that there isn’t anywhere near the same level of short interest on GLD.

AB: The short position in GLD isn’t nearly as large as it is for some equity funds – but we have looked at GLD, and it has the same structural issues, just to a lesser extent, at least for now. The short interest in GLD has fluctuated around 20 million shares. Now, GLD is a pretty big fund. With 20 million shares short, it is roughly 95% fractionally reserved. So for all the investors who think they own the underlying physical gold, the fund actually has 95% of it in the vaults.

But GLD does not have to stay at 95% fractionally reserved. If there were a massive wave of short-selling in GLD, you could end up with a very significant fractional-reserve situation. If that were followed by heavy redemptions, you’d have the same kind of problem I described earlier – not enough gold to redeem all the shares.

DG: Could they just say, "From here on, we’re not issuing any more shares"? Would that stop the short-selling?

AB: Not necessarily, because, you know, the short-sellers are selling – in fact, it would probably exacerbate the short-selling. So as long as a fund is issuing shares, aggregate buying demand can be satisfied by expanding the fund. If they stop issuing shares, aggregate demand would get satisfied by short-sales of existing shares. So, if anything, closing the issue window should make the problem worse, not better.

DG: Working through the mechanics of this, let’s say gold drops by a few hundred bucks. Say, for instance, that there is some major change in the market along the lines of when Volcker raised interest rates back in ’79-’80. And at that point a lot of short-sellers say, "Okay, this is it for gold," they pile on, they start shorting the hell out of GLD, and now all of a sudden you’ve got a real problem because the fractional aspect of it balloons, if you will.

AB: Well, you don’t necessarily have an immediate problem. It depends on the market conditions and the level of panic. You certainly would have a ballooning fractional-reserve situation, meaning that the reserves held in actual gold versus the implied ownership by people who think they own GLD (even though the shares have been hypothecated by the broker) will shrink. Those investors may believe they are still entitled to the metal, but the reserve of gold held on their behalf starts to shrink very quickly under those conditions.

The bigger challenge might be if there were an actual redemption wave. If that happened when GLD was already substantially fractionally reserved, then you’re back to an 1800s gold bank problem. Fractionally reserved banks can be hit with a run.

DG: Right. Is there anything else that would make this whole "house of cards" collapse? Suppose a highly visible ETF stumbles and is unable to meet redemptions, or they just have to postpone redemptions. That might be the sort of trigger that could really send people off.

AB: You know, one of the big risks, by the way, that no one has really discussed much, is if an ETF were to have a big redemption run in panicky market conditions and halted redemptions. Halting redemptions is a complicated decision, because it breaks the symmetry that allows the arbitragers to go long or short both the basket of stocks and the ETF shares to move price toward NAV.

So it’s quite possible that if redemptions were halted for any length of time, the arbitragers wouldn’t be keeping the share price in line with NAV. We already know from the Flash Crash that significant price departures from NAV are quite possible for ETFs.

DG: Knowing what you do, I mean, obviously you deal on an institutional level with your money-management firm, do you own ETFs personally?

AB: We do not. We do not own any ETFs either personally or on behalf of the funds we manage.

DG: Is it because of the research you’ve done or just because it’s not what you guys do?

AB: I would say it’s primarily because it’s not part of our strategy, but obviously we did the research because we were interested in understanding the product better.

DG: So, any advice for readers? Is there a short interest over which a person should be concerned about his holdings?

AB: Well, I don’t know if I could set a threshold, but I would certainly encourage people to make sure they know what the short interest is in any fund they are considering. That’s a metric that is starting to become more accessible. Since we published in September, some of the ETF sponsors, like BlackRock, have begun reporting on ETF short interest, which I think is terrific – kudos to those guys. We would like to see better transparency and disclosure, so that institutional and retail investors alike are aware of the counterparty risks that are "hidden in the plumbing," to use Morningstar’s term, and are aware of the actual and somewhat complicated mechanics of the products that they’re buying.

DG: Do the ETFs with a mandate to magnify an index 2 or 3 times (e.g., RSW) have an elevated level of risk, due to the additional leverage?

AB: The underlying "assets" from which these funds get their NAV are derivatives to begin with, which introduces another layer of counterparty risk – one that has already experienced serious problems. We find it surprising that packaging complex derivatives in an exchange-listed security (the ETF) seems to remove all of the sophisticated investor standards usually applied to derivatives trading by SEC, CFTC, etc.

One ETF recently launched in the U.S. is PEK, the Market Vectors China A Shares ETF. This is another great example of where the industry is headed.

It is illegal for most foreign investors – except a few licensed global institutions – to buy A shares on Shanghai or Shenzhen, China’s two mainland stock markets, and Market Vectors is not one of the exceptions. So instead of owning A shares, the ETF owns swaps with brokers that are licensed in China to own A shares. The fund holds the swaps as its underlying "assets." So PEK is an NYSE-listed China A shares ETF that does not own a single Chinese A share.

If PEK were to become significantly short in the secondary market, it would mean a fractional-reserve ownership of a derivative representing a basket of stocks that would be illegal for nearly all of the ETF’s investors to own directly. More confusing still is what it means to be short PEK in the first place, since it has historically been illegal to be short A shares in China at all.

In essence, ETFs are being used to package and securitize products that are at best poorly understood and in some cases are used to circumvent securities regulations. An example closer to home is when the SEC briefly banned short-selling of essentially all financial stocks in 2008. The financial-sector ETFs were not on the list, so many hedge funds kept right on shorting financials using those ETFs.

DG: Certainly a lot to think about here. Any other questions I forgot to ask about, but that I should have?

AB: No, I think that was a pretty good coverage of a little bit of work we’ve done.

DG: Is there a good publication that would help people better understand the mechanics of the ETFs, because it is obviously very complicated, something that people might want to be able to study?

AB: Always the best place to look is in the fund’s prospectus. The prospectuses are long and impenetrable, because they’re written by the legal team, but they really do have a tremendous amount of information. If you can float through one of them, I think it’s definitely to your advantage.

DG: Thank you for your time.

Successful crisis investing requires that you see the big picture… and know where it’s leading in the near future. That is the forte of The Casey Report, with its editorial team of two economists and two investment pros, among them Doug Casey himself. While it’s hard to make enough money in today’s markets to beat inflation, it is possible… learn how in our free report Your Bank Account Is Slowly Bleeding to Death.

David Galland is the managing editor of Casey Research.

In describing the current situation in these United States, and in many of the world’s other superpowers, we here at Casey Research have often used the word “intractable”… as in, “impossible to resolve.”

While that may not be technically accurate – because there is no problem related to economics that can’t be solved if one is willing to swallow sufficiently strong medicine – it is a correct assessment, given the overwhelming role that politics now play in the economy.

In a recent edition of The Casey Report, I observed that the largest and most persistent bubble of all over the last half-century has been the bubble in government – making the ones witnessed in dot-com stocks and housing mere blips by comparison.

The following chart is particularly illustrative of that contention.

As you can see, the level of government spending (state being the blue area, and federal being the red) as a percentage of GDP has grown to levels last seen during the unprecedented mobilization undertaken to fight WWII – a period marked by the government takeover of entire industries, rationing of all key commodities, wage and price controls, and much more.

Though it is an overused analogy, the chart paints a perfect picture of a frog in a pot of water slowly being brought to a boil.

The economic trap the government has stumbled into opened decades ago, as a result of the nation’s leaders misunderstanding both the basics of economics and the complex relationship between the rulers and the ruled.

To frame the discussion, I would start by pointing out that in order for a government to be successful, above everything else it needs to avoid being hated. That’s not to say that it has to be wildly popular, though that’s never a bad thing, just not actively despised.

Generally speaking, the single most important way that a government avoids becoming the object of public hate is to maintain things in such a way that people are able to get by financially.

Sure, people might not like a politician’s ethics, and they might have strong views about some stupid and destructive government act, but if people can get up every morning secure in the knowledge that there will be food on the table and a roof over their heads – that their businesses will carry on in a more or less predictable manner – their opinion about the government will never rise to the level of hate.

Thus, the overarching goals of government should be to assure that, come what may, the footing of the economy is firm and that the property of the citizenry is protected. Given that the government doesn’t actually create wealth of its own accord, the best way to accomplish these goals is relatively simple and can be summed up as, “Do no harm.”

Which brings us to the trap the U.S. government stepped into, as did virtually all of its peers around the globe.

Decades ago, the government simply decided to expand its role beyond providing the basic services that make some contribution to a smoothly operating society. While it may have done so with the best of intentions, the record makes it clear that its motivations have increasingly been political in nature.

Returning to the chart, you can see that in the early part of the 20th century there was almost no growth in government. You can also see that that period of quietude was sharply disrupted by WWI, then the Great Depression, which was followed by WWII – each of which jacked the government’s role in the economy markedly higher. And once the trend got started, it has largely continued unabated until today. Note the latest spike, at the far-right side of the chart, and you don’t need to wonder where things are headed next.

The government could have avoided stepping into this trap simply by resisting all calls for it to expand the limits of its role in order to “do something” about this societal ill or aspiration – rigorously leaving such matters to the people themselves to address.

While successive generations might have groused about the government being uncaring or unsympathetic to the needs of the needy, by being tight-fisted and modest in its exertions, the government’s finances would have remained solid as a rock. That in turn would keep the weight of the government’s dead hand on the economy light and readily manageable. As a consequence, come what might, the vast majority of people could count on being able to earn a good dollar and keep most of it for their own purposes.

In other words, if back in 1905 or so, the government had just said “no” to foreign adventures and domestic largess, we would today be living in a different world altogether.

Let me get to the point, because it has important implications for us all.

If the government had kept its role limited and its finances in good shape, people might not love it, but they’d respect it – and, more to the point, they wouldn’t hate it. However, by expanding as it has, the government has drained its treasury. Then, politically unable and unwilling to stop its spending, it kept going – racking up the largest debt in history.

That has brought us to a crossroads.

One path leads to more spending, in which case the currency will collapse, wiping out the remaining wealth of the citizenry… resulting in a hateful population. The other leads to overt default and a wholesale unwinding of the government’s massive role in the economy, again wiping out the wealth of the citizenry and resulting in a hateful population.

In either scenario, a government anxious to avoid the worst can be expected to raise taxes and take other desperate measures to avoid failure. Hungary, Poland, Bulgaria, and other nations have recently made pension grabs; we can expect to see that in the U.S. as well before this is over. Again, at the same time that these moves may help the government stay afloat awhile longer, it plants the seeds of public hatred and cements its eventual downfall.

In our strongly held view, the government will continue to opt for the path of more spending – until it simply can’t, at which point the first path will lead back to the second. And so, no matter what it does at this point, the government will soon find itself faced with serious and widespread discontent.

Throw a heavily militarized constabulary into the mix, and the potential arises for the situation to get very ugly, very fast.

That the government remains firmly committed to its spending becomes obvious in a recent Reuters article about plans by the new Republican House to reduce Obama’s already diluted $100 million in planned federal budget cuts, to just $50 million.

And this while the government continues deficit spending to the tune of more than $100 billion a month. What a joke. What a bad, bad joke.

In the current edition of The Casey Report, senior editors Doug Casey, Bud Conrad, and Terry Coxon chart the frothy economic waters we are finding ourselves in – and provide practical advice how to navigate them to your benefit.

You have to make your own decision as to how you’ll protect yourself about what’s coming, whether by just diversifying into inflation hedges, or diversifying your life internationally – but whatever you do, don’t be lulled into complacency by any temporary pick-up in economic activity engendered by the government’s monetization. It’s a trap.

[Right now, you can get The Casey Report for only $98 per year – an unprecedented 72% off the regular price. But hurry, this special offer is only available for 72 hours. Details here.

David Galland is the managing editor of Casey Research.

As the U.S.
dollar takes a nosedive and precious metals gain more and more attention
from individual investors, the number of questions and concerns
is increasing as well. The following reader email addressed to Casey
Research is representative of so many inquiries that we decided
to provide an in-depth response that may prove instructional to
others as well.

I have been
agonizing about getting metal after dumping paper metal I held
and was reading the Daily Dispatch looking for investment clues.
I was pondering the ratios of thirds that you mentioned in a recent
Dispatch and the pursuing of metal stocks when an issue occurred
to me that was not mentioned.

On the one
hand, you discuss the dollar trap of investors running from one
currency to another, away from the dollar and back to it. I fear
that the dollar is doomed as are other fiat currencies, and time
is getting short. So the question that came to mind is, what happens
if one is invested in metal stocks or any vehicle that is denominated
in a fiat currency, and that currency goes bust, blotto?

What value
does that investment retain? Does it become a total loss? Redefined
into the currency of the locality that operations are in? Converted
into some other New World Order monetary unit, SDR’s or nationalization
of any regional assets by the locals? Is this impossible to plan
for?

I realize
I am probably speculating on a subject that can only be determined
by psychics and crystal balls, or those with a sixth sense on
the subject, but it is an issue I have not heard anyone ponder,
except those who only beat the drum for physical metals.

If I allocate
away from physical into speculative investments denominated in
fiat in the ratios you suggest, it might provide an additional
boost if one’s timing is impeccable. But weighing that against
being trapped in a depreciating currency unit, along with the
possibility of physical metal becoming unobtainium, it does not
seem to be a prudent decision.

I would
appreciate a further explanation for your ratios, and does the
ratio vary with total personal asset amount? Is your ratio determined
by finances or politics?

~ Chet

Here at Casey
Research, our current rule of thumb suggests a portfolio allocation
of approximately one-third in precious metals and related investments;
one-third in cash (spread among several currencies), and one-third
in “other” – namely deep-value stocks, energy, emerging
market investments, etc. These ratios are meant entirely as a general
guideline, as everyone’s circumstances will be different.

The concept
is that the one-third dedicated to a mix of physical precious metals
and stocks (the mix determined by risk tolerance) will offer you
“insurance” against further currency debasement as well
as some very attractive upside potential… with the amount of
the upside determined by the amount of risk you are willing to take
on

Which is to
say, with the true Mania Phase of the precious metals markets still
ahead of us, the micro-cap junior resource explorers still hold
the potential for explosive profits. But they require being able
to hang in there through periods of extreme volatility. Moving down
the risk/reward scale, the larger producers will provide very handsome
upside, but without the risk of being “trapped” in a thinly
traded junior. And finally, for the precious metals component of
the portfolio, the amount you hold in physical metals should be
viewed as a core holding of “good” money.

The one-third
dedicated to cash reduces overall volatility and gives you ammo
to jump on new opportunities. By spreading the money across a number
of better-managed currencies, as well as your native currency for
general expenses and liquidity, your currency portfolio can preserve
value better than a “red or black” bet on a single currency
such as the U.S. dollar or euro.

Our subscribers
have done well with the “resource” currencies of the Canadian
dollar and the Norwegian krone. In time, as the purchasing power
of the fiat currencies begin to decline, we’ll be looking to
reduce this segment of the portfolio.

The final
one-third is something of a catch-all, where we opportunistically
follow some key themes such as energy, food, inverse interest rates,
foreign real estate, and so forth.

Again, that
particular allocation is necessarily general – with some focusing
more heavily on the precious metals, others on the cash component,
and others on more traditional stocks.

Now, as to
the part of Chet’s question dealing with “what happens
if one is invested in metal stocks or any vehicle that is denominated
in a fiat currency, and that currency goes bust, blotto?”

To answer
that, I adroitly hand the baton over to Terry Coxon, one of our
Casey economists and editors.

Here’s
Terry…

Not to worry.
You may be confusing “denominated in” with “quoted
in.”

Every bond
and every CD is denominated in a particular currency, which means
that what it promises to pay you is a certain number of units
of the currency. A U.S. Treasury bond, for example, promises you
a certain number of U.S. dollars. An investment’s denomination
is part of the investment’s character.

In most
cases, an investment is quoted in a particular currency. Prices
of U.S. Treasury bonds, to use the same example, are customarily
quoted in U.S. dollars. But that is only a matter of customary
practice. You could, if you found it convenient, quote the price
of a U.S. Treasury bond in Swiss francs. For all I know, there
are people in Zurich who do just that.

That’s
the difference between denominated in and quoted in. The denomination
is inherent in the investment. The currency used for price quotes
is a matter of convention and can change.

By convention,
stocks trading in New York are quoted in U.S. dollars, stocks
trading in London are quoted in pence, and stocks trading in Tokyo
are quoted in yen. Notably, some stocks are quoted in more than
one currency, such as Canadian stocks that trade both in Canada
and in the U.S. – a demonstration that the currency used
for quoting a stock’s price is a matter of choice and not
something inherent in the investment.

So in what
currency is a common stock denominated? No currency at all. A
share of common stock doesn’t promise to pay you a certain
number of units of a particular currency. Instead, it promises
to pay you a pro-rata portion of whatever money or other property
the company distributes as a dividend. If all paper currencies
lose all value, successful gold mining companies will still own
their properties and can still operate profitably. But when they
pay dividends, they won’t be paying out dollars or any other
paper currency. They will be paying out whatever has replaced
the paper currencies – perhaps gold itself.

Carefully
chosen gold stocks won’t evaporate when paper currencies
do. They will rise in value.

And no one
chooses gold stocks more carefully than BIG GOLD editor Jeff
Clark. Picked for asset protection as well as outstanding profit
potential, his medium- to large-cap gold and silver producers are
generating steady returns of 56.8%… 46%… even 187.9% for subscribers.
And right now, if you give it a try, you can kill two resource birds
with one stone: Pay just $79 per year for BIG GOLD, plus
receive 12 monthly issues of Casey’s Energy Opportunities FREE.
More
here.

David Galland
is the managing editor of Casey
Research.

Here at Casey
Research, we have been rather negative about the economy for many
moons. To be otherwise in the face of the decades-long trend toward
ever more government – along with its increasingly destructive
and expensive meddling in the free markets – would have been
foolish. And, so far, we have been right.

However, I
for one am beginning to see some light at the end of the tunnel.

It won’t
happen overnight, and maybe not in the next five to ten years, but
it increasingly appears to me that the government’s disastrous
“problem solving” that has brought us to this place is
approaching a limit. Case in point, governments the world over are
now engaged in an insane race to the bottom for their currencies
– which will only gain speed if the Fed goes ahead with a new
round of quantitative easing. Should the Fed persist with this latest
madness, countries all over the globe are likely to step up their
own interventions – but that may very well lead to the fiat
system breaking down completely, to be replaced by something more
tangible.

Likewise, given
the increasingly dire need to spur economic growth, we could soon
see an end to the growth in bureaucracy and the fire hose of taxes
and regulations that those bureaucrats have been spraying over the
global economy for decades.

Put another
way, having squandered so much of human progress through counterproductive
policies, any leader that wants to retain power – and they
all want to retain power – is soon going to be forced to return
to policies that have been proven to allow businesses to blossom.

This sea change
won’t happen all at once – and probably not without the
global economy first going through a dark and troublesome period.
But I have to believe that we’ll soon see a widespread recognition
that there are problems to be solved, and opportunities to be captured,
by breaking from the herd. Thus, while one state tries to raise
taxes to “solve” its budget problems, another will see
the opportunity for growth to be had by lowering taxes. While one
government passes more regulation to pander to a favored group,
another will repeal legislation to lighten the dead hand of government
in order to favor all.

In reasonably
quick order, the governments that reduce, rather than increase,
their burden on their business communities will see their economies
begin to prosper while others stagnate – just as they always
have. The United States in its youth provides the paradigm of this
principle, but Hong Kong, Singapore, Dubai, and a handful of other,
less pure examples prove the point as well.

In support
of this general theme, subscriber D.W. recently sent along an interesting
piece on boom times in a Swiss canton that is picking off the hedge
fund managers being chased out of the UK by the 50% tax now being
levied on earnings of over £150,000 a year.

And I quote…

Switzerland’s
tempting tax regimes attract UK firms

Thirty minutes
from Zurich and dotted with traditional dairy farms, it might seem
an unlikely location for some of Britain’s biggest hedge funds.
But it is one of a number of Swiss regions competing to offer ever
lower tax rates in a bid to tempt British businesses to relocate.

The hills are
alive with the sound of cowbells – and construction workers.

The village,
in the area of Höfe in Schwyz is clustered around a shimmering
lake which reflects the lush green, rural backdrop.

However the
scenery is also now increasingly dominated by building sites as
it reinvented itself as a hedge fund centre by offering low personal
tax rates to attract cash-rich fund managers.

Spa hotels
and up-market furniture retailers are springing up on the outskirts
to cater for the new clientele.

Full
article here.

Why am I so
confident that following another round or two of desperate, last-gasp
efforts to maintain the statist quo, we’ll see a shift to a
global competition based on free-market policies and hard money?

Simply because
when there is only one path left, the choice of where to go next
becomes obvious.

Or as one anonymous
pundit so well put it…

"The world
will soon wake up to the reality that everyone is broke and can
collect nothing from the bankrupt, who are owed unlimited amounts
by the insolvent, who are attempting to make late payments on a
bank holiday in the wrong country, with an unacceptable currency,
against defaulted collateral, of which nobody is sure who holds
title."

The very real
problems now confronting the world – most of which were created
by politically motivated politicos trying to solve real and manufactured
problems for favored constituents – have now reached the point
where they can only be solved by lowering the burden of government
on entrepreneurs and letting the free market do what it does best.

The countries
that are first to jump on this bandwagon, or that are most vigorous
in shedding their layers of obstructionist regulations and taxation,
are going to be those that win the day. Conversely, any country
that stubbornly tries to hold on to the statist quo is headed for
even more serious troubles as its productive elements ship off to
more favorable turf.

Investment
angle? Watch the news for signals indicating that a particular government
is turning toward freer markets, smaller governments, and lower
taxes – then pile in. Getting in early on such a turnaround
could be hugely profitable, just as leaving money tied up in the
markets overburdened by stubborn statists is a sure ticket to a
big loss.

Politics have
never played a bigger role in assessing where your asset value might
go. That’s why every month, David and the other editors of
The Casey Report analyze the economic, financial, and political
big-picture trends and recommend the best opportunities to profit.
Knowledge is power when it comes to protecting your personal wealth.
Details
here.

David Galland
is the managing editor of Casey
Research.

We recently
received the following comment in our Q&A Knowledge Base.

Investors
should be prepared to sell gold as either increased inflation
expectations or doubts around debt sustainability force a sharp
increase in US Treasury bond yields. Simply put, in an environment
of high real interest rates, the allure of gold could disappear
as quickly as it did in the early 1980s when Paul Volcker took
control of the Federal Reserve.

My response…

First off,
I want to congratulate the reader for trying to anticipate the conditions
that might mark the end of the gold bull market. Because, make no
mistake, the gold bull market will come to an end – and when
it does, it’s not going to be pretty for those who stubbornly
stay too long at the party.

As to the possible
triggers for gold’s big sell-off, the reader’s contention
is directionally correct when he points out that this could occur
when real interest rates (T-bill rates minus CPI) become high enough.
At that point, as a non-yielding asset, gold will become less attractive
to investors looking for income. And, gold will fall.

However, the
situation today is significantly different than during Volcker’s
term as the head of the Fed.

The first difference
can be seen in the chart here that I just dredged out of the archives
of The
Casey Report. Besides painting a picture that many of you
will think obvious – that inflation is the biggest driver of
interest rates – you can also see that gold’s stunning
rise in the second half of the 1970s occurred during a period of
strongly rising interest rates. So, rising interest rates and rising
gold prices are not mutually exclusive.

The second
difference between now and then becomes clear in the next chart
showing that while there certainly was an inflation problem during
Volcker’s reign, there definitely was not a debt problem.
At least not compared to today.

The implications
of the nation’s current debt load loom large in this discussion.
Aggressively raising interest rates, as Volcker did back in the
day, would not just dent today’s U.S. economy, it would destroy
it. As it would evaporate a significant amount of the trillions
of dollars now sitting in government debt, much of it held by pensioners.

Put another
way, Volcker raised interest rates as energetically as he did because
he could. Today, that couldn’t happen – at least not without
pushing the U.S. economy into a death spiral. That’s why we’ve
long compared the scenario faced by today’s policy makers to
being stuck between “a rock and a hard place.”

While the smoking
ruin solution I wrote about a few weeks ago – where the
government steps aside and lets the free market do its worst, so
that it can then do its best – is certainly possible, the more
likely scenario is that the Treasury and the Fed will keep reacting
to each new chapter in the crisis by further degrading the currency
in the hopes that at some point the debt becomes manageable. Of
course, there is the real risk that at some point along the path,
our creditors will lose faith and demand higher interest rates.

But what happens
if interest rates begin to move up based on credit concerns, and
not in response to a noticeable uptick in price inflation? At that
point, couldn’t we see positive real interest rates relative
to CPI – therefore reducing gold’s appeal?

If interest
rates begin to rise for any reason – including concerns over
creditworthiness – the obvious damage to the economy and to
the government’s ability to service its debts will only heighten
concerns over repayment. Almost overnight, creditors will begin
to fear either overt debt defaults or the covert default of yet
more inflation, and demand even higher rates.

At that point,
with interest rates beginning to spiral, few people will be looking
to buy bonds but will remain fixated on the return of capital, versus
return on capital.

Being repetitious,
debt is the single biggest economic challenge facing the U.S. –
and much of the developed world. In time this debt will get resolved,
it always does, but it’s not going to be pretty.

As I see it,
unlike the inflation of the 1970s that could be treated with a strong
dose of tight monetary policy, the debtflation we now face can only
be resolved through default. Given that no U.S. government will
want to join the ranks of history’s sovereign deadbeats, the
inflation option remains the most likely course.

And in that
scenario, gold is still a solid investment and so should be a core
portfolio holding.

The
Casey Report focuses on big-picture investing – analyzing
emerging mega-trends and their effects on the economy and markets…
and recommending the best ways to profit from those trends, whether
they’re positive or negative. To learn more about the editors’
favorite investment of 2010, click
here.

David Galland
is the managing editor of Casey
Research.

Last week
the government released the latest unemployment data. Bloomberg,
always ready to roll up the sleeves to help its friends in government
(get reelected), was running a headline that “Companies in
U.S. Added 67,000 Jobs in August.”

While I haven’t
had time to go through the minutiae of the report, I find myself
scratching my head at Mr. Market’s rather positive reaction
to the report, given the bullet points:

• Manufacturing
  payrolls declined by 27,000.
• Employment
  at service-providers fell by 54,000.
• Retailers
  cut 4,900 workers.
• State and
  local governments gave walking papers to 10,000 people.
• The federal
  government cut 111,000 jobs (mostly temporary census workers).
• The number
  of “underemployed” – people who want full-time
  work, but have given up and are now working part-time, increased
  again, from 16.5% to 16.7%.

The fine folks
at Chart of the Day just published their take on the numbers. You
may see something cheerful in this snapshot, but if so, it eludes
me…

Interestingly,
a week ago ADP, a company that does real-time payroll processing
for about one in every six U.S. workers, and whose data – because
it is based on hard data and not surveying – has tended to
be accurate, released its report for August employment. Based on
ADP’s data, they had forecasted that the construction industry
had actually cut 33,000 jobs in August.

Their data
pointed to an overall decline in the work force of 105,000 jobs,
worse than the government’s numbers that showed overall unemployment
rose by 54,000 – moving the unemployment rate from 9.5% back
up to 9.6%.

At all times,
but especially ahead of an election as important as November’s,
you can count me skeptical in the extreme when it comes to government
data. Especially when it flies in the face of the clear trends in
motion. Even with the government’s stimulus funds still coursing
through the economy, in the second quarter U.S. gross domestic product
fell by more than half, to an annualized rate of just 1.6%. Without
the government’s supercharged spending, it’s been calculated
that actual GDP would have been halved again.

So, where are
all these new private-sector jobs coming from?

The construction
industry was reported to have hired 19,000 people – a good
number of whom, I suspect, are working on government-subsidized
projects. At least in this neighborhood – and everywhere else
I’ve traveled over the summer – there are almost no new
houses being built. But there are a lot of roads being paved, whether
they need it or not.

It also was
reported that 17,000 new temps were hired in August. Historically,
the number of temporary workers rises throughout the duration of
a recession. In fact, only when the number of temps decisively turns
down, in conjunction with full-time employment turning up, can we
begin to expect that the economy is on the road to recovery.

Health care
also added a fair number of jobs, over 20,000. The nation’s
hospitals and medical facilities are dangerously understaffed –
especially ahead of the pending nationalization of the industry
and the added demand that will trigger – so this is a bright
spot, of sorts.

And the mining
industry added 8,000 jobs, as you would expect it to. All to the
good, until the next round of legislation sends this and other “dirty”
businesses back into retreat. (A major overhaul of the U.S. mining
regulations was temporarily shelved because the Democrats were concerned
it would hamper Nevada senator Harry Reid’s reelection chances.
After the elections, expect it to resurface.)

However, even
if you take the government’s latest unemployment report at
face value and accept that the private sector added 67,000 jobs,
with overall employment falling again by “just” 54,000,
the country still hasn’t even begun the process of clawing
back the more than 8.4 million jobs lost since this crisis hit.

And, given
that the economy is being helped along through overt stimulus and
the Fed’s not-so-overt policy of maintaining abnormally low
interest rates, conditions for a recovery are about as favorable
as they’re going to get.

As Bud Conrad
explains in detail in the current edition of The Casey Report,
these low interest rates simply can’t continue. And when they
start to go up, along with taxes as the Bush tax cuts expire, the
faltering economy will be dealt another body blow. (Click
here to read Bud’s analysis.)

I might quip
that the road to recovery will be long indeed, but that would be
inappropriate, because so far the road to recovery is nowhere in
sight.

The Casey
Report focuses on big-picture investing – analyzing emerging
mega-trends and their effects on the economy and markets… and
recommending the best ways to profit from those trends, whether
they’re positive or negative. To
learn more about the editors’ favorite investment of 2010,
click here.

David Galland
is the managing editor of Casey
Research.

Just last
week, it was reported that the turnout for the Democratic primary
was the lowest in 80 years. While the Republicans are clearly energized
by their concerns about the direction the Democrats are taking the
country in, the Democrats themselves seem to have decided to forgo
the voting process, perhaps in favor of a refreshing nap.

No question
about it, the president is in the hot seat.

While I am
sure that back in 2008 Barack Obama was one happy camper about having
taken the presidential prize, today one has to wonder if that victory
has led him to certain bitter regrets.

His problem,
the problem bedeviling the government at its highest level, is that
there is actually no palatable solution to the persistent debt crisis
now gripping the U.S. economy by the throat.

In fact, the
only tangible solution might be best termed the “Smoking Ruins
Solution.” Allow me to elucidate.

The Keynesians
would take great umbrage at the idea that the government is left
with no viable options at this point. The solution is clear to them
– more stimulus. And this time around, no skimping! A paltry
$800 billion isn’t even going to begin to get the job done.
Rather, if two trillion dollars of freshly minted money is what
it takes to kick the U.S. economy out of its swoon, then so be it.
Hell, make it three if that’s what it takes – we can worry
about the (inflationary) consequences later.

Economists
who look to someone other than Keynes for guidance, have other ideas
– but not many. And, as per my comments above, none that would
be even remotely palatable to the man on the street. That goes double
for the politicians (of both parties), who rely on the proletariat
to provide them with the votes that keep them in power and in porridge.

While I don’t
have the time to scratch even a square inch of the surface of all
the goofy solutions economists might trot out if asked, I will attempt
to briefly address, in the broadest terms, a solution that might
be considered acceptable to those who skew toward the Austrian school
of economic thought.

For those
of you unfamiliar with the Austrian perspective, it puts a large
amount of faith in the unfettered free market, and almost none at
all in the ability of governments to do much more than run economies
headlong into solid walls.

I have to
warn you, however, that the solution I am about to propose involves
no quick fix or linking hands around the fire, accompanied by happy
singing. Rather, it is more akin to treating a dread disease with
a very strong medicine – so strong, in fact, that should the
patient survive, they would (at least for some period of time) suffer
a steep degradation in the quality of life.

I say that
because the only real solutions available to the country are certain
to result in financial carnage and social upheaval of a most extraordinary
sort. For starters…

• A dime-on-the-dollar
  forced renegotiation with U.S. Treasury/agency debt holders.
  Sorry, China, Japan, et al. – push has come to shove, and
  it’s over the side with you.

• Letting
  the banks that should fail, fail. Sorry, shareholders and
  bond holders, which now include taxpayers, but you made a bad
  bet. And sorry, anyone with more in your failed bank than is
  covered by the FDIC, you’re out of luck on the excess.
  Given that the FDIC is also broke, we’re not even sure
  about the money you thought was covered.

• Turning
  the lights out on the U.S. empire. The U.S. spends more
  on maintaining overseas government operations than all the rest
  of the world’s nations combined. While the cost of ending
  our involvement in perma-wars, turning off the lights at military
  installations, canceling aid and subsidies to foreign governments
  will cause widespread pain and misery – both at home for
  the dismissed soldiers and overseas for our allies – doing
  so is likely to improve our security by dramatically reducing
  our boot print on the face of the globe.

  We’ve
  got more than enough in the way of nukes to deal with any large-scale
  threats, and with a more streamlined national security apparatus,
  we’d be certain to get a lot better at spotting the odd
  terrorist threat before the malcontents make it to U.S. shores.

• Goodbye,
  big government, and thanks for all the chicken. It’s
  been a wonderful run, with promises of fat chickens in every pot,
  affordable homes for all, safety nets under safety nets, universal
  healthcare, and an almost infinite number of regulations to make
  sure we’re safe in every conceivable circumstance. We hate
  to see you go, but go you must, because even though U.S. business
  labors under the second highest corporate tax rate in the world
  and the individuals who do pay taxes pay over half of their income,
  the shortfall between revenue and government expenses is at historic
  levels with no end in sight. And that’s just impossible to
  continue.

Under my solution,
the size and scope of government will have to be seriously reduced,
a process best started by severely limiting the ability of politicians
to make new regulations and pass new taxes or mandates. With relatively
little to do – as opposed to the situation today, when literally
nothing is beyond the interest and reach of the federal government
– a wholesale purge of the bureaucracy can be undertaken.

Yes, that
would mean hundreds of thousands of freshly dismissed bureaucrats,
many of them possessing no real marketable skills, hitting the employment
market. But look at the bright side, the oversupply of labor willing
to work for subsistence pay will cause “guest” workers
to throw up their hands and head to greener pastures, leaving the
former bureaucrats to clean the sewers, collect the garbage, and
pick the tobacco.

• Farewell,
  Fannie and Freddie. Nationalizing the mortgage industry
  was a horrible idea… an idea whose time has now expired.
  The loans these zombie institutions hold should be pumped out
  into the market at whatever the free market will pay, which
  won’t be much, then the doors shut.

• Institute
  a flat tax at a level that everyone will happily pay. But
  that’s not fair, shout the progressives. To which I might
  respond, look at the facts. One of the biggest differences between
  America in its youth and the lands whence the citizenry came
  was that, in America, there were none of the entrenched classes
  that dog so many countries even to this day.

I can’t
begin to count how many rich people I know who have lost essentially
all their money due to bad investments or business decisions. Likewise,
I know any number of wealthy people who started with little or nothing,
but through hard work and enterprise made their mark and their money.
The key to a robust economy is to make it as easy as possible for
anyone to earn, and keep, the benefits of their efforts… and
a reasonable flat tax goes a long way in that direction. As an added
advantage, a flat tax would result in a wholesale shedding of accountants,
lawyers, IRS employees, and more.

“But
that will only add to unemployment,” you might fret (well,
not you, but the person next to you). To which I would answer, rhetorically,
by asking the question, “Is the desire to avoid such downsizing
reason enough to keep the wasteful, counterproductive, and impossibly
complex current tax system in place?” Hardly.

What the country
needs now more than anything is transparency and the fostering of
a solid foundation that allows businesses, and the entrepreneurs
that start them, to do what they do best – create wealth.

• Link
  the money to something that limits the ability of government to
  print the stuff up at will. While some sort of a gold standard
  seems logical to me, anything that anchors the currency in such
  a way that the Fed – or the Treasury (in the absence of the
  Fed… one can only hope) – is unable to grow the money
  supply at a faster clip than, say, population growth, or the rate
  at which gold can be pulled out of the ground, would do just fine.

I could give
you other examples of the sort of steps and attendant mayhem that
would result from slashing government and letting the free market
run its course. But I’ll stop there, if for no other reason
than that by now, I suspect, many readers are recoiling in horror
at the inanity of the ideas just presented.

No question,
these solutions would leave the economy in smoking ruins –
in worse shape, even, than at the height of the Great Depression.
While the devil is invariably in the details, the argument for pulling
the proverbial trigger on the smoking ruin solution is understandable
– at least to me – by getting back to the positive outcomes
that would result.

• The
  overhang of unpayable government debt would be gone. Sure,
  the Chinese, Japanese, and Middle Eastern oil sheiks (along
  with anyone else who got stuck with a lot of bad debt) would
  be really, really unhappy with us. Again, sorry – but we’re
  bankrupt and pretending we’re not is just going to make
  things worse in the long run. Besides, in relatively short order,
  I suspect our trading partners would get over their losses on
  defaulted government bonds because…

• Business
  would be booming. Unshackled from high taxes and excessive
  regulation – and freed from the fear that at any moment
  some change in the regulations, or even the whim of a minor
  bureaucrat, can knock the pins out from under a business –
  the U.S. would once again become the world’s preferred
  place to do business.

• The
  debt bubble would deflate. As it now stands, we can’t
  even begin to tally all the outstanding bad loans, let alone
  who ultimately owns that debt. Each new bank that fails, each
  new equity and bond holder that goes bankrupt, and each new
  financial institution that folds reduces the toxic debt that
  will otherwise plague the economy and create uncertainty until
  it’s ultimately resolved. Under the scenario painted above,
  the deleveraging and destruction of debt would come fast and
  furious, allowing the nation to understand the true value of
  everything and to move forward from there.

• Housing
  prices would fall to a market-clearing level. People who
  were forced to sell their houses would be forced to sell them
  at a price someone is willing to pay – and that price would
  likely be a lot less than the current market. Tough break, and
  it could lead to a bankruptcy that takes down yet another bank
  – but so be it. It’s time to let the chips fall where
  they might.

• The
  U.S. dollar would once again become trustworthy, and therefore
  in demand. It might even be able to retain its reserve status.

Such strong
medicine would make the patient sick – and likely even cause
reduced quality of life for some extended period of time. But I
have to believe returning America to a foundation built on the principles
of self-reliance and an individual’s right to the fruits of
their labor would lead to a breathtaking groundswell of optimism
and enterprise. Further, just as was the case in 1776, the U.S.
would again provide a model for the rest of the world to follow,
so the benefits would be global.

Of course,
everything I just wrote would be considered almost criminally outrageous
by most of the citizenry – and written off as the ravings of
a madman by the politicians.

Which is why,
in time, it will be the Keynesians’ arguments that win the
day, and the next leg down will be met by a wave of newly printed
funny money – a veritable flood of the stuff. Certainly not
before the November elections, and certainly not before the threat
of a deflationary collapse provides the cover the government needs
to act – but it’s coming.

Gold still
seems a safe bet to this observer.

And everything
gold is what Casey’s
Gold & Resource Report specializes in… covering
topics like: When and where should you buy gold coins and bars –
and how much of your portfolio should you allocate to gold? What
are the best gold-related investments that can protect your wealth
and provide up to 4:1 leverage to the physical metal? All that for
only $39 per year – with 3-month money-back guarantee. Read
more here.

David Galland
is the managing editor of Casey
Research.

In the emails
that our readers at Casey Research send our way, questions and concerns
about the possibility of gold confiscation rank high.

My somewhat
standard response is that, yes, it’s possible, but that we
should see straws in the wind well before it happened… allowing
us to take measures to protect ourselves.

While I don’t
want to make too big a deal about it, there have been clear signs
of late that the U.S. government is taking an unhealthy interest
in your gold.

My recent
article “I
Smell a VAT” touched on one such straw. The relevant point
being that, thanks to a regulation slipped into the healthcare legislation,
coin dealers – and all businesses, for that matter – will
have to begin reporting any purchases of $600 or more from anyone,
including clients selling back their gold.

While I think
the overriding intent is to pave the road for the implementation
of a value-added tax (VAT), there’s no question that the legislation
simultaneously paints a target on the back of the free trade of
precious metals.

Then, a couple
weeks ago a friend sent me a copy of Mother Jones, an a unapologetically
“progressive” mouthpiece with a cover story titled “Glenn
Beck’s Golden Fleece.”

And friend
and correspondent Lowell sent along an article with an embedded
video link to a lengthy ABC
News “investigation” by Clintonista George Stephanopoulos
that picks up on the Mother Jones story.

Now that you’ve
watched the video – and if you don’t, some of what follows
won’t make any sense – I’d like to share some observations
based on personal experience.

About Coins

Years ago,
I headed up the publishing division of a company (that will go unnamed)
with a separate division selling coins. I was there when the coin
business started, and while not involved, was impressed at its rapid
growth in the heady days of the 1970s gold bull market.

Then something
happened. While the founder was a strong advocate for hard money
and sincere in his intent to do the right thing by his customers,
as the coin business grew, he increasingly recruited “professional”
managers to run the firm – hired guns whose sole focus was
boosting the bottom line and, by so doing, their bonuses. And the
business hired more and more “professional” salespeople
– the sort of folks who know how to squeeze a client good and
hard.

As the company’s
sales soared, fueled by hard-hitting marketing, the founder’s
good intentions began to weaken under the onrushing flood of cash
that began to wash in. In time, the entire conversation at the coin
division switched from “What’s good for the customer?”
to “What coins can we sell with the biggest mark-up?”

On those occasions
when I was invited to comment on what was going on, I did what I
could to argue against the corporate culture that had developed,
but my impassioned and increasingly angry fights with the managers
of the coin division couldn’t win out over the millions in
profits being made. As much as I enjoyed my job, the situation became
so degraded, I had no choice but to resign.

Now, let me
be clear. The company broke no laws and, in fact, did nothing that
I suppose most businesses on to a good thing might not do; marketing
was generating lots of prospects, and the sales force was selling.

The problem
was that the product line had moved from selling highly liquid government-issued
gold and silver bullion coins to selling illiquid “modern rarities,”
an oxymoron if there ever was one. Whether “proof” Mexican
silver dollars, “treasure” coins, or privately minted
commemorative coins, the one thing you could be sure of was that
the mark-ups were huge.

Which meant
that, in the absence of an active collectors market – which,
when it comes to “modern rarities,” just doesn’t
exist, and never will – the coins were very unlikely to ever
provide a reasonable return on investment, let alone be a good asset
to preserve capital. Quite the opposite, they were almost certain
losers.

Buyer Beware

In the ABC
video, you’ll hear a sound bite from a client of Goldline who
spent $5,000 on “collectible” coins, saying that he wanted
to buy bullion, but that the sales guy “kinda, sorta talked
me into buying these other coins.” Soon thereafter the buyer
decided to sell those coins and, when he did, he took a 42% loss.
Which, he points out, was a big hit to his net worth.

You can probably
spot all the things wrong in that paragraph, but I’ll do it
anyway.

First, the
disgruntled former client says he was looking to buy bullion coins,
but the sales guy switched him to a “collectible.” Whose
fault is it that he allowed himself to be swayed? Quoting Nancy
Reagan, when dealing with a salesperson, often times the best thing
to do is “just say no.”

Second, if
taking a loss of about 42% on an investment of $5,000 really hurts
his net worth – he shouldn’t have been buying illiquid
coins in the first place.

Third, buying
any “collectible,” or pretty much any asset, at full retail
and then turning right around and selling it, is invariably a sure-fire
ticket to a quick loss.

Finally, who
is to say that the coin dealer that bought the coins off the client
didn’t lowball him? That, too, is part of generating a profit
in the coin business.

While I feel
sorry for the former Goldline client, he really can’t blame
anyone but himself for that loss. He didn’t do his homework
or stick to his guns when the salesman tried to move him up to a
higher-margin product line.

As for the
company, I don’t know them, but I do know that they spend a
lot on marketing and celebrity endorsements. It doesn’t take
a genius to figure out that money has to be recouped from somewhere
– specifically, the clients. Which is why I strongly suspect
that, yes, the company’s salesmen are especially aggressive.
And that they try very hard to load their clients up with high-margin
coins.

Let me recap
some lessons from this article, and based on my own brush with the
business.

First, if
you’re going to become a coin collector, don’t think you
can stumble into it and enjoy any measure of success. Do your homework
– then do some more – before actually laying out your
hard-earned cash. Fortunately, there are a lot of useful resources
out there for you to rely on… pricing guides, auction results,
and numismatic groups, to name just a few.

More important,
however, is that if you are not going to be a collector, then stay
away from anything but U.S. or Canada-minted bullion coins, or bullion
bars issued by the widely acknowledged mints such as Johnson Matthey.

Will the bullion
products be exempt from confiscation, should it come to pass? No.
But trying to avoid confiscation by dealing yourself into a large
loss right out of the box by overpaying for an illiquid pseudo-collectible
is just silly… no matter what the sales person tells you.

What’s
in the ABC Video That Should Concern You

While imminent
confiscation isn’t really addressed in the ABC exposé
of Goldline, there were some things that caught my eye as worthy
of further reflection.

The first
was the contention by the appropriately named NY congressman, Anthony
Weiner, that it was ludicrous to suggest that the government could
ever just confiscate a person’s gold. Excuse me? Deep breath.
If the Weiner were to repeat that contention to my face, the conversation
might roll out something like this…

“What!?!
Did you actually just say what I think you said?”

“Why,
yes, David, I did.”

“Are
you kidding?”

“Why,
no, David, I am not.”

“So,
a government that can invade countries on false pretenses…
arrest people and throw them into prison camps and hold them indefinitely
without trial… whisk suspects off to foreign countries to be
tortured… hit targets in sovereign nations on the other side
of the globe with missiles fired from drones… declare imminent
domain to take private property in order to give it to a hotel developer…
confiscate homes because someone on the property, maybe not even
the owner, is caught with a marijuana cigarette… freeze the
bank accounts of anyone suspected of a crime, then not let them
use their own money to defend themselves… offer known criminals,
murderers even, ‘Get out of jail free’ cards if they testify
against someone else… but they wouldn’t confiscate gold?
Oh, and by the way, Roosevelt already did it once, you moron!”

“Who
are you calling a moron? Security, we have a problem.”

Another deep
breath. Pat hair back into place and resist urge to apply my forehead
to the keyboard.

But enough
of Mr. Weiner.

The second
thing that should concern you – and the EVP of Goldline tossed
Stephanopoulos a soft pitch down the middle on this one – was
when he mentioned that his salesmen have instructions to “advise”
their clients on the best sort of coins to buy. Paraphrasing Stephanopoulos,
“But your people aren’t licensed as investment advisors,
are they?”

No, but I
suspect that, if this witch hunt continues, they may soon have to
be.

Especially
because a congressional committee has been set up to investigate
this serious matter. Surprise, surprise, the co-sponsor of the committee
is none other than Congressman Weiner. Apparently he was chosen
for this particular bit of dirty work. While all of this may be
nothing more than grandstanding and bare-knuckle politicking, any
time Congress gets involved, pretty much anything can happen; keep
your eyes open for a fresh assault on the gold coin industry.

And, finally,
the thing that probably concerns me most is that, whatever else
he is, Glenn Beck is a highly visible and apparently effective critic
of the current administration. Having failed to knock him off the
air by unleashing a well-financed boycott that chased away many
of his advertisers, it appears the Democrats are now pursuing their
vendetta against Beck by attacking the business practices of the
show’s largest sponsor. No matter what your opinion is of the
man, this sort of determined government-backed assault should make
your antenna go up.

Is Goldline
an angel? Based on my experience with the industry, probably not.
But in this case, I’m not sure that that matters as much as
that they sponsor Beck’s show.

A Final
Word – on Confiscation

Do I think
confiscation is imminent? No.

But I do think
that the straws in the wind point to yet more regulation. This could
ultimately place gold dealers under the watchful eye of the SEC
or some other Frankenaucracy that emerges out of the new financial
reform legislation.

I am not a
fan of regulation – even if it sounds like a good idea. For
instance, to protect the ignorant from predatory salesmen. My rationale
is that this is not a perfect world and never will be. Humans can
and will find a way around every rule (witness the fact that Madoff,
the former head of the NASDAQ, was able to scam billions off clients).
Therefore, the sooner the citizenry learns that they have to rely
on their own common sense – and actually educate themselves
– before reaching for their wallets, the better. Having an
implied government blessing over every transaction does nothing
but create a false sense of security.

But that’s
just my particular, and some think peculiar, world view. Back in
the world we live in, any new regulations will, if nothing else,
assure that any private transactions between you and your favorite
coin dealer will become a thing of the past. The new reporting requirement
on purchases of over $600 pretty much makes that a reality.

With this
new layer of reporting in place, should the sovereignty come to
the conclusion that it, versus you, should be in possession of your
gold – they’ll know whose door to knock on.

Of course,
we can’t know if and when such a thing might occur… but
to pretend it can’t is to be naïve or, in the case of
Weiner, disingenuous.

In my article,
“I Smell a VAT,” I touched on some ideas for how you might
protect yourself from a possible gold confiscation (none of which
involved buying overpriced coins).

There is one
other option I didn’t mention – expatriate. Many of the
happiest people I have met in my life have their passport from one
country, residency in another, and money/gold in a third.

As David says,
getting your money – and maybe yourself – out of the U.S.
is one of the smartest strategies to protect your wealth from the
long and ever-growing arm of the government. Click
here to read our new report on the 5
best ways of internationalizing your assets.

David Galland
is the managing editor of Casey
Research.